States Confront Fiscal Shock

Almost 20 states are appropriating general fund dollars targeted to the coronavirus pandemic—and eight are transferring resources from their “rainy day funds” and reserve accounts, according to the National Conference of State Legislatures. Many more will surely follow as the nation works its way through this unprecedented health and economic crisis. 

But how state leaders respond to—and survive—these challenges will depend in no small part on how they marshalled and managed their revenues in the years since the Great Recession. Many analysts agree that state governments are generally better prepared for a recession today than they were in 2008. But the 10 states with the largest populations—representing more than one-half of the country’s total—illustrate the range of strengths and challenges that policymakers and those states’ residents will face, according to a fresh review by Neal Johnson Associates. 

Big 10 Fiscal “Stress Test”

Texas, California, and Georgia would appear to be best positioned to weather a mild economic downturn, according to one assessment. Moody’s Analytics’ “Stress-Testing States 2019” estimated the potential budget impacts of a moderate recession based on data from the National Association of State Budget Officers; under that scenario, all three states could see budget surpluses. (See table, below.)

Conversely, Florida, Pennsylvania, and Illinois all clustered near the bottom of this fiscal test, with estimated budget gaps ranging between 5% and 10%. Of the 10 largest states, North Carolina, New York, Ohio, and Michigan would see smaller shortfalls of less than 3%, according to this forecast.

But many additional variables contribute to this balancing act. Paradoxically, “some states have built sizeable reserves by neglecting fundamental investments in their residents’ well-being and long-term prospects,” argue Michael Leachman and Jennifer Sullivan, co-authors of a new cross-sector analysis of states’ policy and fiscal choices for the Center on Budget and Policy Priorities. States that made smarter decisions on policies ranging from health care (especially Medicaid expansion under the Affordable Care Act for low-income residents) to modernized, well-funded unemployment insurance systems will help those states better navigate troubled economic waters.

And all evidence suggests that ensuring that a state’s public community colleges, four-year institutions, and public-private training partnerships are affordable, effectively financed and governed with a focus on today’s learners is critical to economic survival—especially now. States that integrate their postsecondary education and training systems to upskill current workers as well as prepare the next generation for community engagement and work can strengthen their regions’ capacity to provide both a safety net and a bridge to future economic growth.

Revenue Swings Escalate Uncertainty

Still, fiscal shocks can drive otherwise well-prepared states with volatile revenue structures into dangerous territory.

A comparative analysis of state tax revenue volatility drives this point home. While California ranked relatively high on the Moody’s “Stress-Test,” it also has the most volatile tax revenue structure among the 10 largest states, according to a 50-state analysis by Pew. (See “Tax Revenue Volatility.”) Why? Because a growing share of the state’s general fund revenues come from income taxes—and the state is heavily dependent on wealthy taxpayers whose income streams are less predictable than those who hold middle- or low-wage jobs, reports the California-based College Futures Foundation.

“Even states relatively well-equipped right now like California and Texas may have significant swings in revenue,” warns state fiscal policy expert Scott Pattison, “and so they could still have dramatic budget cuts if revenue falls quickly. The higher the past rise, the more potential the fall.”

Neal Johnson Associates will continue to report on the impacts of these historic fiscal shocks to the states and capture best practices in fiscal and policy actions that support all residents—but especially the most vulnerable.

Find weekly updates on state actions at the National Conference of State Legislatures, “State Fiscal Responses to Coronavirus.”

Read “Stress-Testing States 2019,” Sarah Crane and Colin Seitz, Moody’s Analytics, October 2019.

Here’s the just-released Center on Budget and Policy Priorities Report, “Some States Much Better Prepared Than Others for Recession,” by Michael Leachman and Jennifer Sullivan.

Check out The Pew Charitable Trusts analysis, “Tax Revenue Volatility Varies Across States, Revenue Streams.”

Access the 2016 College Futures Foundation Higher Education Finance Forum report, “Prospects for State General Fund Revenues for Higher Education,” by Mark Hill.

 And here’s my recent reporting on best practices in addressing the needs of some of the most vulnerable student populations: single parents and those with demonstrably insufficient food and housing, as well as recent trends in public higher education funding.