Years Later, the Recession’s Sting is Still Tough to Shake for Many States

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New research takes a look at the lingering mark the downturn left on state budgets.

States across the U.S. continue to bear an imprint on their finances from the Great Recession despite roughly a decade of national economic growth in the years since the downturn ended.

That’s according to new research The Pew Charitable Trusts released this week. It finds that state spending in areas like public education and infrastructure is still behind compared to where it stood before the recession took its toll. The recession ran from late 2007 to 2009.

The number of workers on state payrolls remains down as well, the researchers found. They also note that fixed costs for Medicaid and public employee pensions continue to pressure budgets. And that some states have low levels of “rainy day” reserve funds on hand.

“State finances haven’t fully shaken off the effects of that downturn,” Pew’s Barb Rosewicz said during a call with reporters earlier this week. “Even though the Great Recession seems far off, it's legacy is still relevant in challenges states are facing today,” she added.

The findings come at a time when states during the past year or so have generally seen healthier tax revenues and the economy is doing well based on many measures.

But there are questions about how much the federal tax overhaul enacted in late 2017 boosted state tax collections in the near-term and to what extent the added revenues will be maintained.

“A budget surplus today is great, but it doesn't necessarily mean that states are back to business as normal,” Rosewicz noted.

The Pew report says that states lost out on an at least $283 billion when tax collections sank below 2008 levels and remained there until 2013, after adjusting for inflation.

To help put that figure in context, general fund revenue for all states in fiscal 2018 totaled about $837.7 billion, according to the National Association of State Budget Officers.

Looking at education, the Pew researchers found that per-student spending on K-12 schools was down in 29 states in academic year 2016 compared to 2008. Initial data for the past two years show that this trend is continuing for over 20 states.

It’s a similar story with higher education. State spending per student for public colleges and universities was down 13% in 2018 compared to about a decade earlier, with 40 states reporting lower per-student funding, according to the report.

Infrastructure investment has received heightened attention during the Trump era, with many state and local officials holding out hope for legislation that will greatly beef up federal funding.

And since 2013, 31 states and the District of Columbia enacted legislation to increase or possibly increase overall gas taxes, according to the National Conference of State Legislatures. Local governments have also asked voters to approve taxes or bonds to fund public works.

But Pew finds state investment in roads, waterworks and other infrastructure was 3.2% lower in 2017 than it was in 2007. There were fluctuations in the years between. But 2017 saw the lowest level of state infrastructure funding as a share of the economy in over 50 years.

From a peak of about 2.8 million workers in 2008, (not counting teachers and other public school staff) state government jobs dropped after the recession hit, declining by nearly 170,000 through 2013.

Workforces have recovered some positions since then. But employment was still down by over 132,000 jobs last year compared to the 2008 high mark.

The U.S. economy is in a historically long growth cycle. But another recession will inevitably occur at some point. One way states prepare for this is by socking away money in reserves.

Pew found that at the end of fiscal 2018, rainy day funds held more money than any past year on record. That’s only part of the story though. At least 19 states still have smaller rainy day funds as a share of their operating costs than they did in 2007.

Seven states in fiscal 2018 had less than one week worth of operating costs in rainy day funds.

Rosewicz says there’s a risk that lower funding levels in areas like infrastructure and education “could be cemented in place” if they aren't erased before the next downturn.

“That could lead to permanent changes in the level of state support for certain services and a de facto reordering of state priorities for how taxpayer dollars are spent,” she added.

A full copy of the Pew report can be found here.

Bill Lucia is a Senior Reporter for Route Fifty and is based in Olympia, Washington.

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