Pew’s Fiscal 50: State Trends and Analysis presents 50-state data on key fiscal, economic, and demographic indicators and analyzes their impact on states’ long-term fiscal health.
The coronavirus outbreak in early 2020 abruptly ended the longest U.S. economic expansion on record and with it a promising stretch for states’ finances. Long-running pressure on state budgets had eased in 2019 amid widespread economic growth and tax revenue gains that led to the first budget surpluses in years in many states. Still, some states were in a stronger position than others as they began to experience a public health emergency and their greatest fiscal and economic test since the Great Recession of 2007-09.
Despite a long recovery marked by slow tax revenue growth, the vast majority of states experienced a spurt of healthy tax collections just before COVID-19 hit and shocked the nation’s economy. At the end of 2019, all but six states were taking in more tax money than they did before the Great Recession inflicted losses in every state. Half of states had posted double-digit gains since the recession, but others collected just barely as much as they did a decade earlier, after adjusting for inflation. The recent surge in tax revenue had led many to add to their rainy day funds, which as of mid-2019 could cover a larger share of spending than before the Great Recession in at least two-thirds of states.
The economy and employment rates were on the upswing through the close of 2019. Nationally, the percentage of adults in their prime working years who held jobs had finally recovered at year’s end, though nearly half of states were still below pre-Great Recession levels. For the first time since the 2007-09 downturn, every state for two consecutive years had experienced gains in its economy as measured by state personal income. But growth in most states slowed in early 2020 as the pandemic’s earliest impacts began to reverberate through the economy.
COVID-19 Abruptly Ends Decade of State Tax Revenue Growth. On the verge of the coronavirus pandemic, state tax revenue posted its 10th year of growth since the Great Recession amid the longest economic expansion in U.S. history. By the end of 2019, all but six states were taking in more tax revenue than at their peak before or during the 2007-09 recession, half recording double-digit increases, after adjusting for inflation. A final ranking of how states’ tax revenue fared since the last downturn provides insights into how prepared their finances were when the coronavirus triggered tax revenue shortfalls in 2020, sparking renewed budget uncertainty. View the indicator or print the analysis.
States’ Financial Reserves Hit Record Highs. States collectively were more financially equipped by the end of fiscal 2019 to weather the next economic downturn than at any point in at least 20 years. Nationwide, states held record amounts in both rainy day funds and total balances, which include dedicated savings and money left over at the end of the fiscal year. These reserves also could cover a record share of state spending. State-by-state results varied, but rainy day funds in at least 34 states and total balances in at least 28 exceeded pre-recession levels when measured as a share of operating costs—the highest numbers yet. View the indicator or print the analysis.
State Personal Income Slows at Long Recovery’s Abrupt End. Most states recorded a slowdown in total personal income growth in early 2020. The first quarter marked the end of a historically long period of economic expansion in which states experienced largely uneven gains. North Dakota and Utah registered the top growth rate since the outset of the Great Recesssion, more than three times as fast as last-place Illinois and Mississippi. Western states generally recorded the largest personal income gains over the more than 10-year expansion. View the indicator or print the analysis.
State Employment Recovered Unevenly from Last Recession. On the verge of a new recession, the U.S. employment rate in 2019 for adults of prime working age finally recovered from losses triggered by the Great Recession. But the percentage of 25- to 54-year-olds with a job still fell short of pre-recession rates in nearly half the states, leaving some at an economic disadvantage when the COVID-19 pandemic triggered a new downturn. Compared with 2007, the prime-age employment rate increased the most in Michigan, while New Mexico recorded the largest decline among states. View the indicator or print the analysis.
The coronavirus pandemic was expected to intensify two challenges already facing states by increasing costs for Medicaid, the health care program that is most states’ second-biggest budget expense, and triggering swings in volatile tax revenue, which can confound policymakers’ efforts to balance budgets.
Meanwhile, states continued to face fiscal pressures from inherited shortfalls in funding for public employees’ pension and retiree health care benefits; recurring deficits between annual state revenue and expenses; and weak population growth, which can diminish economic prospects and revenue collections.
One lifeline for states continued to be federal dollars, which made up roughly one-third of all state revenue before the latest economic shock led to a boost in federal aid to states.
States Collectively Spend 17 Percent of Their Revenue on Medicaid. Medicaid consumed a greater portion of states’ own money in nearly every state between fiscal 2000 and 2017. States’ increases varied widely, however, from less than 1 cent to nearly 12 cents more per dollar of state-generated revenue, exerting different degrees of budget pressure. Medicaid’s claim on state revenue surged in the wake of the Great Recession, after temporary federal economic stimulus dollars expired but before the federally funded expansion of Medicaid eligibility began, and has remained stable since. Medicaid is most state governments’ second-biggest expense, after K-12 education. View the indicator or print the analysis.
Tax Revenue Volatility Varies Across States, Revenue Streams. Some states experience greater swings in tax revenue from year to year than others do, leading to surprise shortfalls or windfalls that can make it hard to manage budgets. Alaska experienced the greatest volatility over the past two decades and South Dakota the least, after removing the effects of tax policy changes. Taxes on oil and mineral extraction and corporate income were consistently more volatile than other major tax streams. View the indicator or print the analysis.
Long-Term Obligations Vary as a Share of State Resources. Unfunded pension benefits were the largest, most prominent, and fastest-growing of a selection of future costs facing states as of 2013. States reported $968 billion in unfunded pension costs—the equivalent of 6.9 percent of 50-state personal income, as well as $587 billion in unfunded retiree health care liabilities (4.2 percent of personal income) and $518 billion in outstanding debt (3.7 percent). If not properly managed, these costs can limit future budget flexibility and raise borrowing costs. View the indicator or print the analysis.
9 States Struggle With Long-Term Fiscal Imbalances. Even in the aftermath of two recessions, most states amassed sufficient revenue between fiscal years 2004 and 2018 to cover all their expenses. But total revenue in nine states fell short, jeopardizing those states’ long-term fiscal flexibility and pushing off to future taxpayers some past costs for operating government and providing services. States can withstand periodic deficits without endangering their fiscal health over the long run. But chronic shortfalls are one indication of a more serious, unsustainable structural deficit in which revenue will continue to fall short of spending absent policy changes. View the indicator or print the analysis.
Western, Southern States Gain Residents the Fastest. All but two states—Illinois and West Virginia—added residents over the past decade, with those in the West and South growing fastest. Still, population growth is estimated to have slowed nationally and in most states over the past 10 years, continuing a long-term trend. In 2018 alone, nine states had fewer residents than a year earlier. Population changes are tied to states’ economic fortunes and government finances, and are therefore useful for understanding both. View the indicator or print the analysis.
Federal Funds Hover at a Third of State Revenue. The federal government is the second-largest source of state revenue—accounting for 32.4 percent of the total in fiscal 2017—meaning that federal budget decisions also play a key role in state budgets. But states’ reliance on federal funds varies widely, ranging from about 21 percent of revenue in Hawaii to more than 46 percent in Montana. The share of states’ revenue made up by federal dollars in fiscal 2017 was the fourth-largest on record. View the indicator or print the analysis.