With state budgets experiencing an increase in both spending and revenues, the economy is showing signs of a slow, measured recovery, according to a new report released today.

State revenues have grown but remain sluggish, as Medicaid spending continues to hamper overall state budget pictures, according to the Fiscal Survey of the States, released by the National Governors Association and the National Association of State Budget officers. Revenues generated by oil production have had the greatest impact nationally on state budgets, while uncertainty over unemployment and the looming Supreme Court decision on health-care reform cloud state fiscal portraits.

Despite revenue growth, states have been tentative with how they handle new-found revenue. "With spending, you continue to see growth," said Scott Pattison, executive director of the National Association of State Budget Officers.

But now that federal stimulus funds are exhausted, state spending has increased 4 percent, putting pressure on the already tepid growth of states' economies. "Slow growth, though better than the recessionary years," said Pattison.

Medicaid state spending did not increase in the last couple years, Dan Crippen, executive director of the National Governors Association, said.

But Medicaid costs have been rising, up 4 percent from last year leading into fiscal year 2013, which begins July 1, 2012. These costs, coupled with poor property values, left states with record budget shortfalls. "In fiscal years 2009 and 2010, you saw a decline in spending," said Pattison, while in fiscal years 2011 and 2012, there was an increase in spending of 3.3 percent and 2.2 percent, respectively.

According to Pattison, slow growth makes it tough to cover all state costs, which include funding K-12 education, prisons and universities. "From a municipal bond standpoint, rating agencies and investors are interested in good financial management," he said. "I wouldn't be surprised if you saw an increase in borrowing."

In 2012, 39 governors recommended a spending increase, according to Pattison. "Only 8 states ... have to make mid-year budget cuts." In 2009, 43 states made mid-year cuts.

Pattison said end-of-the-year balances coupled with rainy-day fund reserves have increased from 6.5 percent of expenditures in 2012 to 7.8 percent in 2013. States are saving more because their growth rate, although positive, is slow.

North Dakota also has seen an oil boom, which may affect the outlook of fiscal year 2013. It is now the second-leading oil producer in the country, trailing only Texas.

Employment has lagged behind increased state revenues due to the decrease in federal spending. "Federal spending to state and local governments have been diminishing," said Crippen. "Whether it's sequestration or failure to pass transportation bills."

States are also suffering from low property values. Crippen said they have yet to stabilize and that it will take time for property revenues to catch up.

He said that uncertainty, in a larger public sense, is partially to blame for the lagging recovery. "There is much more uncertainty in the public sector than the private sector," he adds, explaining that the economic uncertainty in the housing sector, Europe, and the Supreme Court health-care decision all play a role in our economic prosperity.

Medicaid costs remain one of the most daunting tasks facing state budgets for fiscal year 2013. "Future requirements for spending on health care, education, and other things which have been cut over the last 4 years are unable to accommodate anything other than health-care increases," said Crippen.

"States are set to absorb another 15 million Medicaid patients, making it tough for states to plan."

The reason for the increase, according to Crippen, is that there are more longer-term unemployed than normal. "In this part of the recovery, you would expect to see costs of Medicaid declining," he said.

But with an increase in retirees adding to the number of Medicaid recipients, overall health-care costs are straining state budgets.

"Medicaid has very few areas left for states to control; the Maintenance of Effort Requirements, under the Affordable Care Act, freeze in place beneficiary requirements," said Crippen. "There are very few policy levers left for states to cut medicaid spending so the pressure would be put mostly on provider reimbursements and even that is limited right now between this period and 2014."

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