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Spending pressures, federal cutbacks and sluggish economy add up to fiscal uncertainty for states

by Tim Anderson ~ June 2012 ~ Stateline Midwest »
When states were just beginning to rebound from the state fiscal crisis brought on by the U.S. recession, Scott Pattison was among the experts in state finances that warned policymakers to prepare for a “new normal.” Yes, revenues would rebound, but no, don’t expect the kind of growth that had shaped state budgets in the years prior to the downturn.
Pattison, executive director of the National Association of State Budget Officers, says we are now in that “new normal” era. For example, NASBO data show that between 1990 and 2007, the average yearly increase in state spending was 5.7 percent; between 2011 and 2012, it was 3.5 percent. During a recent interview with CSG Midwest, he talked about what this will mean for states, as well as some of the specific challenges that lie ahead.
Q: How would you characterize the fiscal condition of states at the moment?

A: All of the trend lines are going in the right direction. But the economy is still pretty tepid, and some of the more recent indicators have been very concerning. Unemployment numbers, GDP growth and state revenue growth aren’t what you would hope.
Q: Is it fair to say that we’re in this “new normal” stage in terms of state revenue growth?

A: Yes, I think we are. The recession part is over, so we’re returning to growth rather than decline. But on the other hand, we’re growing slower than [past averages]. And so in a lot of states, we’re still not even back to pre-recession levels. ... The result, I think, is going to be a focus on the big areas of K-12 education, Medicaid and health care. From there, some really tough decisions are going to have to be made about other parts of the budget. How do the states handle their university systems and the challenges there? Or the growing health care costs of aging inmate populations? Or the health costs of retirees? There are a lot of issues to deal with.
Q: What are some of the expectations that you think states should have with regard to future funding from the federal government?

A: Over time, I think they should expect a decline in the amount of funds. That won’t be true in every area — Medicaid, for example — but that is what I would generally expect. States are going to have to prepare for that, and I’ve been intrigued by the number of states already making those plans.
Another issue at the federal level is the uncertainty, and the fits and starts that we’re seeing. Even if there’s a cut, if you know it’s coming, you can plan for the next few years. But we’ve had a really difficult time getting that certainty. Transportation is one of the many examples of that, where you’re seeing the passage of short-term extensions [of funding bills]. The problem with that is even if that means a little more money over time, it’s difficult to plan and you need to have contingencies in place.
Q: What kind of impact would “sequestration” — the $1.2 trillion in automatic spending cuts in the U.S. Budget Control Act that would begin to take effect in 2013 without federal action — have on state budgets?
A: We benefit in an odd way from the sequestration because things like Medicaid are exempt. That doesn’t mean people at the state level are running around and saying, “Sequestration is great.” But there is an acknowledgement that there is a benefit to us [because of the exemptions] as opposed to some other decisions that might be made.
Q: How would you generally assess how states handled the fiscal crisis they had to confront over the past few years?

A: First and foremost, states deserve credit for rolling up their sleeves and doing what they had to do. There wasn’t a lot of magic to what was done. You use the tools that you have available. You tap into the rainy-day funds, and you use reserves to the extent you can. And then you cut. States tended to cut less in the priority areas of K-12 education and Medicaid. And right now, a lot of any of the new money coming to states is going to those two areas.