State budgets are unexpectedly thriving in the wake of the pandemic, concludes a new analysis from the National Association of State Budget Officers. But don’t start feeling too optimistic, because a modest slow down is expected in the coming year.
With nearly half of school districts’ revenues coming from state funding on average, the analysis points to the current opportunities and potential upcoming challenges for districts as they work to address pandemic-related learning loss, fill teacher shortages, and improve facilities.
The analysis showed most states ended fiscal year 2022 with year-over-year revenue growth that exceeded their forecasts. The revenue increases come after rapid growth in tax collections in fiscal 2021 as well, following declines in 2020.
Florida saw a revenue surplus of $21.8 billion in fiscal 2022, the highest in state history, according to the analysis. Connecticut broke a record with its $4.3 billion surplus in the fiscal year, and Ohio saw revenues exceed forecasts by $2.7 billion, a record high. In Arkansas, Idaho, and West Virginia, surpluses hit record highs as well.
Multiple factors helped drive the record-busting revenues, said Brian Sigritz, director of state fiscal studies for the association and the author of the analysis.
Economic Growth, Inflation Drove Tax Revenue Increases
Economic growth in the wake of the pandemic, such as increases in wages and consumer spending, was a driving force. States were also able to benefit from the increase in online purchases, he noted, thanks to the 2018 Supreme Court ruling that enabled them to collect sales taxes on online sales.
Federal COVID-19 relief aid for states also played a role in boosting states’ revenues, Sigritz said. And, the recent rise in inflation helped drive increases, since increased prices for goods and larger salaries resulted in higher sales and wage tax revenues, respectively.
Increased profits for businesses boosted corporate income tax revenue, and a strong stock market performance in 2021 helped raise personal income tax revenues. Much of Ohio’s increase was due to an increase in personal income tax collections, for example.
State Spending Leans Toward One-Time Investments
So, how are states spending their influx of cash?
Many are being careful about allocating federal aid or revenue surpluses on reoccurring budget line items, since federal aid will end and the record-high revenue increases aren’t expected to repeat next year, Sigritz said.
Much of those funds are instead being directed toward one-time investments in capital projects, long-term debt payments, aid to local businesses, and other expenses aimed at strengthening their economies. Some is going back to taxpayers. In Massachusetts, for example, the expected $2.5 billion surplus is so large that it could trigger a state law that would require the state to return money to residents via tax relief.
As governors look ahead, many are also showing an interest in using both their federal dollars and state tax dollars to increase funding for education in the fiscal year 2023, Sigritz said, which could have a sizable impact on districts’ financial health. On average, districts receive about 47% of their funding from their state budgets, he said.
“We’ve definitely seen K-12 as a priority for states and we’re continuing to see that again as states have seen growth in revenue over the past two years,” Sigritz said.
Investments in K-12 are spread across a number of areas, he noted, adding “first and foremost” is teacher recruitment and retention. “That has become a priority for a lot of states.”
In addition to recruitment and retention efforts, Sigritz said states are looking to spend funds to boost staffing levels for school nurses, mental health professionals, and other support personnel.
Some states have also decided to use increased revenues to fully fund education formulas, which direct how much each district receives in state aid.
We’ve definitely seen K-12 as a priority for states and we’re continuing to see that again as states have seen growth in revenue over the past two years.Brian SigritzDirector of State Fiscal Studies for the Association
States are also using COVID-19 federal aid funding to help address pandemic-related learning loss through summer schools and supplemental programs.
Others are investing in one-time capital improvements to upgrade K-12 facilities while the funding is still available, he said, which reduces the need to incur debt later on.
Growth predicted to remain slow, but funding levels to stay high
While this year’s record-high increases in state revenues were “unexpected,” Sigritz said, it’s unlikely revenues will break records again in the coming years. But they will likely grow at a modest level. Governors’ 2023 fiscal year budgets assume revenues will grow at 1.4 percent, compared with fiscal year 2022, the analysis stated.
There are uncertainties that play into states’ fiscal outlooks, including the impact inflation, workforce shortages, the war in Ukraine, and a potential increase in COVID-19 cases could have on the economy.
Still, given the record-high growth in revenues states have seen over the past year, Sigritz said even minimal growth in the future still means states, and districts, will be operating with larger budgets than before.
“States are looking at lower growth this year in revenue, but the growth is following two straight years of very rapid growth, so it’s already on a higher base,” he said. “Even if it’s barely any growth or turns out to be negative growth, we’re still at somewhat elevated levels because of the strong growth in the past two years.”
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