WASHINGTON—State budgets are recovering, but have not returned to pre-recession levels of 2008, according to the biannual report, The Fiscal Survey of States, released today by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO). As the federal government tries to get its fiscal house back in order, Washington might look to the states for lessons in good fiscal stewardship.

While spending is expected to increase next year by 2.6 percent after rising 5.2 percent this year, spending will still be below where it was in 2008. General fund spending, at nearly $669 billion, is expected to be $19 billion lower in fiscal 2012 than fiscal 2008, a 2.7 percent decline.

General Fund revenues rose 5.9 percent in fiscal 2011, but 2012 revenues are still below 2008 levels. Recommended budgets for fiscal 2012 forecast a 3.9 percent increase in total tax revenue. Sales taxes increased by a scant 0.3%. Total General Fund revenues remain 3.6 percent below their pre-recession highs despite tax increases in several states.

Additionally, states face the expiration of enhanced Medicaid funds from the American Recovery and Reinvestment Act of 2009 (Recovery Act). State spending of flexible Recovery Act funds has declined drastically from $60 billion in fiscal 2010 to $50 billion in fiscal 2011 to just under $3 billion in fiscal 2012. Despite the expiration of Recovery Act funds, states nonetheless are locked into Medicaid spending by federal requirements.

While the worst may be over in the near-term for most states, all continue to adjust. Following adoption, 23 states cut their enacted fiscal 2011 budgets by $7.8 billion. Total balances are estimated to be $32.6 billion, or 4.9 percent of expenditures (2.5 percent without Alaska and Texas), based on fiscal 2012 recommended budgets.

"While the report highlights improvements in states fiscal conditions, it also shows the many challenges and tough decisions states will face over the next few years as they fully recover from the economic downturn," said NASBO Executive Director Scott Pattison.

"The greatest short-term risk to states' recovery comes not from statehouses, but from Washington," said NGA Executive Director Dan Crippen. "While these numbers hopefully mark a turning point in states' recovery, their fiscal health is not likely to return to pre-recession levels for some time. The long-term risks to state budgets and our country far overshadow any short-term growth. As states look ahead, it is not just the economy that gives them pause, but also the aging of our population and the seemingly inexorable increase in health care costs."

Short-term risks include:

• Medicaid Growth and Expansion. Increasing expenditures and eligibility place pressure on other expenditures including education, transportation and public safety;
• Erosion of Tax Base. Continued subsidies to internet sellers and further erosion of the sales tax base means more reliance on income taxes;
• Maintenance of Effort. MOE's effectively wall off segments of state budgets increasing pressure to cut other state-funded services; and
• Unfunded Mandates. Changes to major state-federal programs must include new flexibility for states to do more with less, not just pass the buck.

Governors have a duty to be good fiscal stewards of taxpayer dollars. The recession forced many states to take difficult actions to balance budgets, and to find innovative ways to make government more efficient and productive. Reforms should be designed to produce savings for both the federal government and states and, where appropriate, should also include shared savings. The federal government cannot balance its budget on the back of states.

NGA Contact: Krista Zaharias, 202-624-5367

NASBO Contact: Scott Pattison, 202-624-8804

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Founded in 1908, the National Governors Association (NGA) is the collective voice of the nation's governors and one of Washington, D.C.'s most respected public policy organizations. Its members are the governors of the 50 states, three territories and two commonwealths. NGA provides governors and their senior staff members with services that range from representing states on Capitol Hill and before the Administration on key federal issues to developing and implementing innovative solutions to public policy challenges through the NGA Center for Best Practices. For more information, visit www.nga.org.

Founded in 1945, the National Association of State Budget Officers (NASBO) is the instrument through which the states collectively advance stage budget practices. The major functions of the organization consist of research, policy development, education, training, and technical assistance. These are achieved primarily thought NASBO's publications, membership meetings, and training sessions. Association membership is composed of the heads of state finance departments, the states' chief budget officers, and their deputies. All other state budget office staff are associate members. NASBO is an independent professional and education association and is also a self-governing affiliate of the National Governors Association. For more information, visit www.nasbo.org.