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How 2014 Gave States a Financial Wake-Up Call

While budgets were more stable last year, several states still tapped into their reserves.

Are states more financially troubled today than they were a year ago? One analysis from the nonpartisan Federal Funds Information for States (FFIS), which monitors federal spending, appears to make that case. The survey finds that nearly half of all states faced at least two of four major budget stressors in 2014. That's up from just 14 states the prior year. But a closer look reveals the real culprit: 2013 was an unusually good year, lulling some states into a false sense of fiscal security.

The FFIS' annual Continuum of State Fiscal Stress report is used to get a sense of the challenges states face in a given year. It tallies state responses to the following four survey questions:

  1. Did states meet their enacted budgets or did they have to make cuts?

  2. Did tax collections meet or exceed expectations?

  3. Did states end with balances that equaled or exceeded 5 percent of general fund expenditures?

  4. Did the total year-end balance increase as a percent of spending from the previous year?
New Jersey and Pennsylvania were the only states to have faced all four budget stressors this past year. Conversely, Georgia, Nebraska, South Carolina and Wyoming were the only states to experience none of them. Thirty-seven states experienced one or two of these symptoms. That's a significant change from five years ago at the height of the Great Recession, when 37 states had three or four symptoms. Still, 2014 marked a shift from the prior year when 15 states had no stressors and 21 states had just one. And given that the National Association of State Budget Officers reports that state budgets are more stable than they were a year ago, it leaves one to wonder: What's actually happening and should we be worried?

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It turns out that fiscal 2014 was a "bit of an anomaly," says Marcia Howard, FFIS' executive director. "What really caught a lot of states in 2014 is, they missed their revenue estimates so they then had to tap their reserves." For those keeping track, those actions account for two of FFIS' four distress symptoms. "Because of the windfall they got in 2013," Howard continues, "they just didn't do a particularly accurate job of forecasting what their 2014 revenues would be."

In other words, in fiscal 2013 tax collections exceeded expectations in many places because of federal tax changes. Although many states tried to take that boost into account in their 2014 budgets, a full 20 states still fell short of their revenue estimates and 35 states showed a decline in their year-end balances. By comparison, just seven states in 2013 missed their revenue estimates and 21 tapped their reserves.

Not every state that dipped into its reserves is in trouble. Many oil-producing states, which tend to have volatile revenues, have built up ample reserves because of that unpredictability. Montana, for example, saw its total balance decline from more than one-quarter of general fund spending in fiscal 2013 to about one-fifth in 2014. According to a recent analysis by the Pew Charitable Trusts, Montana has one of the most volatile revenue streams in the country when it comes to its severance tax on oil and minerals. Typically, the more volatile a state's overall revenue is from year to year, the more money it should have in its reserves to compensate. Alaska's income, for example, is the most volatile of the 50 states and its reserves are enough to keep the government operating for about two years, Pew says.

All that unpredictability aside, what can we expect for this year? FFIS' Howard says she expects budgeters will have taken a cue from their blown estimates for 2014 and approached the current year with a more conservative view than may actually be necessary. So far, the economic data coming out at end of 2014 is a little stronger than initially predicted -- jobs are growing, the national unemployment rate is at a six-year low and gas prices have dropped, which helps push other consumer spending. Therefore, Howard says, states may see more revenue in sales and income tax than they anticipated. "Also, when the economy is growing, states end the year with more in reserves," she says. "So by all those indications, 2015 looks like it'll be much improved."

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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