UPDATE 1-US state revenues recover but budgets still tight

Tue Jun 12, 2012 4:05pm EDT

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* Revenues to rise to $690.3 bln, up 4.1 percent

* Spending likely to reach $682.7 bln, up 2.2 percent

* Uncertainty springs from economy, federal policy, healthcare

By Lisa Lambert

June 12 (Reuters) - U.S. states are remaining tight-fisted with spending even though their revenues are expected to top the levels reached before the recession, unnerved by the clouds over the U.S. and global economies.

For the upcoming 2013 fiscal year, total U.S. state revenues will increase by $27.4 billion, or 4.1 percent, to reach $690.3 billion. General fund spending, however, will rise by only $14.6 billion, or 2.2 percent, according to a survey of governors' budgets released on Tuesday.

Tax collections, the largest source of revenue, will likely rise 4.8 percent to $556.6 billion, according to the survey, conducted by the National Governors Association and National Association of State Budget Officers.

"It's a reflection of the uncertainty that's going on," said Scott Pattison, executive director of the state budget officers' organization. "It shows very cautious budgeting on the part of governors."

For fiscal 2013, which for most states begins on July 1, state revenues will likely be $10 billion greater than in fiscal 2008, the last year before state revenues collapsed under the combined pressures of the housing downturn, financial crisis and recession, according to the report.

When their revenues cratered, states had to slash spending, hike taxes and turn to the federal government for help. Meanwhile, newly unemployed citizens turned to states for help with healthcare or education. All states except Vermont are required to end their fiscal years with balanced budgets, which means that, unlike the federal government they cannot operate at a deficit.

The U.S. economic recovery that officially began in 2009 has filtered down to states' coffers only recently.

"It's a really historic recession," said Michael Leachman, director of state fiscal research at the Center on Budget and Policy Priorities, which closely monitors state budgets. "I wouldn't want to lose the context of the impact of the recession on state revenues and that there's still a lot of need for state services because unemployment is high."

Altogether, 39 states are pushing up spending in fiscal 2013, although 25 will likely spend less than before the recession. Total state spending will be 0.7 percent below the $687.3 billion of expenditures in fiscal 2008.

But the current surge in revenues is ebbing, according to the Rockefeller Institute of Government. At the same time, voters show no appetite for further tax hikes. That leaves states with little room to fight new threats such as unemployment, a stalling recovery, or economic fallout from the turmoil in Europe.

Europe poses a large threat to many states, especially those that rely heavily on income taxes, said Kim Reuben, a senior fellow at the Urban Institute. Their budgets take steep hits when taxpayers' investment income drops.

"If Europe leads to a recession, if growth slows, I think states are going to be in trouble," she said. "Their revenues are going to be lower and there will be more uncertainty for states that trade with the rest of the world."

For the last couple of years, the federal government has also created challenges in budgeting.

The U.S. Congress has scheduled cuts of up to $1.2 trillion affecting states as part of last summer's deficit deal. Also, federal lawmakers often find savings by cutting grants sent to states, said Dan Crippen, executive director of the National Governors Association.

"There's at least as much uncertainty in the public sector as in the private sector and that's deterring governors from doing much," he said, adding that the Supreme Court decision on the national healthcare law due this month is obscuring their outlook, as well.

For fiscal 2013, states have closed or are closing gaps equal to $30.6 billion, according to the report. That's less than half the $64.5 billion in budget gaps they closed in fiscal 2012. The most popular method for balancing budgets is targeted cuts, followed by reducing funding for local governments.

MEDICAID CONSUMING MORE DOLLARS

Medicaid, the healthcare program for the poor, is consuming larger shares of the increased spending by states. As part of the 2009 economic stimulus plan, the U.S. government pitched in extra funding for the program, which the states operate with partial federal reimbursements. Now, that money is gone and states are covering more of the program's costs.

State spending on Medicaid rose 20.4 percent in fiscal 2012, and federal spending dropped 8.2 percent. The projected rate of growth for states is much slower for fiscal 2013, 3.9 percent.

"Despite the recovery, when you would expect Medicaid case loads to go down, Medicaid costs continue to go up," Crippen said, noting large numbers of long-term unemployed and discouraged workers have kept demand high. "Healthcare is still the story, still the challenge."

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