From Fitch Ratings
U.S. state fiscal year 2014 budgets anticipate continued economic and revenue recovery despite uncertainty about federal government funding and healthcare reform, according to a new Fitch Ratings report.
State tax collections have grown for twelve straight quarters based on Census Bureau data through December 2012, with Fitch observing continued growth since then. Although the pace of growth has slowed since 2011, fiscal 2013 results so far are generally in line with, or exceeding, budget expectations.
Most state budgets assume sustained, slow economic and revenue gains for the current and coming fiscal years.
While budgets have, for the most part, been devoid of surprises, a key uncertainty for state budget-makers is action at the federal government level. On the revenue side, taxpayer activity to accelerate income into calendar 2012 to avoid federal tax increases has resulted in very strong current-year income tax results in some states that make forecasting more challenging and raise the risk of underperformance in the coming year.
Conversely, the end of the federal payroll tax holiday is reportedly one factor in sluggish sales tax growth experienced by many states over the past several months.
On the spending side, sequestration is having a limited effect on economic performance and the finances of states, which in most cases are choosing not to replace funding for federal programs.
However, Fitch believes that states remain significantly exposed to the possibility of future federal funding cuts. Cuts would be most challenging if they affected Medicaid, which accounts for the majority of federal aid to the states and so far has been protected from automatic cuts.
More immediate uncertainty is presented by federal healthcare reform, the major provisions of which will take effect in fiscal 2014. This affects all states, regardless of whether they are choosing to expand Medicaid.
For details, see the Fitch special report US Public Finance Credit View