Connecticut is not alone. According to the National Association of State Budget Officers’ (NASBO) annual state spending survey, half of all states saw revenues come in lower than budgeted in fiscal 2016 and 24 states – including Connecticut – are seeing those weak revenue conditions carry into fiscal 2017.
That is the highest number of states falling short of revenue projections since 36 states budgets missed their mark in 2010, according to the NASBO report and Governing. As a result, 19 states made mid-year budget cuts in 2016, totaling $2.8 billion, Connecticut among them. That number of states “is historically high outside of a recessionary period,” according to the report. The revenue slowdown is caused mainly by slow income tax growth, even slower sales tax growth and an outright decline in corporate tax revenue, the report explains, stating that “progress since the Great Recession has been uneven, and many states are seeing softening state tax collections.”
Overall, state spending totaled $786 billion last fiscal year, a 3.7 percent annual increase. Although it marks the seventh straight year of spending growth, it represents a slowdown from fiscal 2015 when spending increased by 4.4 percent.
“Weaker-than-anticipated revenue collections and resulting budget gaps in fiscal 2016 led some states to cut spending during the year,” the report indicated, with overall spending increasing just 1.8 percent to $781 billion in fiscal 2016, compared with the previous year’s growth of 5 percent. When accounting for inflation, 32 states are still spending less than they did before the Great Recession and total state spending also has yet to surpass pre-recession levels. Across the states, cuts enacted by legislatures come most often in K-12 education, an “all other” category, followed by Medicaid, higher education and corrections, according to data compiled for the NASBO report.
The state has an estimated $1.3 billion or $1.5 billion budget deficit, according to reports from the governor’s Office of Policy and Management and the legislature’s nonpartisan Office of Fiscal Analysis, CTNewsJunkie reported recently.
“Certainly a recession is coming sometime soon,” said NASBO President-elect Michael Cohen, who is also California’s finance director, told Governing. “But I think economists in all of the state offices would tell you that’s a really hard economic forecasting [task] of predicting when that’s going to happen.” NASBO had previously predicted that fiscal 2016 would mark the full recovery of state budgets from the recession, but the cutbacks and increased inflation has delayed that at least another year.
The report indicates that eight (including energy-producing states like Alaska, North Dakota and Oklahoma) planned to spend less in 2017, and 11 states planned to up their spending by 6 percent or more next year. In those states, sales tax increases have improved their revenue with Louisiana, for example, anticipating a 17 percent increase in revenue, driven by an expected $800 million increase in sales tax collections.
Most states have focused on strengthening their rainy day funds, according to the report, though some states – particularly energy-producing ones – have had to tap their reserves to help address budget shortfalls. Twenty-nine states increased their rainy day fund balances in fiscal 2016, and 25 states project increases in fiscal 2017. Since aggregate rainy day fund levels hit a recent low in fiscal 2010, 40 states had increased their amounts as of the end of fiscal 2016, at least in nominal terms, the report said.
“States will also have to contend with rising spending demands in areas such as health care and education, long-term pressures such as pensions and infrastructure, and increasing federal uncertainty,” the report predicted, “particularly concerning the prospects of tax reform and health care policy. In this environment, states are likely to be cautious in their spending and revenue forecasts, as they continue to focus on ensuring structurally balanced budgets.”