S&P: Rosier Near-Term Outlook for State Budgets, but Risks Persist

The Pennsylvania State House chamber.

The Pennsylvania State House chamber. Shutterstock

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The credit rating agency released its annual U.S. states budget analysis this week.

Things are looking up for state budgets, at least for now, according to new research from S&P Global Ratings.

State tax collections for fiscal year 2018 (which ends on June 30 in 46 states) are beating forecasts and in most states revenues have surpassed where they were at this point last year, the credit rating agency says in its annual U.S. states budget analysis, released Tuesday.

Federal policies, including tax cuts and recently approved spending increases, promise to offer stimulus to an economy that is already over eight years into a growth cycle, the report notes.

Additionally, S&P says rising budget pressure from Medicaid has eased. Enrollment has leveled off, and interest among congressional lawmakers in rolling back federal support for the program has faded.

But the report also cites estimates that U.S. economic growth will peak this year around 2.9 percent, before slowing due to factors such as demographic changes and limited gains in labor productivity.

By 2021, S&P expects real U.S. GDP will check in around 1.8 percent.

Meanwhile, there's been recent turbulence in financial markets, which poses a possible threat to state budgets.

And, despite signs of health in the current budget cycle, S&P points out that states continue to face a range of fiscal difficulties.

For instance, some states are seeing teacher strikes tied to education funding. Many states have infrastructure maintenance backlogs. And public employee pension costs are a perennial concern.

"A more positive tone in the credit conditions affecting U.S. states does little to ameliorate the structural sources of credit stress that have increasingly buffeted the sector in recent years," the report says.

It adds: "We expect a state's financial management and budgetary performance during these 'good' times will dictate much about its resilience to stress when the economy eventually softens.

Bill Lucia is a Senior Reporter for Government Executive's Route Fifty and is based in Washington, D.C.

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