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U.S. states greet new fiscal year with modest spending growth

Money
Money

WASHINGTON (Reuters) - Most U.S. states will start their new fiscal year next month with budgets that provide some breathing room both for spending and revenues, according to a semi-annual report released by the National Association of State Budget Officers on Thursday.

General fund spending, which represents 40.3 percent of states' budgets, is expected to increase 2.9 percent in fiscal 2015, which for most states begins on July 1. At the same time, revenues are forecast to rise 3.2 percent, according to NASBO.

Although recovery from the state fiscal crises caused by the 2007-09 recession has been slow, states' spending and revenue gains have outstripped inflation.

"For many states, this has presented an opportunity to accelerate fiscal progress," NASBO said. "Governors in most states are proposing to increase spending in fiscal 2015 by more than the current rate of inflation, bolstering core services such as K-12 education and higher education."

In general, though, spending proposals "have been put forth with caution," NASBO said, as it warned that "growth in personal income tax collections in fiscal 2015 may be hampered by stagnant wages."

States are considering cutting taxes and fees by $2.5 billion next fiscal year, although more than half of governors have proposed leaving taxes untouched. Florida, Minnesota, New York and Ohio are considering the biggest tax reductions, while governors in Delaware, Massachusetts and New Jersey are considering the most substantial increases.

This fiscal year, states cut taxes and fees by $2.1 billion after raising them by $6.9 billion the previous year.

In fiscal 2013, a one-time surge of revenue resulting from federal tax code changes brought states' reserves up to a healthy level, representing more than 10 percent of general fund expenditures. Their collective $73.5 billion of ending balances was a record high, NASBO said.

The balances, though, declined this fiscal year as states used reserves to deal with slower revenues and they will likely end fiscal 2014 at $63 billion, or 8.6 percent of expenditures. Governors have proposed further drawing down balances to $55.4 billion in fiscal 2015, or 7.4 percent of general fund expenditures.

The fastest growing expense for states during the last few years has been Medicaid, the healthcare program for the poor partly paid for by the federal government. This year, Medicaid spending likely grew a total of 13 percent, with the states' contributions rising 5.9 percent and federal funding increasing 18.3 percent. The reform law known as Obamacare expanded the qualifications for enrollment in Medicaid and also put in more federal dollars for the program.

In fiscal 2015, states expect Medicaid spending to grow 7.6 percent in total, with the state side increasing 5.8 percent and the federal side 10.2 percent. States also forecast that the program's enrollment will continue to grow, by 8.9 percent, next fiscal year, according to NASBO.

(Reporting by Lisa Lambert; Editing by James Dalgleish)

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