States’ Fiscal Health

Source: Pew Charitable Trusts, Fiscal 50: State Trends and Analysis, July 28, 2016

Fiscal 50: State Trends and Analysis, an interactive resource from The Pew Charitable Trusts, allows you to sort and analyze data on key fiscal, economic, and demographic trends in the 50 states and understand their impact on states’ fiscal health.

Key findings:
Recovery from the Great Recession is slow and uneven
States’ fiscal conditions have improved since the Great Recession ended seven years ago, but their recoveries are incomplete. More than 20 states still collect less tax revenue than at their recession-era peaks, after adjusting for inflation, and most have yet to rebuild their financial cushions to pre-recession levels. In addition, 22 states’ employment rates trail 2007 levels. Despite these challenges, personal income in all states has bounced back above pre-recession figures, though growth has fallen short of historic norms.

Tax revenue. Nationally, total state tax revenue recovered more than two years ago from its plunge during the recession. But state to state, the recovery has been uneven due to differences in economic conditions as well as tax policy choices. For the first time, tax collections in a majority of states—29—were higher in the second quarter of 2015 than at their peaks before or during the downturn, after adjusting for inflation. States with below-peak tax revenue still have less purchasing power than they did more than six years ago.

Reserves and balances. States have only partially rebuilt their financial cushions after tapping them to plug budget gaps during the recession. At the end of fiscal year 2015, only 18 states could cover more government expenses using rainy day funds and general fund balances than they could have in fiscal 2007, just before the recession. Four states had less than five days’ worth of expenses set aside for budget shortfalls.

Employment-to-population ratio. Despite a U.S. economy that has added jobs each month over the past five years, no state could boast that its core labor pool had fully recovered as of 2015. The share of prime-working-age adults (ages 25 to 54) with a job remained below pre-recession levels nationally and in 22 states. Employment rates for this population were lower than in 2007 in another 26 states and higher in two, but not by statistically significant amounts, so the results were inconclusive.

State personal income. Personal income in all states is back above levels seen at the Great Recession’s onset, signaling a widespread U.S. economic recovery. But growth since the start of the recession has varied, ranging from a constant annual rate of less than 1 percent in Nevada to almost 5 percent in North Dakota. Four states—Alaska, North Dakota, Oklahoma, and Wyoming—lost some of their post-recession gains over the year ending in the first quarter of 2016.

Over the long term, additional challenges await states
Even after overcoming the effects of the recession, states face financial pressures that will shape budgets now and for years to come. A major issue for a number of states is how to cope with an accumulation of unfunded public pension and retiree health care liabilities, which total more than $1.5 trillion nationwide. Other challenges include rising Medicaid costs, volatile tax revenue, and uncertainty about federal funding levels.

Debt and unfunded retirement costs. 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.

State Medicaid spending. The share of states’ own money spent on Medicaid grew in all but one state—North Dakota—between fiscal 2000 and 2013. States’ increases varied widely, from a fraction of a penny to almost 11 cents per dollar of state-generated revenue, exerting different degrees of budget pressure. Medicaid is most state governments’ second-biggest expense, after K-12 education.

Tax revenue volatility. 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 corporate income and oil and mineral extraction were consistently more volatile than other major tax streams.

Federal share of state revenue. The federal government is the second-largest source of state revenue—accounting for 30.8 percent of the total in fiscal 2014—meaning that federal budget decisions also play a key role in state budgets. But states’ reliance on federal funds varies widely, ranging from about 17 percent of revenue in North Dakota to almost 41 percent in Mississippi. The share of states’ revenue made up by federal dollars was largely unchanged in fiscal 2014 even as expanded Medicaid grants began to flow to some states.