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MANAGEMENT UPDATE.

WATCH OUT FOR UPCOMING BUDGET CHALLENGES

The month of January was named for the ancient Roman God Janus, who is generally portrayed as having two faces – one pointing to the left, the other to the right, a fitting image for the god of beginnings and transitions.


With that in mind, this month is a particularly appropriate one to take a Janus-like look at state fiscal standings. The face looking toward the past, in our minds, is smiling, as projected revenues for fiscal 2024 are roughly 34 percent above fiscal 2019 levels, according to the National Association of State Budget Officers (NASBO). Additionally, rainy day funds have more than doubled from fiscal 2020 to fiscal 2022, reports NASBO in its Fiscal Survey of the States.



But from the perspective of the forward-looking face of Janus, for many states that smile turns into a frown, according to a January report by the Pew Charitable Trusts. As its author Josh Goodman, who works on the Pew Charitable Trusts’ state fiscal policy project, points out, “For the first time since 2020, state governments must confront broadly shared budget challenges. Some of the most populous states—including California, New York, and Pennsylvania—face among the most serious problems, but these governments are not alone. Based on budget analyses states published in late 2023, roughly half of Americans live in states that report short-term budget gaps, potential long-term deficits, or both—and this inventory almost certainly understates the scope of the problem because many states do not publish sufficient forward-looking data to meaningfully assess their fiscal outlook.” 


Goodman told us he is already seeing a few states consider strategies such as delayed payments to close budget gaps. For example, California Governor Gavin Newsom’s proposed budget would record payroll for state workers on July 1, 2025 instead of June 30—reducing costs for fiscal 2025, but increasing them for fiscal 2026.


One of the states that has appeared to be doing quite well until recently, is Arizona, according to Pew, reporting that, “even as Arizona continues to be a magnet for jobs and residents, legislative staff projected that the state would face budget shortfalls in the current year” and beyond.


The report points out that some of the seemingly good news about states’ fiscal affairs was a result of serious challenges “that were temporarily masked by federal assistance during the COVID-19 pandemic—but never went away.”  Beyond that, states have put themselves at risk of future fiscal woes because of decisions they made over the last few years to reduce revenue while simultaneously increasing spending. They were able to afford this dream combo when federal aid was streaming in, but these actions could come back to haunt them, as unsustainable in coming years. As Goodman points out to us, many state adopted tax cuts that gradually reduce rates over multiple years have not fully phased in yet. That raises further questions about whether budgets will remain balanced in the years ahead. 


One of the most important points raised in the Pew report is the advantage gained by states that actually report long term deficits in the first place as opposed to others that aren’t looking beyond the immediate future and run the risk of shockwaves when and if things turn south. According to a November Pew report, “15 states publish ‘long-term budget assessments’—multiyear projections of revenue and spending that explore whether states are expected to experience deficits or surpluses and why. An additional 15 states publish long-term revenue and spending projections (while doing less to explain the numbers) . . . The 20 states that do not use these analyses may unknowingly be heading for similar problems—problems that will only be harder to solve the longer they go unrecognized and unaddressed.”


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