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Assessing 2014 s Top State Fiscal Issues

Assessing 2014’s Top State Fiscal Issues

Corina Eckl 1/2/2014

By Corina Eckl

What top fiscal issues can legislators look forward to addressing when they convene their 2014 legislative sessions?

The list is both familiar and diverse, at least according to legislative fiscal directors who are prepping for the upcoming sessions. These front-line experts offered their assessment of top fiscal issues for 2014 in response to a recent NCSL survey conducted in preparation for the "State Budget Update: Fall 2013." The results are illuminating.

But first a little background: The Great Recession was the defining economic event of the last 80 years. Its impact was wide and deep. Closing huge budget gaps and managing massive revenue shortfalls topped legislative agendas for several years. More than  four years since the Great Recession officially ended most states are experiencing slow but steady revenue growth. This is an improvement from the down years, but poses different  challenges for lawmakers as they assess the capacity of their state budgets to support government services.

Pie chartTop state fiscal issues generally fall into two categories: the must-address issues and the ones lawmakers (including governors) would like to address. Must-address issues such as Medicaid and education arise every year because they account for $1 out of every $2 of general fund spending. They also have caseload or enrollment pressures  and are the focus of frequent policy deliberation. They also have a sense of urgency. The more “discretionary” issues tend to be ones lawmakers think have been shortchanged during tight budget times or may have a longer term benefit to the state. Good examples are infrastructure improvements and tax reform. So with fiscal conditions stabilizing and even strengthening in some states, it will come as no surprise that all of these issues made the list of top fiscal agenda items in 2014.

The Must-Address Issues

Health care programs, especially Medicaid, always make the top fiscal issues list.  The reasons can vary from year to year but generally involve caseload increases, benefit changes, medical inflation rates and policy changes. For 2014, 29 states expect Medicaid/health care to be a top fiscal issue. This time its top-of-the-list status largely is being driven by the effects of federal policy changes, most notably the implementation of the Affordable Care Act (ACA).

Lawmakers in additional states may consider if they want to expand Medicaid coverage under provisions of the ACA. While 100 percent of the medical costs of the expansion will be covered by the federal government through 2016 (and phase down to 90 percent by 2020), states will remain responsible for 50 percent of the administrative costs. Other states are looking at cost increases from rising caseloads even if they don’t expand eligibility levels under the law because more individuals who already qualify but are not enrolled will learn of their eligibility for Medicaid coverage. For those new enrollees, states will receive their normal federal Medicaid matching rates. For more information, see this NCSL report.

Education funding is another perennial top fiscal issue. It represents about one-third of state general fund budgets, so it regularly receives priority attention.  At least a dozen states will address education funding in 2014. In Idaho, two competing task forces will submit recommendations for future education policy changes, which could carry a significant price tag. The Kansas Supreme Court is reviewing a lower court ruling that could require up to a 2 percent increase in school funding. Missouri lawmakers will look at foundation formula funding.

While most of these states will focus on elementary-secondary (K-12) education, several will examine higher education, too. Mississippi lawmakers will consider expanding funding for K-12, institutions of higher learning and community colleges.

Another must-address issue is corrections funding, which is a top fiscal issue in six states. Arkansas will consider inmate and parole reform to alleviate prison overcrowding. Idaho lawmakers will consider whether to continue with prison privatization.

Other Top Fiscal Issues

Thirteen states will give top attention to state employee salaries and benefits in 2014. In Oklahoma, state employee pay, particularly in the public safety area, was last adjusted in 2006. South Carolina will examine state employee health insurance. Several states, including Alaska, Illinois and Kentucky, are expected to examine state employee retirement and pension issues.

Tax policy or state revenues more generally will top fiscal agendas in a dozen states. The specific issues vary considerably but include the expiration of temporary taxes in Alabama and Illinois, the possible elimination of certain tax expenditures in Maine to generate an additional $4 million in revenue, and possible tax modernization in Nebraska, where an interim study may stimulate changes. Some other states, such as New York and Ohio, also will consider tax reform. Delaware lawmakers will consider revenue performance—the latest five-year forecast shows revenue growth is expected to be essentially flat.

Nine states reported that infrastructure issues will top legislative agendas this year.  Hawaii notes infrastructure needs have gone unaddressed since the start of the Great Recession. California will consider financing water infrastructure. Some states, such as  Pennsylvania and Utah, will examine transportation funding.

Other top fiscal issues of note include:

  • Rising debt service in Connecticut, where debt service is the single largest line item increase in the projected budget.
  • A structural general fund deficit in Maryland, where the structural gap is expected to worsen based on downward revenue revisions and additional spending increases.
  • Budget stability in Minnesota and, in Michigan, the impact of Detroit’s bankruptcy.
  • Colorado and Oregon will consider disaster relief funds because of flooding  and wildfires.
  • Lawmakers in Maryland and Virginia will give priority attention to the effect of federal sequestration on their state’s budgets.
  • In a dramatic turn from recent years, California lawmakers will consider how to allocate a potential budget surplus—yes, a surplus.

The Challenges Ahead

During an NCSL Fiscal Chairs meeting in mid-December, several legislators commented on their state’s fiscal situation and what it means going forward. They reiterated and expanded upon the top fiscal issues they will address in 2014 and beyond. The tone of this discussion was fascinating and sometimes unexpected. Though every legislator in attendance noted that their state’s fiscal situation had improved since the Great Recession, not one was ready to sing “Happy Days are Here Again.”   

Some of the reluctance to celebrate the improvement stems from uncertainty.

“We still have high unemployment, and there are a lot of unknowns about when the next downturn will occur,” says Senator Richard Devlin (D), chair of Oregon’s Joint Committee on Ways and Means. “We are better off than a few years ago, but we are reluctant to use the word ‘stable.’ There is nothing to celebrate.”

This sense of uncertainty is being exacerbated by lackluster revenue performance. Perhaps Representative Jay Kaufman (D), chair of Massachusetts’ Joint Committee on Revenue, says it best. “There’s an enormous sense of fragility.”

Another worry stems from the inevitable competition for limited state resources.

 “Our budget is a competition between Medicaid and education,” says Representative Herb Frierson (R), chair of Mississippi’s House Appropriations Committee.  “Medicaid has been growing 9 percent per year over the past 10 years. It is exceeding revenue growth rates. We don’t know what to do. The situation is genuinely and truly tough.”

Alaska has a similar story.  “Our fiscal experts tell us that K-12 education and Medicaid will eat up 90 percent of the budget within 10 years if we don’t make changes,” says Representative Bill Stoltze (R), co-chair of House Finance Committee. “We need to discuss sustainability, especially as we see reductions in federal support.”

And, ironically, the improving revenue situation brings its own set of challenges. Nevada lawmakers, who grappled with one of the largest budget problems in the nation, had to close a gap that was one-third the size of the state’s budget. “Everybody wants more money now and we’re reluctant to go crazy,” says Representative Debbie Lasko (R), chair of the House Ways and Means Committee. “We’re trying to boost collections through revenue growth, by creating jobs.”

Vermont joins many other states in seeing an improved situation, but lawmakers there still see challenges. “We are in a much better position than two years ago. It was a tough time to be in the Legislature and on the Finance Committee,” says Senator Jane Kitchel (D), chair of the Senate Appropriations Committee. “But we are concerned, cautious. Those of us working on the budget have a tough year ahead.”

An overriding theme seemed to emerge from the discussion: Lawmakers are concerned about budget sustainability. Specifically, do they have enough resources to provide stable and, as necessary or desirable, rising support for state programs? Is there enough money to pursue new initiatives? As long as revenue growth rates remain stubbornly slow, the answer may be no.

 “We need a balanced budget and a budget that has a future and can grow,” says Representative Toni Walker (D), chair of Connecticut’s Joint Appropriations Committee.

In considering sustainability, it appears that some of the focus may be more fundamental.

 “We need to take a good look at how government does its work,” says Vermont’s Kitchel. “We don’t have good mechanisms in place to determine if we got the results we wanted.”

Mississippi’s Frierson agrees, “We need to do things more smartly.  We can’t depend on Congress.”

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