Economic Downturns: Protecting State and Local Budget Priorities in Challenging Times

For most states, unfunded pension liabilities are the largest of three major long-term costs weighing on their future finances, ahead of unfunded retiree health care benefits for public employees and outstanding debt.

Tax revenue volatility is a main driver of state budget uncertainty. Although states can increase or decrease tax revenue by changing tax policies, the volatility of individual tax streams is driven by a variety of factors. These include economic factors such as the mix of industry, natural resources, and population, as well as changes to the federal budget and unforeseen events such as natural disasters.

When the economy takes a downward turn, couples often temporarily put off having children.1 But in the years following the Great Recession, births never rebounded. Instead, fertility has largely continued to follow a downward trajectory across the country, falling to a record low in 2020.2 State budgets have started to feel the effects of this long-term decline. The future course of fertility represents a key source of fiscal uncertainty for states as smaller working-age populations may eventually threaten tax bases.

Population growth in southern states outpaced all other regions in the second full year of the COVID-19 pandemic. Florida was the fastest-growing state for the first time since the 1950s, expanding by 1.91% between July 2021 and July 2022. Western states also gained residents, but at a much slower pace. Strong population growth can lead to a rosier economic and fiscal landscape as a growing labor force stimulates new economic activity.