Jan | Feb 2014


 
No Easy Times Ahead >>

‘Be Prepared for Some Tough Tradeoffs’

By Mary Branham, CSG Managing Editor
 

Scott Pattison, executive director of the National Association of State Budget Officers, believes states still have a tough road ahead even though the fiscal situation is beginning to improve.

 

How were state fiscal conditions at the end of the 2011 fiscal year?

“Actually, it was fairly positive at that time on the revenue side. We were seeing a strong improvement in state revenues as we got to the middle of the calendar year, the end of fiscal year 11. Unfortunately, there are so many demands on the spending side that there were still some really difficult decisions that elected officials had to make, including continuing to have to make some cuts, even to education. It was a mixed bag; certainly an improvement from where we were, but still a mixed bag.”
 

Were budgets more stable this year compared to the last few years?

“I think that there was more stability for state budgets because we could predict the situation. During the beginning of the recession, we were having shortfalls because revenues were coming in below forecasts and making predictions was hard to do. It was like playing catch-up. We were constantly having to make cuts or make changes because less money was coming in than expected. As we approached fiscal year 12, and now we’re in fiscal year 12, we were more stable because we knew that the stimulus act funds were ending, so we could predict that.”
 

What happened in 2011 that changed the fiscal conditions?

“It really was economic. We had revenues falling way below forecasts and coming in way below the period prior to that recession, during that recessionary period and beyond. The situation for states is very, very dependent on the national economy. There is a lag time between the time of economic recovery and the time of state fiscal recovery, so … regardless of how lackluster some of the economic indicators are at the moment, as the economy recovered, you did start to see an improvement in state fiscal situation.”
 

What are states facing now?

“I think for the long term, we are going to see for states a new normal in which they don’t have the growth in spending that they had in decades since World War II. That’s going to make it difficult to decide where money is going to go. There’s a lot of pressure to spend money on education and health care, on Medicaid, prisons, transportation—a lot of areas that people need or want to spend money on, and there’s not going to be enough to go around. So I expect for the long term, we are going to see some really, really difficult decisions as to where to spend money.”
 

What does the fiscal cliff—the end of the Recovery Act—mean for states?

“I think it’s going to be less dramatic than some have predicted simply because we knew the Recovery Act was ending and we knew those funds, particularly to areas like Medicaid and K–12, were being phased out and therefore we were able to plan for that and predict that. The drama of the impact has been lessened as a result to be able to plan for it and predict the end of the Recovery Act funds. … We really are entering a period for several years in which economic growth will not be sufficient to bring in revenues that will allow us to go back and restore all the cuts previously made.”
 

During times of recession, more people need programs like Medicaid so
states have to spend more.

“The cost of Medicaid definitely goes up in bad times simply because there are more people enrolling in the program. … In the aggregate, we’re finding that states are going to spend nearly $16 billion more on Medicaid for this current fiscal year 12 than they did last year … to make up for loss of Recovery funds and the growth of the program. At the same time, in the aggregate, states are still cutting K–12 and higher education and other areas of state government are remaining flat. To me, that is extremely significant that the only area of major actual growth in spending at the state level for fiscal year 12 is Medicaid.”
 

What will the discussion on reducing the federal debt mean for states?

“States are going to have to plan for a steady decline in funds from the federal government. It’s not clear what funds will be cut and by how much; and I also don’t think it will be extremely dramatic. I think this is something that will be more phased in over time. I think states have to plan for the fact, when you look at the size of the federal deficit, regardless of the politics, you have to assume that the federal government over time is going to decrease at least the growth of federal spending and states receive a huge amount.”
 

How did the federal debt downgrade actually affect states?

“It’s one of those things that should be a concern over time for the states when they examine their debt capacity and issuance of debt. At the moment, the downgrade by one of the rating agencies of the federal government does not appear to have any dramatic impact on the states; however, it has certainly made the rating agencies examine more carefully the ratings of state debt.”
 

How do states handle the big looming issues that affect financial stability?

“I hope that if we do have another healthy period of economic growth, that during that period, the states make some financially responsible decisions and at that time deal with some of these long-term liabilities, because that’s the time you have the money and you should be dealing with your long-term liability. Don’t ignore them during the good times. I hope that they’re prepared for the healthy economic period that we certainly hope comes in a few years and deal with these really long-term issues.”
 

So what is the big picture for states?

“The big picture comes down to they’re going to have to be prepared to make some tough tradeoffs. I do not foresee easy times for states. Even if we see some economic improvement, they’re going to have to make some tough decisions. We’re just not going to be back to a period of time where they’re going to please everyone and put as much money as they need or want to in every single area of state government. They’re going to continue to have to make tough decisions.”