The fiscal health of most state’s general funds has some paying cash for infrastructure projects instead of issuing bonds in a rising rate environment, though it appears some states are beginning to reach the end of the windfall.
State officials ruminated on the state of their budgets during an event hosted by the National Association of State Budget Officers on Tuesday. The discussion included economic analysis by Emily Mandel, Moody’s Analytics and was moderated by Shelby Kerns, executive director, NASBO. Kate Nass, the deputy chief financial officer at the Oregon Department of Administrative Services indicated that Oregon may be sailing towards the end of the funding windfall.
“Our biennial budget is about flat, so that feels hard,” Nass said . “We had to make some hard choices and we ended up pulling some money out of our rainy-day fund.” The state used the money to shore up housing, health, and education programs.
NASBO tracks and posts state budget summaries which have been showing a steady rise in revenue growth and reserve contributions for the past two years. The group has reported that rainy day balances grew 58% in fiscal 2021, rose again in 2022 and are projected to increase this year. But the gains may be tapering off.
General funds levels have tripled in the past few years thanks to higher tax collections and federal stimulus money. The states have used the money to pay down debt, paying cash instead issuing bonds for capital projects, and making supplemental payments to pension plans.
Oregon employs a tax kicker system that sends budget surpluses back to taxpayers as a credit. Colorado’s Taxpayer Bill of Rights champions a similar strategy and is kicking a 14% surplus back to its citizens while also putting federal funds into the state’s highways.
“The stimulus funds helped us to change the financing mechanism for how we’re paying for Colorado’s roads,” said Lauren Larson, director, Colorado Office of State Planning and Budgeting. “Without those dollars, the deal never would have gotten done.”
Kimberly Murnieks, director, Ohio Office of Budget and Management, said that her state recently transferred $700 million into its reserves, giving it a record high balance. The state has also been investing federal funds into debt service.
“We used the one-time federal funding to pay off our unemployment insurance debt from the pandemic so that would not be a drag on our businesses,” she said. “We have invested in water and wastewater infrastructure projects and communities all across our state.”
NASBO’s recent data connects its findings from late last year that showed a bright spot for bond financing being used for transportation projects. Last November the organization reported that total transportation spending accounted for 7.3% of total state expenditures and increased an estimated 19.5% in fiscal 2022. It was only up 3% in fiscal 2021. NASBO estimated that in fiscal 2022 state fund spending rose 17.8%, federal funds were up 16.4%, while debt spending increased 43.5% in the transportation sector.
Per NASBO’s numbers from last October, the enacted budgets for fiscal 2023 are currently pegged at $1.16 trillion, which represents a 6.7% increase over fiscal 2022. In fiscal 2022, the states clocked in with spending growth of 18.3%, the highest annual increase in spending since NASBO started tracking it in 1979. Adjusted for inflation, general fund spending in fiscal 2022 increased 9.6%. Pew tracks the state’s reserve or rainy day funds and has also documented a steady increase in the numbers.