Just a year ago, the financial future looked bleak for state governments as governors and lawmakers scrambled to cut spending amid the coronavirus recession that was projected to pummel revenue.
They laid off state workers, threatened big cuts to schools and warned about canceling or scaling back building projects, among other steps.
Today, many of those same states are flush with cash, and lawmakers are passing budgets with record spending. Money is pouring into schools, social programs and infrastructure. At the same time, many states are socking away billions of dollars in savings.
“It’s definitely safe to say that states are in a much better fiscal situation than they anticipated,” said Erica MacKellar, a fiscal analyst with the National Conference of State Legislatures.
Spending plans for the budget year that begins July 1 are up 10% or more in states spanning from Florida and Maryland to Colorado, Utah and Washington.
Fiscal analysts cite a variety of reasons.
The federal government poured billions of dollars into state coffers through a series of pandemic relief packages. Federal aid also sent billions more to U.S. households and businesses that, in turn, pumped money into the economy.
State finances also fared better than feared. Consumer spending rebounded to shore up sales tax revenue, and state income taxes were bolstered by a strong stock market and high-wage earners who kept working remotely while others were laid off.
The result is that states now face “a very promising fiscal and economic outlook over the next couple of years,” said Justin Theal, a state fiscal research officer at The Pew Charitable Trusts.
A recent Pew report found that after an initial sharp plunge in tax revenue, 29 states recovered to take in as much or more during the peak pandemic period of March 2020 through February 2021 than they did during the same 12 months before the pandemic began.
Idaho, Utah, Colorado and South Carolina posted some of the biggest revenue gains along with South Dakota, which was one of the few states never to shut down. The Pew report also noted modest revenue gains for some states that imposed more aggressive coronavirus precautions on their economy, including California, Massachusetts and New York.
The $212 billion budget enacted earlier this year in New York is up almost 10% over the previous one. Federal COVID-19 relief provided the bulk of that growth. But state spending alone still is up by 3.8% in the new budget, according to Democratic Gov. Andrew Cuomo’s administration.
New York’s bigger budget includes a mixture of ongoing and one-time spending, including a $1.4 billion boost in basic aid for schools and a $1.3 billion plan to overhaul Penn Station.
Florida’s record $101.5 billion budget is up roughly 11%, with bonuses for teachers, police and firefighters, and new construction projects at schools and colleges. Lawmakers decided they had money to spare, expanding sales tax breaks for school and hurricane supplies and creating a new tax-free week to buy museum and concert tickets and recreational gear for camping, fishing and surfing.
Florida is among several states that amplified their 2021-2022 budgets with at least part of their share of a $195 billion state aid package from the recent American Rescue Plan Act signed by President Joe Biden.
Shortly after that plan passed, Moody’s Investors Service upgraded the outlook for states from negative to stable, citing stronger state finances and continued federal aid. It said the new federal aid equaled nearly 16% of states’ own revenue for the 2019 fiscal year.
In many states, lawmakers are devoting federal COVID-19 relief money to one-time purposes, such as additional aid to workers, expanded access to high-speed internet or replenishing depleted unemployment trust funds.