NASBO: State expenditures reach highest level in 35 years

COVID-19 stimulus spending caused 2021 state expenditure estimates to sky-rocket to the highest level in 35 years.

That was according to the Fiscal 2019-2021 State Expenditure Report released by the National Association of State Budget Officers Friday.

Total state spending reached $2.65 trillion in fiscal year 2021, a jump from the $2.28 trillion observed in fiscal year 2020, an estimated jump of 16.2% year over year, with a median increase of 12.5%.

“The large increases in total state spending, led by strong gains from federal funds to states, is directly related to COVID-19 recovery response and recovery efforts,” the report said. The passage of the CARES Act in Spring 2020 provided significant funding to states through 2020 and early 2021 and the American Rescue Plan of March 2021 provided $195.3 billion for states and the District of Columbia, in addition to $4.5 billion for territories, who have until 2024 to allocate funds.

Despite NASBO’s yearly State Expenditure Report providing actual fiscal stats for fiscal years 2019 and 2020, 2021’s fiscal numbers are estimates and won’t be finalized until the group releases next year’s report. But still, with the increased stimulus states have received over the last year and half and continued funding from the new infrastructure spending law, states should expect to have these levels to remain high for at least the next few years.

“We’re expecting to see continued growth in federal funds to states over the next few years,” said Brian Sigritz, director of state fiscal studies at NASBO and author of the report. “There is a recognition that most of the funds are one time in nature,” he added. “There are a lot of states trying to determine the best use of funds and trying not to create many new programs where there would be ongoing spending obligations beyond the length of the next several years.”

The report is divided into sections by specific expenditures.

Total spending in the “all other” category increased 29.3% in fiscal 2021 with state funds for these purposes growing 10.4% and federal funds rising 72.8%.

That category includes the bulk of state government agencies and spending for programs like children’s health insurance, care for mentally ill, public health programs, family services, constitutional officers, legislative and judicial branches, employer contributions to pensions and health benefits, economic development, unemployment insurance, and housing.

“States estimate in fiscal 2020 they expended $73.2 billion in federal COVID-19 aid for ‘all other’, while in fiscal 2021, federal COVID-19 aid for ‘all other’ purposes is estimated at $226.4 billion,” the report said. States reported spending a total of $427.9 billion in overall federal COVID-19 aid, up to $321.6 billion in 2021 from $106.3 billion in 2020.

“Unlike fiscal 2020, when state revenues declined for the first time since fiscal 2010, state revenues rose sharply in fiscal 2021, increasing by an estimated 12.8%,” the report said.

“Several factors help explain recent improvements in states’ revenue outlooks, including: federal stimulus measures infused money into the economy, which helped to lessen state revenue losses; high-income earners have been relatively insulated from the COVID-19 pandemic’s economic effects, which has limited impacts on personal tax collections; the types of consumption most curtailed by the pandemic comprise a relatively small portion of states sales tax bases; and the greater ability to tax online sales following the U.S. Supreme Court decision in Wayfair v. South Dakota.”

According to NASBO’s Spring 2021 Fiscal Survey of States, nineteen states reported they recognized these delayed revenues due to the deadline shift in fiscal 2021 instead of fiscal 2020 stemming from the Supreme Court decision, ultimately depressing 2020 revenues and leading to higher growth in 2021.

The 35-year average growth rate for state expenditures is 5.7% but in the last decade, typically fell under that. Beginning 2012 with a decline of 1.1%, it increased in 2013 by 1%, 3.8% in 2014, 6.4% in 2015, 1.4% in 2016, 3.6% in 2017, 3.2% in 2018, 5.1% in 2019, leading to a jump of 8.7% in 2020 and the whopping 16.2% in 2021, its largest ever.

But usually, state spending grows on a nominal basis each year since 2012, when total spending declined for the first time in NASBO’s 35 year history of conducting the State Expenditure Report as a result of lapsed stimulus measures. A similar outcome could follow this heightened period of fiscal spending, as state revenues are expected to continue to rise in 2022, yet at a lower rate than exhibited this year.

State general fund spending, which includes some elements of transportation spending, grew a total of 4.1% in fiscal 2021 with transportation and public assistance claiming the highest percentage growth claiming 32.3% and 21.7%, respectively. But for transportation, “general funds make up a very small percentage of overall transportation spending,” the report said.

Transportation represented 7.1% of total state expenditures in fiscal 2021.

NASBO also asked states to separately detail their debt service spending, which totaled $50.7 billion in fiscal 2019, $47.8 billion in fiscal 2020 and $55.9 billion in estimated fiscal 2021. In fiscal year 2021, debt service represented 3.6% from state funds (excluding bonds) and 4.6% of spending from the general fund only.

“Some states reflect the no general fund spending for debt service because they earmark certain tax revenue streams to support bond repayments and direct those resources to state funds other than the general fund,” the report said.

Capital expenditures have also been steadily rising over the last few years, rising 9.1% in fiscal 2021, 4.7% in fiscal 2020 and 6.1% in fiscal 2019.

“A large amount of capital expenditures does come from bonds,” Sigritz said. “Things like the infrastructure bill that’s been passed at the federal level will work in tandem with additional investment the states have made on their own over the past several years.”