Most states are not yet even three full months into their new fiscal year (FY), but budgetary cracks are already starting to show. Many states are wrestling with systemic difficulties that have been hobbling their economies for years, such as unfunded pension liabilities or a weakening energy sector. Some have been hit more recently by lower than expected revenue estimates that have thrown their books out of balance. Others are not in immediate fiscal danger, but could be tipped into crisis by even a mild economic downturn or adverse judicial decisions. In total it appears that 21 states are already facing budget shortfalls for the 2017 fiscal year.
Although not every state has a balanced budget requirement, all states functionally work off of a balanced budget (some with more chicanery than others). Thus, states facing a shortfall will find their fiscal maneuverability limited as they are forced to find the money to fill in the gaps either by cutting spending or hiking revenue. And they will have to fix these current year problems when they return to session (most in January), before moving on to the following year's budget, which in turn may also be negatively affected by tempered revenue forecasts. For example, Virginia has already had to shelve plans to increase public employee salaries and New Mexico is considering a new tax on alcohol and tobacco.
As we have previously noted, predicting revenue shortfalls is something of an inexact science, so our list of states with potential revenue problems is not exhaustive or final, especially this early in their fiscal years. New states might pop up and some below could fall away as new revenue figures roll in over the coming months, but these are the states we plan to keep the closest eye on in the months to come. If you have insights we haven't captured here, please let us know.
Revenue reports from July found that Connecticut ended the last fiscal year (2016) with a $316 million deficit and more trouble is on the horizon. Things have been going from bad to worse for the state's budget writers over the past two years as they have wrestled with persistent revenue shortfalls and political turmoil. With tax receipts continuing to slip, it looks like lawmakers will have to enter the fiscal mire again when they return to Hartford in January.
Maryland Comptroller Franchot (D) has just downgraded the state's revenue projections by $783 million and recommended that lawmakers tread carefully when crafting their next budget. The comptroller said he was revising estimates down by $365.1 million for the current year and by $418 million for FY18; this after he announced that Maryland ended FY16 $250 million below forecast. He blamed the these downgrades on stagnant growth in the Maryland's economy and a job market with insufficient high-paying jobs. Looking ahead to the legislative session, he advised lawmakers to continue down a path of fiscal restraint and to not seek to either cut or raise taxes for the time being. For their part, lawmakers have been playing the blame game, with Governor Hogan (R) accusing Democratic legislators of overspending and Democrats questioning the governor's fiscal stewardship.
While Massachusetts is enjoying a strong overall economic outlook, weak revenue numbers and an estimated $240 million gap leftover from the state's last budget means that the state could have to make some difficult fiscal choices next year. State economists reported that thus far into the fiscal year revenues are $36 million short of previous projections, though Governor Baker (R) has said he wants to wait for September's receipts before calling for any specific policy prescriptions. Adding to this fiscal pressure, Massachusetts continues to face systemic budgetary challenges arising from rising Medicaid costs, a slow recovery from the Great Recession, and lawmakers' use of one-time monies to patch holes in previous budgets.
New York Comptroller DiNapoli (D) issued a report in July warning that the state was facing possible recurring $5 billion budget gaps over the next three fiscal years. DiNapoli points to the legislature's use of one time funds for recurring line items as a key driver for the shortfall. This, coupled with a dwindling balance in the state's rainy day fund, could portend trouble for the next round of budget negotiations.
Pennsylvania has had a tumultuous relationship with its budgeting over the last two years, having been at pains to get spending plans balanced and in on time. While Governor Wolf (D) has declared that the budget he signed in July balanced the state's books for the current fiscal year, a mounting structural deficit spurred on by rising pension costs looms over the legislature. Lawmakers returned to Harrisburg recently with the intent to, among other things, implement some level of pension reform, but the political deck seems stacked against a long term solution.
A recent economic forecast predicts that Florida will end the current budget year with a scant $7.5 million surplus, but notes the state could face a potential $1.3 billion deficit in FY18. Lawmakers from each side of the aisle have begun divvying up blame for this fiscal instability—either too much spending or too many tax cuts—ensuring that they will face hard decisions and a political divide in the coming legislative session, which begins in March.
After two special budget sessions this year, Louisiana policy makers were able to temporarily balance their state's budget, but an August economic forecast predicted a $1.5 billion revenue shortfall for FY18. Lawmakers adopted significant “temporary” tax increases to patch together this year's budget, but economists are warning that there is currently no revenue to replace those policies when they expire next year.
Mississippi lawmakers overestimated how much money they would realize during the current budget year and are now facing a $56 million shortfall. Governor Bryant (R) has announced that he plans to close the gap—which is being credited to an accounting error—with agency budget cuts instead of pulling more money from the rainy day fund. Such a cut should be enough to balance the budget, but it may be a short-lived victory as the deficit is likely to grow larger: revenues have been falling below expectations, and approximately $70 million in revenue will not be available to the legislature as a matter of law.
While the exact figures are unclear, it seems that Texas will be facing a troubling budget picture next year. Weak energy prices, a Medicaid funding gap of up to $1.6 billion, reduced revenue due to last year's tax cuts, means that lawmakers could be forced into a fiscal corner. Legislative leaders have told state agencies to prepare to see their budgets cut by 4 percent next year. Complicating matters further, Governor Abbott (R) and Lt. Gov. Patrick (R) have called for lawmakers to cut franchise and property taxes. On the positive side, Texas has a large rainy day fund ($10+ billion) to cushion serious blows.
In August Governor McAuliffe (D) announced that Virginia was facing a $1.5 billion biennial budget shortfall, among the largest in his state's history, due to lower than expected withholding and sales tax receipts. The governor announced that he hopes to draw down money from the state's reserves and to divert money that would have gone to a planned public sector employee pay raise, but he says that more tough decisions will be necessary.
Due to Illinois' ongoing budget morass, the state now faces an $8 billion budget shortfall for the current fiscal year. The state did not adopt formal budgets for FY15 or FY16, opting instead to pass stopgap funding to provide the necessary relief for cash-strapped agencies. There is no indication that the current impasse will let up any time soon, so Illinois' deficit numbers will only increase in the coming months.
The Kansas Legislative Research Department says that the state is currently facing an estimated $20 million budget shortfall caused by lagging tax receipts. The state has received grim revenue news thus far into the fiscal year, with the forecast in August coming in $10 million short of expectations with just $304,000 collected in corporate income taxes. This is the latest turn in Kansas' continued revenue drama, which is widely attributed (accurately or not) to the legislature's marquee tax cuts. In July S&P downgraded the state's bond rating for the second time in two years.
North Dakota continues to face declining revenues in the face of the sagging energy prices and concomitant lower production, causing lawmakers to speculate about how they will seek to close a potential budget deficit during the next regular session. During a 3 weeks special session this summer, lawmakers approved a plan to plug a $310 million budget hole by cutting to government spending. If another hole should emerge many lawmakers are signaling that they would seek to use the state's Legacy Fund to fill it instead of pursuing another round of cuts.
Wisconsin faces a $1 billion transportation budget shortfall over the next two years, which is causing lawmakers to consider whether to discontinue projects or seek additional revenue to pay for the state's roads. Governor Walker (R) has offered a plan that shifts money from state to local highway projects, but legislators have been cool to the proposal thus far.
In June Governor Walker (I) leaned heavily on his veto pen to slash spending from the legislature's budget, but his state still faces a $4 billion budget deficit. The governor had hoped that he would be able to follow these cuts with a series of systemic budget reforms that could ameliorate the state's fiscal problems, but he failed to rally legislators to his cause, opting instead to wait until after November's elections before taking further action.
While Governor Brown (D) was able to achieve most of his fiscal priorities with his state's conservative (for California) $167 billion budget plan, he acknowledged the prospect of a looming revenue downturn. May revenue figures forecast that state tax receipts will decrease by $1.9 billion in the coming years, leading to a possible $4 billion deficit by 2020. While not all economists agree with the governor's prediction, they concede that California's revenue volatility makes it particularly susceptible to an slowdown.
Legislative economists predict that Colorado is facing a budget shortfall for the current fiscal year of between $330 million and$227 million, citing lower than expected sales and corporate income tax receipts. Governor Hickenlooper (D)is still weighing his options to respond to the shortfall, specifically whether he will cut spending or reduce the state's fiscal reserves.
New Mexico's legislative leaders are in crisis over how to fill an estimated $458 million budget hole for the current fiscal year. Economists point to lawmakers' practice of over-budgeting and fluctuating energy markets as the cause of the predicament. Governor Martinez (R) has said that the legislature should balance the state's books in a special session, but thus far the parties are at an impasse over how to proceed: the governor insists that Democrats should hash out the an outline for the policy agenda before hand in order to reduce the cost of a special session, while Democrats counter that the governor needs to be willing to consider new tax revenues as a means of plugging the hole before they can do their work.
Oregon economists estimate that the state's expenditures will balloon over the next biennium, leading to a possible $1.35 billion budget deficit. In addition to rising pension and education costs, observers point to that fact that the economy could be returning to earth after a period of out-sized growth which set a fiscal pace that was unsustainable over the long term. Legislative leaders have gone to their corners, calling for either spending cuts or tax increases, but the elephant in the room is a Measure 97, a tax ballot initiative that would raise $3 billion a year, the largest revenue increase in state history. The measure is billed as a means to hike tax rates on “big out of state businesses,” but, as Governor Brown (D) has pointed out, it would also raise consumer prices across the board. Measure 97 is currently ahead in the polls, and if it is adopted it will have a titanic effect on the state's budget picture next year.
Washington is in a precarious spot as the state could be facing up to a $4 billion budget gap over the next biennium. Revenue figures indicate that when lawmakers set about crafting a budget plan for the next two fiscal years they will face a $474 million shortfall, but this number would balloon out by an estimated $3.5 billion every two years if the state supreme court follows through on its mandate that the legislature must more adequately fund the state education system. Lawmakers are still debating among themselves and with the judiciary how to respond this education mandate, but it is difficult to see where they would find the money to fully abide by it.
Wyoming Governor Mead (R) has said that he will not impose another round of spending cuts this calendar year, but he warned that lawmakers will need to take further steps when they return to session in January due to the continued weakness in the energy sector. It's not clear exactly how much revenue the state will need to balance the state's books, but the governor has lodged his opposition to levying new taxes on property, groceries, and wind energy.