The coronavirus outbreak, recent market swings, and the drop in oil prices have introduced a high level of uncertainty into state budget development in recent weeks. Policymakers are scrambling to assess the potential risk and the available options for addressing it.
For states that had already amassed significant budget gaps—such as Georgia, Kentucky, Massachusetts, and New York—the situation is particularly difficult. They must try to correct decisions made in past years that have proven unsustainable while developing contingency plans for the potential impact of adverse events on revenue and spending needs.
Budget challenges for many states are perennial and widespread. State fiscal policy often focuses on balancing the budget one year at a time, often to the detriment of long-term sustainability. This short-term focus can lead states to enact significant new commitments—and defer critical decisions on how to pay for them. States also may rely on anticipated revenue windfalls that don’t materialize or shift costs for fixing structural problems into future years. Although the full picture of each state’s budget is complex, these types of decisions have contributed to current shortfalls. For example:
- Lawmakers in Massachusetts signed off in November on a major rewrite of the state’s K-12 education funding formula, directing more money to high-need districts, including those with large numbers of low-income students. The legislation, however, didn’t include any mechanism to pay for the increases, requiring significant budget fixes this year.
- In Georgia, policymakers in recent years have approved large tax cuts, including a reduction to the top rate of the state’s personal income tax. Lawmakers also agreed to new spending, including a large pay raise for teachers. But tax revenue, including an expected windfall from the 2017 federal tax reform, has been weaker than expected, leading to a large deficit.
- Last year, Medicaid costs in New York were growing beyond state expectations. To balance the fiscal 2019 budget, lawmakers in Albany delayed $1.7 billion in Medicaid provider payments by three days, shifting the costs into the next budget period and contributing to the multi-billion dollar budget shortfall faced by the state this year.
- While Kentucky technically balances its budget each year, a fuller accounting of the state’s finances shows that Kentucky is one of only nine states in which total expenses were higher than total revenues accumulated between fiscal 2004 and fiscal 2018 (see figure). In December 2019, the outgoing state budget director projected a $1.1 billion budget shortfall over the next two years.
Although the ultimate impact of the coronavirus and other adverse events remains unknown, addressing these long-term budget issues now will put states in a better position to face potential problems down the road. When an economic downturn, a natural disaster, or a public health crisis hits, states can quickly see declining revenue and increasing costs. If they lack enough reserves to fill the gap, they face difficult choices.
Raising revenue or cutting spending are deeply unpopular and often counterproductive during a crisis. In addition, policymakers often face restrictions on what they can do, from federal rules, state law, court orders, or just the time required to enact changes. These tasks are made all the more difficult if a state starts with a long-term budget deficit.
Josh Goodman researches state fiscal and economic policy as part of The Pew Charitable Trusts’ states’ fiscal health initiative.