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Better Planning Could Help States Avoid Perilous Deficits

An analytic tool known as a long-term budget assessment can help states anticipate the fiscal challenges that lie ahead and change course in time to avoid them. Unfortunately, only a minority of states do this.

A natural gas well about 12 miles from Carlsbad National Park
A natural gas well in New Mexico. New Mexico's energy production is booming but is expected to slow in the coming years, presenting budget challenges for the state.
A couple of years ago, New Mexico lawmakers recognized they had a problem. Their legislative staff had performed a budget assessment that showed the state was looking at regular and growing deficits. Not immediately — the real trouble wouldn’t materialize for about 15 years. But it was expected to happen, due to projected declines in the state’s oil and gas production.

These findings were both a challenge and a call to action for state lawmakers. They understood that even if they were no longer in office when the deficits began, the state’s fiscal future — and their legacies as legislators— depended on addressing the issue. And that’s exactly what they did. In last year’s session, legislators used the state’s temporary surplus to add hundreds of millions of dollars to various endowments and trust funds. By generating investment earnings, these will increase revenue in perpetuity, and therefore reduce the deficits.

New Mexico has made this forward-looking approach a regular part of its budget process. Legislative staff released another long-term budget assessment last July that showed that the state’s fiscal outlook had improved, but the risk of future deficits was not eliminated completely. The 2023 assessment also offered policy options that could continue to reduce deficits in 2024 and beyond.

As New Mexico’s example shows, states can use data and analysis to prepare for fiscal crises or prevent them entirely, helping to avoid tax increases and service cuts that harm residents and local economies. Unfortunately, New Mexico’s approach is not the norm. Pew’s research shows that since the start of 2018, only 15 states have published long-term budget assessments. Another 15 have published long-term revenue and spending projections, but do not use the projections to determine whether their budget is on a sustainable path — or discuss the reasons behind that conclusion.

It's sometimes hard for lawmakers to think beyond the annual budget in front of them, but it’s important to conduct multiyear projections of revenue and spending, and ask whether their states are expected to experience deficits or surpluses—and why. In our recent report, Tools for Sustainable State Budgeting, The Pew Charitable Trusts found that when state leaders use the tool of long-term budget assessments, they really do draw on them to make fundamental decisions about how much to tax, spend and save.

Thinking long-term is especially important right now. For states, a period of fiscal abundance is coming to an end. Now, as financial conditions normalize and federal pandemic aid winds down, many state policymakers are questioning whether their budgets are on a sustainable path for the future, or whether they will have to make painful choices about how to allocate resources while governing in a new era of austerity.

Without the fiscal outlook that long-term budget assessments provide, states risk ping-ponging from surpluses to deficits. If that happens, policymakers will struggle to create the lasting effects they hope to achieve for their constituents — and may end up reversing tax cuts or cutting previous enhancements to state services.

Plus, when states face chronic budget deficits, they often rely on payment deferrals or other short-term fixes to balance the budget — maneuvers that make the long-term deficits worse, which in turn leads to more short-term gimmicks. States that have fallen into this vicious cycle find it exceptionally difficult to break.

State governments find themselves in a precarious fiscal position in 2024. Because of record surpluses, states increased general fund spending in fiscal year 2022 by the largest percentage since at least 1979. They also enacted the largest tax cuts in more than two decades in fiscal 2023. However, the factors that caused the recent surpluses — notably, generous federal aid to states and taxpayers — were temporary. It may not be surprising that states that produce long-term budget assessments are beginning to report concerning results. But states that don’t conduct long-term assessments lack the same insights, or the same ability to change course as a result.

Beyond the present moment, states remain certain to face new fiscal challenges in the future, whether due to their own choices, or shifting economic and demographic trends. Budget deficits are easiest to solve when they are addressed promptly — or, better yet, prevented in the first place. But that is only possible if states anticipate their own challenges and act to ensure that their budget remains balanced.

Josh Goodman, a former Governing staff writer, works on The Pew Charitable Trusts’ state fiscal policy project.
Josh Goodman is a former staff writer for GOVERNING..
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