By Lisa Lambert
WASHINGTON (Reuters) - Most U.S. states are set to end this fiscal year in solid financial shape, but a report on Thursday said an array of threats including federal budget cuts and potential sales tax declines will keep state spending.
The survey of states' fiscal conditions conducted by the National Governors Association and the National Association of State Budget Officers found that revenues have come in stronger than expected this fiscal year, and "a number of states could finish fiscal 2013 with modest surpluses."
In total, states will likely end this fiscal year with balances of $23.7 billion. For most, fiscal 2013 ends on June 30.
Florida and Indiana will likely have ending surpluses of more than $2 billion. Massachusetts, Minnesota, New York, Ohio and Texas may have balances greater than $1 billion. California, which scraped the bottom during the recession-induced crisis, is expected to have a surplus of $785 million.
Other states will have small balances, such as Kentucky at $52 million, while some such as Utah will end the year with nothing left over.
Moreover, only 13 states anticipate having deficits next year totaling $6.8 billion.
"There may be surpluses here and there that look good on paper," said Dan Crippen, the executive director for the governor's group. "But the future is not very bright."
The dimness comes in state spending plans. Altogether, total state spending will likely increase 4.1 percent to $728 billion in fiscal 2014.
That is a smaller rise than the historical average of around 5 percent, and 19 states expect their spending to remain below pre-recession highs, according to the report.
When adjusted for inflation, total spending is also below the level reached before the 2007-09 recession, indicating "that state budgets are not growing quickly enough to make up for recession-induced declines and inflation," the report found.
With a relatively tepid recovery across the United States, such a modest increase in state spending means that any contribution to economic growth from state and local governments will be limited.
The surpluses could also be the result of what Scott Pattison, executive director of the budget officers' group, called "a one-time only bump."
With the tax cuts passed under former President George W. Bush expiring at the end of 2012, many taxpayers sold off investments or made other financial moves in the waning days of the year to avoid potentially steep tax bills in 2013. The resulting burst of income buoyed states' income tax collections, which provide more than one-third of total tax revenue.
States could be in for a revenue drop next year, and many are putting the funds to one-time expenditures instead of "ongoing programs that will get them into trouble in the future," said Pattison.
THREATS FROM THE FEDERAL GOVERNMENT
Many of the threats come from the federal government. Chief among them: across-the-board spending cuts known as sequestration that began in March. States are still in the dark about how much their aid they will be reduced because each federal agency is handling sequestration differently. Moreover, legislation to redo sequestration and other budget negotiations are creating further confusion.
There is also Medicaid, the healthcare program for the poor that is partially reimbursed by the federal government and is states' largest spending item. The program is set to expand under the healthcare law known as "Obamacare," with the federal government reimbursing states 100 percent for people who qualify under the expansion.
States are nervous those who currently qualify for Medicaid but are not enrolled, estimated at more than 3 million people, will decide to join amid the outreach campaign for the expansion. They will not receive the 100 percent reimbursement for those enrollees, and could be on the hook for millions of dollars, Crippen said. Medicaid enrollment already likely rose 3.2 percent in fiscal 2013, according to the report.
Concerns about the backbone of the American economy, the consumer, are also growing. A federal payroll tax cut expired in December, and states are worried sales taxes will tumble as people have less disposable income.
At the same time, there are threats posed by mounting obligations that states must fund, with public pensions and healthcare looming over many budgets, said Crippen.
"The fact that states are doing OK this year is a good thing. But there are lots of obligations states are going to have to take on in the near future," he said.
(Reporting By Lisa Lambert; Editing by Tiziana Barghini and Cynthia Osterman)