States Slowly Regain Fiscal Ground Lost in Great Recession

National

Nearly five years after the Great Recession officially ended in June 2009, states’ financial conditions are improving. But most states have yet to return to prerecession performance on some key measures of fiscal health. Even after states overcome the effects of the downturn, additional challenges await them.

An examination of 50-state data in The Pew Charitable Trusts’ Fiscal 50: State Trends and Analysis, an online resource, shows that recovery varies widely from state to state. Tax revenue, employment rates, and reserve funds still are lower in a majority of states than they were before they plunged during the recession. While those measures are moving in the right direction, other pressures are building.

For some states, one challenge is unfunded pension and retiree health care costs for public workers. In 43 states, these long-term retirement obligations are larger than the public debt from bond issuances and other state borrowing.

An issue for all states is the prospect of further belt-tightening by the federal government, which provides nearly $1 in $3 of state revenue. Already, federal economic stimulus aid, which boosted the federal share of state revenue to its highest levels in at least 50 years between fiscal years 2009 and 2012, has largely ended.

Why does state fiscal health matter?

All of these factors affect the fiscal health of state governments, which deliver critical services such as health care for the needy, education, transportation, and public safety. State finances also matter because of their impact on the U.S. economy. State spending accounts for 4 percent of the nation’s economic output, and states provide about one-third of local governments’ budgets.

What is Fiscal 50?

Pew’s Fiscal 50 provides sortable 50-state data and analysis on key fiscal, economic, and demographic indicators that affect states’ fiscal health. Updated regularly, this online resource highlights trends, allows 50-state comparisons, and offers unique insights into the finances of state governments. Each indicator drills down into one of five core areas: revenue, spending, economy and people, long-term costs, and fiscal policy. Fiscal 50 is selective rather than comprehensive in choosing indicators. Each indicator is designed with states’ long-term financial well-being in mind, rather than the short-term perspective of what it takes to balance the budget each year.

Here are six key takeaways from Fiscal 50’s data and analysis:

  • Tax revenue. For the first time, the combined tax revenue of the 50 states appears to have narrowly recovered to its peak level before receipts plunged in the recession, in inflation-adjusted dollars. Results for the second quarter of 2013 represent a milestone but fall short of erasing the recession’s effects. For one thing, recovery was uneven. Only 20 states’ tax collections were above their inflation-adjusted peaks.
  • Federal share of state revenue. After reaching record highs in the wake of the Great Recession, the share of states’ revenue coming from the federal government fell in fiscal 2012 as the federal stimulus program largely ended and states’ own revenues rose. But for the fourth straight year, federal dollars still made up a bigger portion of states’ money than at any other time since at least 1961. In fiscal 2012, Mississippi had the largest percentage of revenue from federal dollars, 45.3 percent, and Alaska had the smallest, 20.0 percent.
  • Change in state spending. The expiration of federal stimulus aid affected state spending. Total expenditures of state and federal funds combined declined from a year earlier because increased spending from states’ own dollars did not make up for the sharp drop in federal aid. Still, when measured as a share of the economy, total state spending was higher than during much of the past two decades.
  • Employment to population ratio. Nearly 76 out of every 100 Americans in their prime working years had a job in 2013, compared with nearly 80 out of every 100 in 2007, before the recession. The decline in the employment rate translates to lower tax revenue for states and increased expenses for assistance programs for the jobless.
  • Debt and unfunded retirement costs. Although states pass balanced budgets, some spending commitments that will not come due for years go unpaid. Among these are long-term obligations for public debt and unfunded pension and retiree health care benefits. As of fiscal 2010, unfunded pension costs in 31 states were a bigger liability than either debt or unfunded retiree health care promises.
  • Reserves and balances. Sixteen states expected their financial cushions to be restored to prerecession levels by the end of fiscal 2013. Although states’ rainy day reserves and general fund balances collectively are growing, three states expected to have less than five days’ worth of operating costs set aside for unexpected expenses.

For most indicators, Fiscal 50 allows users to compare their states with others and to a national benchmark, providing insights and perhaps raising questions in state capitals about why states lead or trail their peers. This resource will be updated when new data are available, and more indicators and analysis will be added.

Fiscal 50 builds on data from the 50 states obtained from U.S. government agencies, the Nelson A. Rockefeller Institute of Government, the National Association of State Budget Officers, the National Governors Association, and Pew’s research. Differences can be expected between certain fiscal data used in this analysis and data compiled and used by states for their own budgeting purposes. Data featured in Fiscal 50 are the best available for drawing fair comparisons across states.

Learn more about Fiscal 50.

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