The untold story of the year for U.S. states might be just how improved their budget conditions are on the eve of fiscal 2019, which begins on July 1 for 46 of them. State policymakers have a lot to cheer. Through December, total state tax revenues had surged 9.4 percent above the prior year, which was up from 2.7 percent from the year before that, according to new data from the Rockefeller Institute of Government.

Thanks to a slowdown in new signups for Medicaid, which is a major cost driver in state budgets, there is less pressure on spending. So far this year, S&P Global Ratings has issued just one credit rating downgrade in the state sector, a slowdown from 2016 and 2017 when there were 17 downgrades, suggesting near-term strains on credit quality have eased. For lawmakers charged with crafting state budgets, these are the pleasant byproducts of accelerating economic growth.

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Despite this good news, caution is in order. Some of the revenue upside might be a windfall from taxpayers that accelerated nonwage income into the 2017 tax year. It’s also possible the current economic cycle is approaching a peak. Aided by an unanticipated burst of federal fiscal stimulus from tax cuts and a large spending package, I forecast gross domestic product growth will top out at 2.9 percent in 2018.

Thereafter, I expect growth will decelerate until reaching its underlying trend rate of 1.8 percent in 2021. There is mounting evidence that this is too slow for the states, most of which operate under decades-old fiscal arrangements entered into when economic growth typically exceeded 3 percent. Anachronistic tax systems developed for the 1950s also hinder states in the face of a burgeoning services-oriented economy and the shift toward online retailing. Not only has growth slowed, state tax systems now capture a smaller share of it than in the past.

In addition, while the flatter Medicaid enrollment trends are welcome, the plateau is unlikely to last. The Congressional Budget Office forecasts that after fiscal 2018, which ends in September this year, Medicaid expenditures will increase by 5.5 percent annually, exceeding the expected revenue growth rates of most states. The aging American population will provide a steady source of new and relatively higher cost enrollees that will exert persistent upward pressure on state spending.

States also face significant long-term funding obligations, not least for the pension benefits promised to their employees. Even after a nine-year bull market for stocks, state pension systems have assets equal to only 68 percent of their aggregate liabilities. Growth in nondiscretionary spending for retirement benefits and Medicaid will outstrip revenues under the most optimistic of scenarios. There is little room for the states to upgrade their existing infrastructure or boost funding for higher education. Ironically, such supply side investments might be among the antidotes needed to reverse the economy’s eroding capacity for growth.

Holding the line in response to this fiscal squeeze also has political limits. Call it austerity fatigue, but look no further than the recent teacher strikes in numerous states for examples of the disaffection boiling over among certain stakeholder groups. Practically speaking, the new federal tax law further narrowed state fiscal options by capping allowable deductions for state and local taxes. Nevertheless, primarily owing to the uptick in revenues, I expect a less acrimonious budget process for fiscal 2019 than for 2018, when 11 states began the year without a budget in place.

Still, as I see it the more positive tone to state fiscal conditions is most likely only a temporary respite from their underlying structural pressures. In the context of a growing economy with low unemployment rates, I expect a state’s financial management and budgetary performance during these "good" times will determine much about its resilience to stress when the economy eventually softens. For those that either stumble into political dysfunction or out of expedience assume recent trends will persist, this moment of fiscal quiescence could prove to be a mirage.

Gabriel Petek is a managing director and U.S. states sector leader in the U.S. public finance group for S&P Global Ratings based in California.