Number of States With Annual Deficits Hit Record Low in Fiscal Year 2022

Only two states reported annual deficits in fiscal year 2022—the fewest in at least 20 years—largely because state revenue collections increased at a record pace nationwide. Despite this short-term progress, six states recorded long-term revenue shortfalls relative to expenses between fiscal 2008 and 2022. These ongoing gaps, if left unmanaged, can threaten states’ fiscal well-being.

Although most states balance their budgets on an annual or biennial basis, budgets alone offer an incomplete picture of states’ fiscal sustainability: that is, whether over the short and long terms, revenue—composed primarily of tax dollars and federal funds—will be sufficient to cover all state spending. Looking beyond budgets to states’ annual 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.

Two years later, 50-state revenue not only fully recovered from the pandemic-induced recession but also grew at the highest rate in at least 15 years. And although spending also soared, only Alaska and Wyoming reported annual deficits in fiscal 2022—the fewest states since at least fiscal 2002, the first year for which The Pew Charitable Trusts collected this data. Alaska’s revenue covered just 80.4% of expenses, and its deficit marks one of the more dramatic shifts of that year, swinging from a 231.1% surplus the prior year to fiscal 2022’s sharp deficit. The state attributes the recent volatility to a large decrease in “investment earnings and interest” revenue collected from the state’s permanent fund, which was created to capture surplus oil revenue. Alaska’s tax revenue sources are also historically quite volatile, and the state’s annual fiscal balance ratio often swings between extreme highs and lows. Wyoming, which recorded a deficit of 92.6%, also relies on more volatile revenue sources, particularly severance tax collections.

Conversely, in fiscal 2022 Illinois recorded an annual surplus for the first time in 15 years, with revenue covering 116.4% of expenses. Along with a decrease in spending, the state’s fiscal position was strengthened by tax revenue collections that exceeded its long-term trend by 16.2% and by ongoing federal aid provided to states as part of COVID-19 stimulus packages in the two prior years.

Utah had the largest annual surplus, with revenue covering 136% of expenses. Kentucky (127.3%), Florida (124.1%), Texas (123.3%), and New Mexico (122.6%) rounded out the top five.

Looking at the long-term view, just six states recorded a 15-year shortfall at the end of fiscal 2022, a drop from eight the previous year. In Delaware (100.9%) and Maryland (100.3%), multiple years of short-term surpluses finally succeeded in reversing long-term deficits.

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 with expenses (adjusted for inflation), in aggregate and year-by-year from fiscal 2008 to 2022, shows that:

• The six states with long-term deficits were New Jersey (93.9%), Illinois (95.3%), Connecticut (95.8%), Hawaii and Massachusetts (both 96.9%), and New York (99.7%). Each state experienced deficits in at least 11 of the 15 years studied.
• Alaska accumulated the largest 15-year surplus (129.2%), followed by North Dakota (123.7%), Wyoming (118.8%), Utah (112.3%), and Montana (109%).
• Aside from Montana, which was the only state to end each of the 15 years examined with a surplus, 10 states recorded just one deficit over the studied years: Idaho, Iowa, North Carolina, North Dakota, South Carolina, South Dakota, Tennessee, Texas, Utah, and Virginia.
• The 50-state median revenue was 103.6% of expenses over the 15 years. Additionally, each census region accumulated a long-term surplus, with the median for the West leading at 105.2%, followed by the South (104.3%), Midwest (104.1%), and Northeast (101.7%).

Year-by-year trends

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.

Official accounting reports for fiscal 2023 are still pending for some states, but the currently available data shows that revenue collections started to come down that year from their earlier post-pandemic highs. Although revenue was still elevated compared with pre-2020 levels, these lower collections, combined with the fading of federal pandemic aid and increased expenses, may throw more states’ finances out of balance.

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 substantial progress getting the problem under control, as evidenced by its fiscal 2022 surplus.)

To avoid long-term 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 serve as a complementary resource to the retrospective of Pew’s state fiscal balance indicator.

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