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: September 3, 2024
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.
Notes
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.
South Carolina reported in its fiscal 2022 Annual Comprehensive Financial Report (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 from the state’s 2022 ACFR. But because the updated report covers only the 10 years from fiscal 2013 to fiscal 2022, Pew sought and received updated fiscal 2012 data directly from the Office of the Comptroller General.
Pew collected revenue and expenses from each state’s annual comprehensive 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 2013 to 2022 from fiscal 2022 annual reports and for fiscal years 2012 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 2008 to 2021 to fiscal 2022 dollars using the U.S. Bureau of Economic Analysis’ implicit price deflator for gross domestic product, accessed May 2024.
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 2008 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 2008 and 2022. 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 2008 to 2021 to fiscal 2022 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 expenses 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 2008 and 2022, 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 2008 and 2022, 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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