State Watch

State government spending tops $2 trillion

State governments will spend more than a combined $2 trillion this fiscal year, a new high led by greater spending on transportation infrastructure, education and entitlement programs.

A new report from the National Association of State Budget Officers (NASBO) found state government spending rose by 4.6 percent during this fiscal year, slightly higher than the previous year's growth but below a three-decade average of 5.6 percent growth.

The $2 trillion mark comes 17 years after state governments first hit the $1 trillion spending mark. John Hicks, who heads the national association, said that makes for a modest annual growth rate of 4.2 percent.

Spending on Medicaid and K-12 education account for the largest shares of state budgets, said Lucy Dadayan, a state budget expert at the Urban Institute. Medicaid accounts for nearly 30 percent of all state budgets, according to NASBO data, while K-12 programs take up just less than 20 percent.

Hicks pointed to some evidence suggesting that Medicaid costs continue to rise, even as enrollment holds steady in the years after most states expanded the program under the Affordable Care Act.

"Usually there is a close alignment in enrollment growth and spending growth," Hicks said. Now, with Medicaid bills rising even as rolls stay steady, "clearly a cost pressure in the Medicaid world is causing that year-over-year growth."

Transportation spending grew quickly as well, driven largely by a huge boost in spending in California. Legislators in Sacramento grew transportation spending by more than 25 percent in the last fiscal year, after passing a gas tax increase that boosted revenue aimed specifically at infrastructure projects.

Hicks also said many states are using a strong economy - which generates more tax revenue - to improve their long-term fiscal outlooks. Many states have added to reserve accounts from which they can draw if the positive economic climate begins to cool.

"States have taken the lessons from past recessions and are building back up their rainy day funds," Hicks said. "Their level of preparation, historically, has improved."

State government spending has risen almost every year in recent history, with the exception of 2012, after the recession, when spending shrank by 1.1 percent.

State revenue grew faster than spending in this fiscal year, led by gains in personal income taxes, a sign of a healthy economy. Of all major revenue categories, only lottery revenue is likely to shrink this fiscal year.

California has by far the highest budget of any state. The Golden State, the nation's largest, expects to spend $282 billion in the current fiscal year, nearly $100 billion of which comes from federal sources. On the other end of the spectrum, Wyoming and South Dakota spend less than any other state, about $4.4 billion each.

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