State Budget Problems Spread

Deficits illustrate importance of long-term fiscal analyses

For the first time since 2020, state governments must confront broadly shared budget challenges. Some of the most populous states—including California, New York, and Pennsylvania—face among the most serious problems, but these governments are not alone. Based on budget analyses states published in late 2023, roughly half of Americans live in states that report short-term budget gaps, potential long-term deficits, or both—and this inventory almost certainly understates the scope of the problem because many states do not publish sufficient forward-looking data to meaningfully assess their fiscal outlook.

Some of the shortfalls states are reporting are fairly small and can likely be solved with relatively minor adjustments. Furthermore, states used the historic budget surpluses they enjoyed in recent years to increase rainy day fund balances to record levels and these reserves may help close temporary budget gaps relatively painlessly. However, for states with structural budget deficits—where ongoing spending chronically exceeds ongoing revenue—policymakers need to either decrease spending or increase revenue to bring the budget back into balance, or else they will eventually exhaust even the largest reserves. The first step is for states to determine the size, timing, and causes of any challenges they face so they can act promptly to bring their budgets back into balance.

States with budget problems

Whether a state appears to have budget problems often depends on both the methodology analysts use and the time frame of the analysis—considerations that complicate any effort to determine which states are thriving and which are struggling. The time frame of analyses is an especially important factor at the moment because fiscal conditions are in transition: Most states ended fiscal year 2023 with surpluses, but the picture is mixed for fiscal 2024 and 2025 and more concerning beyond that. For instance, Minnesota’s executive budget agency projected that the state would enjoy a surplus in the fiscal 2024-2025 biennium, but face a “structural imbalance” the following biennium.

Some of the states reporting challenges suffer from chronic budget problems that were temporarily masked by federal assistance during the COVID-19 pandemic—but never went away. For example, in November, Pennsylvania’s Independent Fiscal Office reported for at least the ninth consecutive year that the state faced long-term budget deficits—and, unlike the previous year, the state had a short-term shortfall as well, as the pandemic-era budget boost ebbed. For years, Alaska has used reserves to balance annual budgets, a temporary solution that fails to resolve the structural deficit that, according to the Legislative Finance Division, the state has endured since 2014. And 10-year forecasts released in December by the state’s Office of Management and Budget projected that both of Alaska’s rainy day funds would be empty by the end of fiscal year 2027 as the deficits continue.

Other states with challenges appeared to be doing well fiscally and economically until quite recently. Even as Arizona continues to be a magnet for jobs and residents, legislative staff projected that the state would face budget shortfalls in the current year and two of the next three years after that. Likewise, a forecast in Florida warned, “a structural imbalance may be emerging, absent any prior corrective actions.”

Key causes

The challenges states face in part reflect the normalization of fiscal conditions after a period of atypical revenue growth driven by federal aid. But other factors are also at play.

For one, states have made policy decisions to reduce revenue and increase spending. The spending increases states adopted in fiscal 2022 and fiscal 2023 and the tax cuts states adopted in fiscal 2023 and fiscal 2024 were among the largest on record, according to the National Association of State Budget Officers. States could afford these decisions while they were benefiting from temporary federal aid, but may not be able to over the long term. In Maryland, for example, the structural surplus the state’s Spending Affordability Committee reported in 2022 gave way to a structural deficit in the committee’s December 2023 report—and recent policy decisions such as a law increasing education spending without sufficient funding were key culprits.

In other states, long-term liabilities are a big part of the problem. In Illinois, deficits stem partially from the state having to spend roughly 20% of general fund dollars on public employee pensions to make up for decades of being one of the worst-funded pension systems in the country.

And even as the national economy proves surprisingly resilient, local economic factors pose challenges for some states. In California, the Legislative Analyst’s Office reported that the state economy entered a downturn in 2022, with declining real incomes, higher unemployment, fewer home sales, and less investment in technology companies and startups. Consequently, California faces a revenue decline “similar to those seen during the Great Recession and dot‑com bust,” leading to a $68 billion deficit for the upcoming year and a $155 billion deficit over four.  

Final thoughts

Although the states reporting long-term deficits face real challenges, they also have an advantage over many of their counterparts: They have a good sense of the problem and can start to determine appropriate solutions. In November, The Pew Charitable Trusts found that 15 states publish “long-term budget assessments”—multiyear projections of revenue and spending that explore whether states are expected to experience deficits or surpluses and why. An additional 15 states publish long-term revenue and spending projections (while doing less to explain the numbers). Most of the recent deficit forecasts come from either long-term assessments or projections. The 20 states that do not use these analyses may unknowingly be heading for similar problems—problems that will only be harder to solve the longer they go unrecognized and unaddressed.

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

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