State Fiscal Policy Toolkit

State and local governments across the United States spend roughly half a trillion dollars annually on transportation and water infrastructure, with about one-quarter paid for through grants from the federal government. This spending includes investments in new projects as well as general upkeep and operating costs for roads, bridges, and public transit systems, as well as the development and maintenance of state and locally managed water resources.

For 20 years, the state pension systems in South Dakota, Tennessee, and Wisconsin have achieved high funding rates and predictable costs. But they came to their success for different reasons, using a range of plan designs and pursuing various priorities.

As more states set aside reserves during good economic times for unanticipated needs, there is no single approach for how best to cap, or set the maximum allowable size, of a rainy day fund. Still, it is always critical that the process be data-driven. To accomplish this, policymakers can use budget stress tests to inform how much money they should have on hand to weather economic shocks and budget shortfalls.

From January 2020 through the end of most states’ 2022 budget year, tax revenue outperformed its pre-pandemic growth trajectory in a record 32 states. Still, annual revenue growth rates slowed substantially during fiscal year 2022 and are on track for negative growth by the end of the current budget year amid looming economic uncertainties.