A December 2023 report from California’s Legislative Analyst’s Office found that the state’s projected deficits had increased to $155 billion through fiscal year 2028, exponentially more than officials had forecasted just months earlier.1 In Alaska, a January 2024 legislative report pointed out that, absent policy changes, the state’s primary budget reserve could be empty in fiscal 2027.2 And a September 2023 report in Florida forecast that compared with before the COVID-19 pandemic, hundreds of thousands more people would remain enrolled in the state’s Medicaid program, costing the state several billion dollars a year.3
These reports are examples of long-term budget assessments—analyses that project state revenue and spending at least three years into the future and then evaluate fiscal sustainability based on those forecasts. The examples show that long-term budget assessments offer critical insights on state finances and reveal that many recent assessments share an important finding: Even after years of budget surpluses, many states still face structural deficits or other ongoing fiscal challenges.
Long-term budget assessments, usually prepared by professional analysts in legislative fiscal offices and executive budget offices, are often an indispensable tool for elected leaders. The assessments’ surplus and deficit forecasts help answer the most fundamental questions lawmakers face when they write budgets: Can the state afford new investments? Or, on the flip side, do lawmakers need to cut spending? Long-term assessments also identify states’ key fiscal strengths and weaknesses—revenue sources that are growing quickly or stagnating; programs and services for which demand is growing; and threats to budget balance from economic, demographic, and technological trends.
The same characteristics that make long-term budget assessments useful for policymakers also make them invaluable for anyone trying to evaluate the state of state finances overall. For anyone seeking to look beyond annual or biennial budget debates and understand the big challenges that worry—or should worry—state policymakers, long-term budget assessments are one of the best places to begin.
Recognizing these analyses’ value as a source of insights, researchers from The Pew Charitable Trusts reviewed long-term assessments to see what states themselves are saying about their most serious fiscal challenges. In a November 2023 report, “Tools for Sustainable State Budgeting,” Pew identified 15 states that had published long-term budget assessments since Jan. 1, 2018.4 Eleven of those states produced new editions of their analyses between July 2023 and January 2024: Alaska, Arizona, California, Colorado, Connecticut, Florida, Maryland, New Mexico, New York, Pennsylvania, and Rhode Island.5
This brief identifies and explains major themes based on Pew’s review of the new analyses in these 11 states and in Minnesota, which also published a long-term budget assessment in late 2023. These analyses do not generally reflect the very latest information in these states: Since the recent long-term assessments were published, many of the states have adopted fiscal 2025 budgets, revised revenue estimates, and taken other significant fiscal actions. However, the conclusions of the analyses remain relevant, because they point to long-term challenges that are likely to stretch beyond any one budget cycle. And though not necessarily representative of all 50 states, the findings of the long-term budget assessments reveal shared strengths, challenges, and risks.
Five themes stood out:
Although recent long-term budget assessments show that policymakers have reasons to worry, the assessments also generally describe the challenges as manageable. In fact, lawmakers in some states—including California, Maryland, and New Mexico—have already used the findings from their assessments to make decisions to improve their states’ fiscal outlook. More states should adopt the use of long-term budget assessments, so that they too can benefit from similar data and analysis.
Pew defines long-term budget assessments as analyses that:
(For a detailed explanation of this definition, see “Tools for Sustainable State Budgeting.”6)
By comparing projected revenue and spending, long-term budget assessments determine whether policymakers can expect surpluses or deficits, which is essential information for understanding a state’s long-term fiscal condition. To analyze ongoing fiscal sustainability, long-term assessments explore the factors driving surpluses and deficits—providing policymakers with the information they need to maintain strong fiscal health or close deficits before they become severe. The professional staff who produce long-term budget assessments—typically analysts in legislative fiscal offices and executive budget offices—ensure that their findings remain timely and relevant to policymakers by regularly updating the analyses, often annually in the early stages of the yearly budget process.
And when policymakers have this information, they often act on it. Lawmakers have used long-term budget assessments to figure out what size tax cuts their states can afford, determine the right balance between spending for one-time projects versus ongoing commitments, and create and enact plans to restore structural budget balance.7
Most of the recent state assessments projected deficits, many of them growing. For example, in November 2023, California’s Legislative Analyst’s Office projected a fiscal 2025 deficit of $68 billion on $223 billion in expected expenditures—nearly five times what the state had predicted just six months earlier.8 In Arizona, lawmakers adopted a fiscal 2024 budget that appeared to be balanced when it was enacted in June 2023; by October, however, legislative staff were reporting shortfalls for fiscal 2024 and 2025. And by January 2024, the projected size of those shortfalls had doubled.9 The January 2023 edition of Rhode Island’s long-term budget assessment showed that the state had nearly succeeded in closing multi-year deficits.10 But by January 2024, the deficit estimates were larger than they had been in forecasts from 2023 and 2022.11 (See Figure 1.)
Further, every state that projected a deficit for fiscal 2025—Alaska, Arizona, California, Maryland, and Pennsylvania—also projected deficits for fiscal 2026 and fiscal 2027.12 The multi-year problems suggest that the deficits were not the result of temporary factors such as high inflation or the end of federal pandemic relief, but rather that these states face structural deficits: Ongoing revenue is insufficient to support ongoing expenses over the long term. Three of the states—Alaska, Maryland, and Pennsylvania—explicitly refer to their budget gaps as “structural,” as do Minnesota, New York, and Rhode Island. 13
Although the 12 states whose long-term budget assessments Pew analyzed for this brief vary in the timing and magnitude of any deficits they face, all expect some degree of fiscal stress: None projected unambiguous long-term surpluses. Connecticut, which uses an atypical methodology for projecting spending that results in overly optimistic forecasts, found that funds other than the state’s general fund, most notably the transportation fund, would face deficits.14 Minnesota expected surpluses for the fiscal 2024-25 biennium, but a budget gap for the subsequent biennium—when revenue growth is not expected to keep up with higher projected spending on education and health and human services.15 New Mexico projected surpluses for the next several years, but found that the state could face deficits after that due to declining oil and gas production.16 And although Florida found revenue exceeding spending in the three-year outlook window, the assessment’s authors warned that “a structural imbalance may be emerging, absent any prior corrective actions.”17
After years of budget restraint, many states took advantage of surpluses from 2021 to 2023 to enact historically large spending increases and tax cuts.18 But the rapid revenue growth that gave rise to those surpluses—the result of temporary federal pandemic aid to states and individuals—has ended. As fiscal conditions normalized, several long-term budget assessments showed that policymakers may have increased spending and cut revenue too far to maintain budget balance. In other states, the assessments found that the decisions exacerbated preexisting deficits caused by spending pressures such as growing Medicaid and employee retirement costs or revenue systems incapable of raising enough money to support spending demands.
The January 2024 edition of New York’s financial plan, for example, noted that the state used pandemic-era surpluses to adopt “historic, recurring funding increases for schools and the health care system.” The challenge the state faces, the assessment explained, is that, “while the State’s investments over the past two years recur, the elevated levels of tax receipts that initially supported the increased funding do not.”19 As a result, the assessment projected that tax revenue would grow by 4% a year while operating fund expenditures would rise by more than 5% a year, a gap forecast to increase the state’s structural imbalance.20
Although long-term deficits are the norm in New York—and states such as Alaska, Illinois, Pennsylvania, and Rhode Island—recent policy decisions in other states helped transform the budget forecast from a surplus to a deficit. For example, budget analysts knew revenue would fall after Arizona lawmakers cut the income tax to a flat rate of 2.5% beginning Jan. 1, 2023. (See Figure 2.) However, Arizona’s January 2024 long-term budget assessment found that revenue had fallen hundreds of millions of dollars further than expected, with income tax collections down nearly 28% for the first six months of fiscal 2024 compared with the same time period in fiscal 2023—contributing to the state’s deficit.21
In some cases, the deficits may continue to worsen unless policymakers take action to close the gap. In Pennsylvania, a November 2023 long-term budget assessment from the state’s Independent Fiscal Office pointed to a 2022 corporate income tax cut as one of the key causes of the state’s deficits.22 Because the state is phasing in the tax cut through fiscal 2031, the effects will grow over time. In fiscal 2029, the last year of the forecast, the analysts estimated that corporate income tax revenue will be $1.8 billion below what it would have been without the tax cut, which accounted for nearly half of the state’s projected deficit for that year.23
These challenges arose because states adopted tax cuts or spending increases without corresponding reductions in expenditures or revenue increases that would have maintained budget balance. With the temporary surpluses gone, some of the long-term budget assessments acknowledged that those choices—revenue increases or spending cuts—are now necessary. Maryland’s assessment described a recent education funding law as a key contributor to the state’s deficits and recognized that “state spending levels are not sustainable in the long-term without a significant revenue increase, reduction of planned spending, or a combination of the two.”24
Although states used a portion of the pandemic-era surpluses for tax cuts and spending increases, they also saved much of the money.25 Several long-term budget assessments pointed to these growing reserves as a source of fiscal strength, but not a solution to structural deficits.
For example, Connecticut’s two recent long-term assessments (the legislative and executive branches publish separate reports) noted the progress made increasing balances in the Budget Reserve Fund, the state’s rainy day fund. After the fund reached its legal maximum of 15% of net general fund appropriations, lawmakers raised the cap to 18% in 2023.26 The General Assembly’s Office of Fiscal Analysis projects that the state will reach the new cap by fiscal 2027.27
Growing reserves provide a cushion that states can use to balance their budgets if they face temporary budget challenges from a recession or other time-limited event. However, even large reserves cannot close structural deficits. Because these deficits recur year after year, states must solve the underlying imbalance between revenue and spending or else they eventually risk exhausting their reserves—as long-term budget assessments in Alaska and Pennsylvania show.
Alaska’s Legislative Finance Division produces its long-term assessments by first analyzing 10-year revenue and spending forecasts from the governor’s office and then producing its own projections. The division’s January 2024 assessment noted that the governor’s projections assumed that expected deficits would be closed using the larger of the state’s two primary rainy day funds, the Constitutional Budget Reserve (CBR). As a result, in the governor’s plan, “the CBR is drawn below zero in FY 27 and down to negative $10.6 billion at the end of the 10-year window in FY 34.”28 (See Figure 3.) The division’s projections also showed the state eventually exhausting its usable reserves.29 Similarly, Pennsylvania’s Independent Fiscal Office projected a negative $1.4 billion balance in the state’s rainy day fund in fiscal 2028 because “the projected deficits are sufficient to eliminate the combined general fund and rainy day fund … balances by the end of the forecast period.”30
The Alaska and Pennsylvania projections should not be taken literally: Rainy day funds generally cannot have negative balances. Lawmakers will have opportunities to balance their budgets without emptying reserves. (The analyses defaulted to reducing rainy day fund balances below zero rather than making assumptions about how policymakers would close the deficits.) However, these examples do serve to illustrate the unsuitability of rainy day funds for solving structural deficits.
Consistent with this principle, several long-term budget assessments warned against using reserves to close deficits, absent an economic downturn. For example, in Maryland the Spending Affordability Committee emphasized the need to maintain reserves for a recession, writing “the state should exercise caution in drawing on the rainy day fund at a time when the Maryland economy is relatively healthy, and the state’s fiscal challenges are only expected to escalate in the coming years.”31 And the New York governor’s office proposed maintaining reserves at record highs—quintuple their fiscal 2020 level.32 Even in California, where the Legislative Analyst’s Office said the state appeared to have entered a recession in 2022, the office cautioned against relying too heavily on reserves to balance the upcoming year’s budget because “preserving a substantial portion—potentially up to half—of reserves would provide a helpful cushion in light of the anticipated shortfalls that lie ahead.”33
Median ages are rising in almost every state as more baby boomers (people born between 1946 and 1964) reach retirement age.34 Long-term assessments expressed concern that, from a state budget perspective, the costs of this trend will likely outweigh any benefits. Colorado’s analysis, for example, warned:
“The state faces two compounding risks: (1) revenue growth will face constraints from a higher share of non-working age adults, who contribute less revenue to the state, especially as it pertains to individual and sales taxes; (2) demand for public benefits and services will increase faster than the rate of overall population growth as older adults tend to demand higher and more expensive state services.”35
Through Medicaid, states pay for nursing home stays and other long-term care—making the program especially vulnerable to aging-related cost pressures. (Medicare does not generally pay for long-term nursing home stays, so people age 65 and over often rely on Medicaid instead.) With the oldest baby boomers approaching 80, these are no longer distant concerns. In Pennsylvania, for example, the Independent Fiscal Office reported that rising Medicaid costs for long-term care for seniors and people with intellectual disabilities was one of the “the main factors that drive rapid deficit expansion” over the next two years.36 And the office projected that those costs would continue to increase: The number of Pennsylvanians age 80 and up is expected to increase 21% from 2025 to 2030, even as the state’s population of people younger than 65 declines.37 (See Figure 4.)
Broader Medicaid cost pressures compound the aging-related challenges. In recent years, Medicaid enrollment has surged because at the start of the COVID-19 pandemic Congress conditioned more generous federal support on states agreeing not to unenroll beneficiaries.38 Even though unenrollment restarted in 2023, long-term budget assessments in Florida and New York projected that Medicaid in those states would continue to serve several hundred thousand more people than before the pandemic.39 So states are at risk of twin Medicaid-related challenges: higher enrollment and, because the program is serving more people age 65 and over, higher costs per enrollee.
Furthermore, although Medicaid is a huge part of state budgets—accounting for 18% of general fund expenditures in fiscal 2023 and far more when federal funds are included—it is not the only category of spending that is vulnerable to age-related increases in health care costs.40 Colorado’s analysis, for example, noted that “the portion of the inmate population with moderate to severe medical needs has increased due to the aging population,” stressing Department of Corrections budgets.41 Likewise, New Mexico identified health care for retired state employees as an area of concern. The staff of the state’s Legislative Finance Committee projected that, absent policy changes, retiree health care would consume an increasing share of state revenue until eventually every dollar of personal income tax revenue could be needed to pay the costs (although New Mexico would not reach that point for decades).42
However, an aging population does also have some fiscal upside. Pennsylvania and Rhode Island project that K-12 enrollment will decline through their five-year forecast periods. These declines will help moderate projected K-12 spending increases in both states, but, because of inflationary pressures, K-12 costs are still expected to grow.43 New York reported that although K-12 enrollment has fallen 10% over the last decade, spending on schools has continued to increase.44
Likewise, smaller populations of young adults could shrink college enrollment and allow states to spend less on higher education. But Colorado budget staffers identified a downside to this trend: less tuition revenue. Colorado’s analysis noted, “forecasts indicate the current reduction in student enrollment continuing due to a much-anticipated upcoming enrollment cliff” and warned that higher education institutions “may face financial difficulties as a result of reduced enrollment.”45
In addition to general fund deficits, several states forecast potential challenges paying for transportation projects. One of the main causes is a weak outlook for gas tax revenue as vehicles become more fuel efficient and more car buyers choose hybrid or electric options.
For example, Connecticut’s legislative and executive analyses both projected that by fiscal 2026 or 2027, spending from the state’s Special Transportation Fund would exceed revenue.46 (See Figure 5.) These deficits are expected even though the state is already redirecting a portion of sales tax revenue away from the general fund—where it is a major revenue source—and to the transportation fund. Weak gas tax revenue is a key culprit: Connecticut’s Office of Policy and Management forecast that the motor fuel tax would raise less money in fiscal 2028 than in fiscal 2024.47
Similarly, New Mexico projected that State Road Fund revenue would fall 15% by fiscal 2050, driven largely by a significant drop in fuel tax collections starting in the late 2020s or early 2030s. The state expects that decline in revenue, together with a forecasted increase of 160% in annual road construction costs, to lead to a sizable deficit in the fund.48
The challenges in Connecticut and New Mexico are mostly long-term concerns, but in other states the problems are more immediate. In Maryland’s recent budget assessment, the Department of Legislative Services projected a $511 million gap between planned transportation capital spending and available funding for fiscal 2025. Over five years, the department estimated that the gap would be nearly $3 billion.49 And these forecasts predated the March 2024 collapse of the Francis Scott Key Bridge in Baltimore.
To close expected transportation gaps, several states acknowledged the need for policy changes. In Connecticut, the Office of Policy and Management warned, “Without additional revenue or reductions in needed transportation investments, the expected increase in costs will outpace the growth in revenues in the long term, impacting [transportation] fund solvency.”50 Some states that have already adopted these types of measures report they are on stronger footing. For example, Colorado’s analysis cited 2021 legislation that “established … fees on gasoline and diesel, electric vehicle registration fees, retail delivery fees for online orders, and rideshare fees” to raise an estimated $200 million dollars in revenue each year. In contrast to other states, Colorado expected that revenue for the state’s transportation fund “will continue growing steadily over the coming years.”51
Recent long-term budget assessments offer states a reality check: Despite pandemic-era budget surpluses, they face ongoing fiscal challenges. Most states that conduct these analyses project long-term deficits, often driven by recent decisions to cut taxes or increase spending. Aging populations and weakening transportation revenue add to the fiscal pressures. Furthermore, although states can rightly celebrate record rainy day fund balances, these reserves will not be sufficient to solve structural budget problems.
The best reason for optimism, however, is that recognizing a problem is the first step to solving it. In the months since states published the long-term budget assessments that Pew analyzed for this brief, policymakers in several states have begun to address the challenges their studies identified. In Maryland, for example, lawmakers increased fees to combat general fund and transportation fund deficits. California enacted budget cuts to reduce the state’s structural deficit, including the elimination of thousands of vacant positions. And New Mexico added hundreds of millions of dollars to trust funds that will provide ongoing revenue even after the expected decline of the state’s oil and gas industry.
As these examples show, long-term budget assessments are helping leaders take action to improve their states’ fiscal trajectories. More states should produce these analyses because when policymakers act on the sound data and analysis that long-term assessments provide, they have the power to address fiscal challenges before they become outright emergencies.
This brief benefited from the valuable insights of Carol O’Cleireacain, adjunct professor, Columbia University School of International and Public Affairs, and Doug Howgate, president, Massachusetts Taxpayers Foundation. Although they reviewed a draft of the brief, neither they nor their institutions necessarily endorse the findings or conclusions.
Pew staff members Josh Goodman, Gayathri Venu, and Sariah Toze researched this brief. The project team thanks Justine Calcagno, Jennifer V. Doctors, Tamara El-Waylly, Sarah Jones, Terri Law, Sarah Spell, and Allie Tripp for providing important communications, creative, editorial, and research support for this work.