On Tuesday, New York Governor Kathy Hochul will outline her budget proposal for the next fiscal year, and the plan will be closely watched by members of both parties in Albany since it comes with the state facing a $4 billion gap. As it turns out, New York state is not uncommon in this respect.
According to a new analysis from the Pew Charitable Trusts, about half of Americans live in states with budget gaps, long-term deficits, or both. There are many reasons why.
Josh Goodman, senior officer for state fiscal health with Pew, spoke with WAMC's Ian Pickus.
It may be an obvious question, but how do these deficits and shortfalls happen?
There are a couple factors really driving the deficits. And I think it's helpful to start by just kind of looking back a few years. And so at the very beginning of the pandemic, you know, state tax revenue was devastated, businesses are closing down, people were working less. But then, pretty quickly, states had these incredible budget surpluses. The federal government was giving lots of aid directly to state governments, and also to individuals who were then spending more on the economy. And that was increasing state tax revenue. What we have happening now is kind of a normalization of fiscal conditions where that federal aid is going away, you know, the economy has held up pretty well, but it isn't booming like it was. And so that's sort of leading to the end of these incredible surpluses that states had. Now over those last few years with the surpluses, states also weren't just sitting on their hands; in many cases, they increased spending, they had big demands for increased spending, and they, in many cases cut taxes as well. So if you have less revenue from lower taxes, if you have higher spending, because you adopted new programs or raised wages for your state workers, that is what sets up the potential for budget gaps.
What's the difference between a long-term deficit and a short-term budget gap?
States always have some years where revenue doesn't come in that strong, maybe because of a recession, maybe because of some other factor. Or where there's something with spending, maybe there's a natural disaster, or they have to spend more. And so that's where you get a short-term budget gap from. But if chronically revenue is coming in short of spending demands, that's what's a structural deficit, a long-term deficit. And so you heard the governor in New York referring to this is a structural situation. When New York looks out several years, they show deficits in each of those years. And that's a sign that over the long term, revenue isn't supporting spending demands for the state.
Are there certain states that are in worse shape than others in this right?
I think the states that have some problems right now, you can sort of put them into a couple different categories. Some of these states are states that had chronic budget problems before the pandemic, and that often were having deficits. And the pandemic, when states received all that money from the federal government, it sort of masked their problems temporarily, but they never really went away. And so New York, you could probably put in that group. In New York, it's pretty typical for the state to report long-term deficits. We have data that shows going back 15 years the balance between revenue and spending. And New York is one of nine states where spending has exceeded revenue over that long-term time period. Other states such as Illinois, Alaska, and New Jersey are sort of in that group. You also have these other states where it is a newer situation, and it's maybe more what they did during the pandemic in terms of increasing spending and cutting taxes, that's kind of their problem now. There are different sorts of groups of problems but the severity sort of varies from state to state.
So this analysis makes the point that it can be difficult to measure the things you're talking about because states all have their own separate reporting processes. And furthermore, a lot of it depends on the timeline that you're measuring. The reason I bring that up is in recent days, Massachusetts Gov. Maura Healey has started proposing $375 million in budget cuts to make up for a billion dollar current spending gap. So the question is, when we're zooming in on states that have the problems you're identifying, what is an appropriate timeline to measure by?
We encourage states to look out at least three years into the future. And that's kind of a minimum. And the reason to do that is, you know, to identify those structural deficits we talked about earlier, that unless you're looking out longer term, you can't set really say, is this a temporary problem? Or is this something where we need to do make permanent changes to get revenue and spending back into balance? And in many cases, three years isn't even necessarily enough; states should be thinking about, what are the policies we have adopted? If states have adopted a tax cut that's phased in over five years, then they should look beyond that five years to say, well, will the budget be balanced after we fully phase in this tax cut?
Isn't part of this just human nature and the nature of our politics? You have somebody who might be in charge of policy for a four-year term making proposals that don't come due for maybe eight years. So I mean, it's tempting to kick the can down the road, isn't it?
Certainly that's something we see across the states. One thing in our research that has been gratifying to see, though, is when states have good data on their long-term budget picture, they use it to make policy decisions. A great example of this was in New Mexico, a state that's done really well the last couple of years, they've had large budget surpluses, but they did an analysis that said, you know, once oil and gas production declines in our state, which we expect to happen, you know, over the next coming decades, we're going to have a big budget problem. And so with their surplus they had, part of what they did is they put some of that money into endowments and trust funds that will generate revenue over the long term. So they said, we're not going to spend all this money right now. You know, we care about the future of our state, we want our goals to be achieved, not just right now, but into the future. And so I think the starting point for getting policymakers to have a long-term perspective is giving them the data that they need to be able to take that longer term perspective.
Let me ask you a cynical question, Josh. The pandemic obviously was not foreseen, and it was a tremendous shock to budget writers, no question about it. But they were rescued. I mean, it's literally in the name. So when states found themselves in an emergency, not only did a federal bailout come through, but as you mentioned, in many cases, it brought states to a position of being flush in a way that they wouldn't have been otherwise. So do you think that has changed the dynamic in terms of long-term planning, knowing that there might be a safety net?
Certainly, that's been an important role of the federal government, not just with the pandemic, but with the Great Recession, going back to Dot Com Bust. So really, the last three recessions we've had, the federal government has come to states’ aid, and part of the reason for that is the federal government can take on debt in a way that state governments can't. And so it's sort of a natural role for them. I'd sort of spin it a different way where I think it's a big open question for states. If there was a recession in 2024, would the federal government come to help them? There certainly been a lot of maybe backlash against the amount of aid that was given to states, there's questions in Congress about whether that was the right decision or not. I don't think state policymakers can be assuming that when there is another recession, when there is another crisis, the federal government will come to their aid, and certainly not to the same degree, necessarily.
