Revenue above expectations, pandemic federal aid and reserves have strengthened states' financial outlook. But states will need to prepare as pandemic aid winds down and the economy slows.
The 2023 fiscal year will start July 1 with states well-positioned due to record fiscal year 2022 revenues and accumulated reserves, as well as federal aid. However, states should begin normalizing spending in the coming year, particularly in light of potential equity market losses, inflation-related rising costs, anticipated slower growth and the absence of new extraordinary federal stimulus. The vast majority of states have prepared to manage this transition with continued resiliency (see Exhibit 1), supporting a stable credit outlook for $375+ billion of state-issued municipal bonds.
HEALTHY BUDGETS FOR 2023
Generally, states expect balanced budgets for the fiscal year 2023, despite likely moderating economic growth. Many states are budgeting for flat to modest revenue growth, with some calling for a pullback from fiscal year 2022’s record tax collections — particularly in corporate taxes.
The National Association of State Budget Officers Annual Survey reports projected 2023 revenue growth at a median 1.4% versus 2022. This is composed of 6% growth in personal income tax, less than 1% growth in sales tax and significant weakness in corporate tax collections, down 11% with expected lower profits. States will continue to use federal pandemic aid (see Exhibit 2).