Data Visualization

Fiscal Balance

Fiscal 50

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The fiscal balance indicator reveals whether states have lived within their means over the past 15 years and annually by assessing how closely total revenue and total spending align. States can withstand periodic deficits, but a long-term gap between revenue and expenses pushes some past costs onto future taxpayers and may indicate an unsustainable fiscal trajectory.

Updated: May 7, 2024

States Had Fewer Annual Deficits a Year After the Pandemic-Induced Recession

Only five states recorded annual deficits in fiscal year 2021, a sharp decline from the prior year when the COVID-19 pandemic threw the finances of 19 states out of balance. Swift and unprecedented federal aid to states and skyrocketing tax collections contributed to the sharp turnaround. Still, long-running shortfalls that started years before the pandemic in several states may result in an unsustainable fiscal situation if left unmanaged.

Although most states balance their budgets on an annual or biennial basis, budgets alone offer an incomplete picture of whether revenue—composed primarily of tax dollars and federal funds—matches spending across all state activities. Looking beyond budgets to states’ financial reports provides a more comprehensive view of how public dollars are managed.

At the beginning of the pandemic, the federal government acted quickly to deliver robust financial support to states facing a slump in tax collections and a spike in spending demands. But despite the additional federal funds, 19 states closed fiscal 2020 with an annual deficit—the most states since the Great Recession.

The tides turned for states the following year, as tax revenue in almost half of states not only recovered from the historic plunge but outperformed pre-pandemic trends. Only Hawaii, where revenue covered just 91.6% of expenses, Illinois (96.2%), Connecticut (96.5%), New York (98.3%), and Massachusetts (99.1%) had deficits in fiscal 2021, while many states accumulated notable surpluses. Alaska, for example, collected enough revenue to cover more than 230% of its annual expenses, a remarkable bounce back from the prior year when the state had the largest annual deficit of any state. Alaska’s tax revenue sources are historically quite volatile, and investment earnings largely drove the growth in fiscal 2021.

But the revenue wave and accompanying federal aid were not enough to bring most states with long-term deficits into fiscal balance. Eight states still recorded a 15-year shortfall at the end of fiscal 2021. Kentucky (100%) was the only exception. Three years of annual surpluses—after about a decade of deficits—allowed the state to finally bridge its long-term gap between revenues and expenses. Meanwhile, New Jersey and Illinois accumulated the largest 15-year deficits, taking in enough total revenue to cover just 92.5% and 93.8% of expenses, respectively.

States can withstand periodic deficits without endangering their fiscal health over the long run, but chronic shortfalls are one indication of a more entrenched structural deficit in which, without policy action to correct the imbalance, revenue will continue to fall short of spending.

Zooming out from a narrow focus on annual or biennial budgets offers a longer-term lens that can help policymakers budget with an eye toward the future. The annual or biennial cycle can mask deficits because they allow shifts in the timing of when states receive cash or pay off bills to reach a balance. For example, states can accelerate certain tax collections or postpone making some payments to balance the books. Clarity on the long-term picture can help states better align spending and revenue before gaps between needs and available resources become larger and more painful to close.

State highlights

This indicator assesses states’ performance from two perspectives: first, by comparing a 15-year lump sum of revenue relative to expenses to uncover states’ ability to bring in sufficient funds to cover costs over the long term; and second, by examining year-by-year financial records for each state to identify how often they experienced shortfalls.

Comparing states’ total revenue from all sources and expenses (adjusted for inflation), in aggregate and year-by-year from fiscal 2007 to 2021, shows that:

  • In addition to New Jersey and Illinois, states with symptoms of structural deficits were Connecticut (95.2%), Hawaii (95.6%), Massachusetts (96.4%), Maryland (98.8%), New York (99%), and Delaware (99.6%). All but Delaware experienced deficits in at least 10 of the 15 years studied.
  • Illinois is the only state to run a deficit in each of the 15 years. New Jersey previously shared this record, but the state reached an annual surplus of 104% in fiscal 2021, breaking its deficit streak.
  • Alaska accumulated the largest 15-year surplus (136.1%), followed by North Dakota (124.9%), Wyoming (122.2%), Utah (110.7%), and Montana (108.5%). Resource-rich states tend to acquire large surpluses in boom years that can help cushion shortfalls when oil or mining revenue decline.
  • Aside from Montana, which was the only state to end each year with a surplus, 10 states recorded just one deficit over the 15 years examined: Idaho, Iowa, North Carolina, North Dakota, South Carolina, South Dakota, Tennessee, Texas, Utah, and Virginia.
  • The 50-state median revenue was 103% of expenses over the 15 years. Additionally, each census region accumulated a long-term surplus, with the median for the West leading at 104.4%, followed by the South (103.6%), Midwest (103.2%), and Northeast (100.7%).

Changes in the economy can move a state’s annual revenue and expenses out of balance, as can policy decisions such as tax or spending changes.

Looking at states’ balances year by year, shortfalls were most widespread during and immediately after the 2007-09 recession, when in fiscal 2009 a record 46 states failed to amass enough revenue to cover their annual expenses. Another wave of annual deficits occurred in fiscal 2016 and 2017, as many states slogged through the weakest two years of tax revenue growth outside of a recession in at least 30 years. Except for the pandemic year of fiscal 2020, most states have reported regular annual surpluses since fiscal 2017, driven in part by widespread tax revenue gains.

New accounting rules that became effective in fiscal 2018 may have also played a role. These rules changed how states estimate unfunded retiree health care costs, lowering expenses in some states, at least on paper. As a result, fiscal conditions pre- and post-2018 are not directly comparable.

Although official accounting reports for fiscal 2022 are still pending for some states, recent data shows that revenue collections continued to soar, but spending also climbed. Further, states that have published their financial reports for that year have largely recorded surpluses, including some that historically have struggled closing the gap between revenue and expenses. But balancing the books in the short term may not be enough to shift the status quo for states with 15-year deficits. Those states may need several years of balanced revenue and expenses to close their long-term gaps.  

Why Pew assesses fiscal balance  

By taking a step back and considering how 15-year total revenue aligns with expenses, The Pew Charitable Trusts aims to help states evaluate whether they take in enough money to cover their expenses or need to change course to bring their finances onto a sustainable path. Rather than track cash as it is received and paid out, as budgets generally do, annual comprehensive financial reports attribute revenue to the year it is earned, regardless of when it is received, and assign expenses to the year they are incurred, no matter when the bills are actually paid. This approach captures deficits that can be papered over in the state budget process.

Accounting for funds in this way is like a family reconciling whether it earned enough income over 12 months not just to cover costs paid with cash but also to pay off credit card bills and stay current on car or home loan payments, rather than pushing some charges off to the future.

Importantly, however, just because a state raised enough revenue over time to cover total expenses does not necessarily mean that it paid every bill. When a state’s annual income surpasses expenses, the surplus is sometimes directed toward nonrecurring purposes, such as paying down long-term obligations such as unfunded pension or retiree health benefits or bolstering reserves. But in other cases, a state might use regular surpluses to create or expand services and to pay the associated recurring bills, while falling behind on annual contributions to its pension system or other existing bills.

So, although reviewing financial reports, rather than simply looking at annual or biennial budgets, captures states’ capacity to pay their bills, it does not reconcile whether revenue was used to cover specific expenses.  Further insights can be gleaned from examining states’ debt and long-term obligations.

For instance, a state whose annual revenue falls short of expenses generally still balances its annual budget, turning to a mix of reserves, debt, and deferred payments on its obligations to get by. But states that are forced to rely on these strategies regularly risk a vicious cycle in which deficits lead to short-term fixes that exacerbate the deficits and harm residents and businesses. For example, because of chronic deficits, Illinois lawmakers regularly delayed payment to hundreds of vendors, including scores of small businesses and nonprofit organizations, for more than a decade. But this just made the problem bigger—the backlog peaked at $17 billion in 2017—because Illinois pays up to 12% annual interest on unpaid bills. (The state has made progress getting the problem under control.)

To avoid outcomes such as Illinois’, states should seek to prevent structural deficits before they start. Pew recommends that states do this by using an analytical tool called a “long-term budget assessment”—which uses projections of revenue and spending at least three years into the future to evaluate whether the state is likely to experience deficits and, if so, why. For example, by conducting a long-term budget assessment, New Mexico discovered that starting in about 15 years it would face regular and growing deficits, driven mainly by expected declines in oil and gas production. In response, lawmakers used the state’s temporary surplus in fiscal 2023 to add hundreds of millions of dollars to various endowments and trust funds, which it anticipates will generate sufficient investment earnings to increase revenue in perpetuity and reduce the deficits.

Because they take a forward-looking approach to structural balance, long-term budget assessments are a logical supplement to Pew’s state fiscal balance indicator.

Joanna Biernacka-Lievestro is a manager and Page Forrest is a senior associate with The Pew Charitable Trusts’ Fiscal 50 project.


Notes, Sources & Methodology

Per a recommendation by Connecticut’s Office of the State Comptroller, Pew used data provided directly by the state for fiscal 2017 and 2018 expenses, rather than pulling from the annual comprehensive financial report.

Minnesota originally reported an annual deficit in its fiscal 2020 Annual Comprehensive Financial Report (ACFR), but revised numbers published in fiscal 2021 showed the state actually had recorded a surplus. Based on the revised data, 19 states had annual deficits in fiscal 2019, rather than 20 as Pew previously reported.

South Carolina reported in its fiscal 2022 ACFR that previously published data for fiscal 2012 through fiscal 2021 was incorrect due to a technical accounting error. Pew has used the corrected data for fiscal 2013 through fiscal 2021 reported in the 2022 ACFR. But because the updated report covers only the 10 years from fiscal 2013 to fiscal 2022, corrected fiscal 2012 data is unavailable.

Sources & Methodology

Pew collected revenue and expenses from each state’s comprehensive annual financial reports using total “primary government” data from the Changes in Net Position table in the report’s statistical section. States report this data for a 10-year period. Pew collected data for fiscal 2012 to 2021 from fiscal 2021 annual reports and for fiscal years 2011 and earlier from the annual reports in which each year’s results were reported for the final time.

Pew converted revenue and expenses for fiscal 2007 to 2020 to fiscal 2021 dollars using the U.S. Bureau of Economic Analysis’ implicit price deflator for gross domestic product, accessed June 2023.

This analysis examined states’ annual comprehensive financial reports in two ways: First, Pew compared each state’s aggregate total revenue with its aggregate total expenses for all years since fiscal 2007 to determine whether the state had collected enough funds to cover all costs. This calculation allowed Pew’s analysts to determine whether states had a positive or negative balance between revenue and expenses. Second, Pew compared revenue and expenses for each year to determine how often each state’s revenue fell short of expenses.

To determine whether states had a negative fiscal balance, Pew aggregated revenue and expenses across all years and then calculated the percentage of the expenses covered by the revenue between fiscal 2007 and 2021. Based on that calculation, Pew identified states that brought in less than 100% of the revenue needed to cover expenses over the 15-year period as possibly having structural deficits.

In addition, Pew converted each state’s revenue and expenses for fiscal 2007 to 2020 to fiscal 2021 dollars using the U.S. Bureau of Economic Analysis’ quarterly implicit price deflator, adjusted from calendar year to match the typical state fiscal year (July 1 to June 30) and divided revenue by expenses to determine how frequently each state brought in enough revenue to meet its expenses over the time span.

Pew based its calculations on total primary government revenue and expense data from the governmentwide, full accrual section of the annual report. Full accrual accounting reports all revenue and all expenses for each year, regardless of when cash is received or paid. In contrast, state budgets typically use a cash basis of accounting, which records income when it is received and expenditures when they are paid.

The data includes governmental activities (e.g., K-12 education, human services, public safety) and business-type activities (e.g., unemployment compensation funds, lottery sales, liquor sales). Pew excluded discrete component units, also called “auxiliary organizations,” such as economic development authorities and some public universities, which states report separately from primary government activities. States vary somewhat in how they classify entities. For example, New York classifies its state university system as a business-type activity and so the system is captured in Pew’s data, but Hawaii considers the University of Hawaii a component unit, so UH is not captured in Pew’s data. If a state switched the classification of an agency between fiscal 2007 and 2021, Pew used the figures from the most recent annual report.

Revenue is made up of general revenue (such as taxes and investment earnings) and program revenue (charges for services, operating grants and contributions, and capital grants and contributions), which both include federal dollars.

Expense data in the full accrual section of the annual reports includes depreciation of capital assets and the incurred costs of maintenance. Pew used the depreciation cost figures from the most recent annual reports.

The Governmental Accounting Standards Board establishes and periodically revises standards for states’ calculations of accrued revenue and expenses. Several revisions went into effect between fiscal 2007 and 2021, meaning a state’s results might not always be comparable across years even though state-to-state comparisons remain valid. Pew used figures from the most recent annual reports.

Beginning in fiscal 2007, most states began using an accrual-basis annual cost for their retiree health care and other nonpension retirement expenses for public employees. As a result, these expenses increased. States also adjusted the way they calculate pension costs in fiscal 2015 and retiree health care and other post-employment benefits in fiscal 2018 to improve the accuracy and transparency of those costs.

Restatements, prior period adjustments, special items, and changes in accounting principles or estimates were captured only if a state reported them in the revenue or expense section of the Changes in Net Position table. Pew researchers contacted officials in each state’s comptroller office in 2016 to verify that Pew was correctly collecting data for aggregate revenue and expenses from the state’s annual reports.

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