U.S. state finances continue to improve

An improvement in U.S. overall state finances is seen, and are no longer a major drag on economic growth as they were through the downturn and early recovery. Real state and local government spending was up 0.8% y/y in Q1, hardly a blistering pace, but a notable turnaround after years of restraint earlier in the recovery. According to the National Association of State Budget Officers, nominal General Fund spending increases are pegged at an average of 4.6% for FY2015 and 3.1% for FY2016, notes BMO Capital Markets. 

Overall, just eight states have planned spending reductions for fiscal 2016. Meantime, states have enacted roughly $1.3 bln in tax cuts for FY2015, but increases of about $3 billion are expected in FY2016 (led by Pennsylvania), adds  BMO Capital Markets. The western Midwest region enjoys the most favorable fiscal conditions, led by Wyoming, Nebraska and the Dakotas. These states sport high employment rates on which to back expenditures, strong fund balances and low pension liabilities. Tax receipts, however, have softened versus last year in most cases. 

Mississippi and New Mexico are underperforming, weighed down by low employment rates and elevated pension liabilities. Illinois continues to rank near the bottom of the pack. Pension liabilities are the biggest issue, with the latest estimate from PEW Center on the States pegging the shortfall at 13.7% of GDP for fiscal 2012- reform on this front continues to progress slowly.