State spending is poised to remain strong this year, though not at the levels of the previous two years when budgets where propped up by federal aid, a recent report by the National Association of State Budget Officers finds.
Over the next year, state revenues are expected to return to levels comparable to pre-pandemic levels, according the recently released 2023 Fiscal Survey of the States. They are projected to be about 34 percent above 2019, which puts states in a “strong fiscal position, based on historical norms,” said Kathryn Vesey White, NASBO’s director of budget process studies
That’s good news for those who have been concerned that years of strong economic growth were about to come to an end. But it doesn’t mean that the comedown from the spending boom of 2022 and 2023 won’t be felt, Vesey White said.
“The combination of revenue and spending growth moderating, alongside the wind down in federal funds, is expected to put some pressure on K-12 school districts,” Vesey White said. “That added pressure will be felt especially [in instances] where school districts are also seeing enrollment declines, and the funding implications those [conditions] can have for their revenues.”
State general fund spending is expected to grow by around 6 percent in fiscal 2024, NASBO’s survey found — smaller than the 11.8 percent increase in 2023 and 16 percent increase in 2022.
Meanwhile, the report shows tax revenues already started to slow in 2023, and are expected to decline in 2024. This comes after 2021 and 2022 brought double-digit percentage growth in state revenues — the fastest growth the report has documented since NASBO began its analysis in the late 1970s, Vesey White said.
“We expect to see continued signs of slower budget growth,” she said.
The report points to a few factors that combine to explain the recent slowdown in state revenues, including: a weaker stock market performance, slower growth in consumption and changing spending patterns, and lower inflation.
It also points to the impact of states enacting tax cuts.
Many states approved cuts to income taxes or other revenue sources after seeing strong growth in 2021 and 2022, said Lucy Dadayan, a principal research associate for the Urban Institute’s tax policy center, which also tracks and analyzes tax data and policy.
This means they opted to provide large refunds to constituents, she said, “instead of using the moment to have some long-term fiscal planning.”
“Fast forward, revenues have been declining in inflation-adjusted terms for 14 to 16 consecutive months,” Dadayan said. “The weaknesses of tax revenues means that people just don’t have money to spend, and that should be a red flag for states moving forward.”
Creative Options for K-12 Funding?
Federal funding accounts for about 10 percent of school district’s budgets, with the rest coming from state and local governments. That dynamic has been skewed since 2020, as the federal government has pumped around $190 billion in stimulus aid to schools. That money largely runs out near the end of this year.
NASBO’s report also highlighted a sizable uptick in rainy day fund levels, meaning that states are setting aside a portion of their revenue surpluses. In 2023, 41 states reported year-over-year increases in the size of their rainy day fund.
However it’s unlikely that most states would tap that pocket of saved money to help fund K-12 education, Dadayan said. States typically reserve that option for when there’s a significant downturn, she said.
One possible exception is California, where Gov. Gavin Newsom recently proposed withdrawing $7 billion from a state rainy-day fund to shield schools and colleges from cuts stemming from a projected drop in state revenues.
It’s more common for states to find additional funding for schools in unallocated surpluses they’ve carried over throughout the past few years, Vesey White said. That’s one area educators and those in the education sector should watch, she suggested.
“Most states also have a considerable amount saved in their general fund ending balances, which are usually unrestricted,” she said. “That might provide a little more wiggle room for states to have some additional resources going into this budget cycle.”
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