To Prevent Structural Deficits, States Need to Use Long-Term Budget Assessments

For state governments, a period of fiscal abundance is coming to an end. Now, as financial conditions normalize and federal pandemic aid winds down, many state policymakers are questioning whether their budgets are on a sustainable path for the future—or whether they will soon have to make painful choices about how to allocate resources while governing in a new era of austerity.

Some policymakers, however, already have a clear sense of what their budget will look like in the years ahead because they use a tool called a “long-term budget assessment.” This tool makes multiyear projections of a state’s revenue and spending and examines whether states are expected to experience deficits or surpluses—and why. In its new report, Tools for Sustainable State Budgeting, The Pew Charitable Trusts found that when state leaders have long-term budget assessments, they use the analyses to make fundamental decisions about how much to tax, spend, and save.

In New Mexico, for example, lawmakers took quick action to close a future structural deficit—identified in their July 2022 long-term budget assessment—before it materialized. This assessment, prepared by nonpartisan legislative staff, showed that the state would face regular and growing deficits starting in about 15 years. The driving force behind these deficits? Expected declines in the state’s oil and gas production.

The findings were both a challenge and a call to action for state lawmakers. They understood that even if they were no longer in office when the deficits began, the state’s fiscal future—and their legacies as legislators—depended on addressing the issue. So that’s what they did. In the 2023 legislative session, lawmakers used the state’s temporary surplus to add hundreds of millions of dollars to various endowments and trust funds, which, by generating investment earnings, will increase revenue in perpetuity and reduce the deficits.

Today, New Mexico is making this forward-looking approach a regular part of its budget process. Legislative staff released another long-term budget assessment in July 2023 showing that the state’s fiscal outlook had improved, although the risk of future deficits was not eliminated completely. The 2023 assessment also offered policy options that could continue to reduce deficits in 2024 and beyond.

As New Mexico’s example shows, states can use data and analysis to prepare for or prevent fiscal crises—helping to avoid tax increases and service cuts that harm residents and local economies.

Unfortunately, New Mexico’s approach is not the norm. Pew’s research showed that since the start of 2018, only 15 states have published long-term budget assessments. Another 15 have published long-term revenue and spending projections but do not use the projections to determine whether their budget is on a sustainable path—or discuss the reasons behind that conclusion.

Without the fiscal outlook that long-term budget assessments provide, states risk ping-ponging from surpluses to deficits. If that happens, policymakers will struggle to create the lasting effects they hope to achieve for their constituents— and may end up reversing tax cuts or cutting previous enhancements to state services. Plus, when states face chronic budget deficits, they often rely on payment deferrals or other short-term fixes to balance the budget—maneuvers that make the long-term deficits worse, which in turn leads to more short-term gimmicks. States that have fallen into this vicious cycle find it exceptionally difficult to break.

State governments find themselves in a precarious fiscal position in 2024. While enjoying record surpluses, states increased general fund spending in fiscal year 2022 by the largest percentage since at least 1979, and then they enacted the largest tax cuts in more than two decades in fiscal 2023. However, the factors that caused the recent surpluses—notably, generous federal aid to states and taxpayers—were temporary. So it is not surprising that states that produce a long-term budget assessment are beginning to report concerning results—while states that don’t conduct a long-term assessment lack the same insights.

States are certain to face new fiscal challenges—because of their own choices or from shifting economic and demographic trends. And budget deficits are easiest to solve when they are addressed promptly or, better still, prevented in the first place. But that is only possible if states anticipate challenges and act to ensure that their budget remains balanced. When legislators use long-term budget assessments to understand the risks and causes of deficits, they can keep their state budget and policy priorities on track.

A lightly edited version of this op-ed was first published on Governing on Feb. 6, 2024.

Josh Goodman works on The Pew Charitable Trusts’ state fiscal policy project.