Great Lakes Wire

(LOUISVILLE) — While declining revenues, a slowing economy, demographic changes, and structural deficits are among the top fiscal issues for states, Michael D’Arcy of Fitch Ratings offered insights during a National Conference of State Legislatures (NCSL) session earlier this month.

The panel was based on a survey of state fiscal offices across the country to determine the top fiscal issues in the states. D’Arcy noted that a majority of state fiscal directors find these issues concerning but addressed ways some concerns may not be as severe as envisioned.

He indicated that declining revenues are indeed a significant concern, with 16 states experiencing revenue declines in the last fiscal year. The median year-over-year growth for states was 0.5 percent, marking a deceleration from previous years' revenue surges. “It is a largely engineered phenomenon,” D’Arcy said, noting that 44 states have cut taxes over the past three years by more than $80 billion. He added, “We thought this year was going to be kind of a fallow year with about $5 or $6 billion worth of total tax reduction actions by the time the supplemental budget sessions were over. It was over $10 billion, equal to 2021. That is driving a lot of the revenue decline.”

Regarding economic uncertainty, D’Arcy mentioned slower hiring and a cooling labor market as substantiating factors for concern. He referenced the Sahm Rule Recession Indicator, which signals the start of a recession if unemployment rises by more than 0.5 percent over 12 months. “That has been the best predictor for a U.S. recession since 1952,” he stated but suggested that this time might be an exception due to an increase in labor supply from new entrants into the country.

On demographic changes, he remarked it varies significantly by state. States like Idaho and Utah benefit from positive demographic trends due to high birth rates and population influxes, whereas Ohio, Michigan, and Maine face challenges maintaining revenue momentum.

The event was moderated by Jonathan Ball, legislative fiscal analyst for the Utah Legislature, and included contributions from Michelle Exstrom, Eric Syverson and Heather Wilson from NCSL; and Fatima Yousofi of Pew Charitable Trusts. The panel also discussed education, housing and pension concerns for state budgets.

D’Arcy noted that despite revenue declines in some states like West Virginia—which saw a 15 percent drop—many still surpassed their forecasts by over 10 percent. He reassured attendees that Fitch currently has five states on positive outlooks for credit ratings with none on negative outlooks.

Eric Syverson discussed recent state tax policies addressing housing affordability, income tax cuts, reducing costs of capital investments, child care costs policy improvements and sales tax exemptions.

Yousofi highlighted long-term liabilities such as unfunded retirement obligations and infrastructure maintenance which could strain state budgets if not managed properly.

Wilson spoke about the ongoing housing crisis noting that since 2019 NCSL has tracked nearly 2,000 bills related to housing affordability with hundreds passed so far this year alone addressing rent stability and easing zoning regulations among other areas.

Article courtesy MIRS News for SBAM’s Lansing Watchdog newsletter

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