Why state governments are tightening their budgets

Many state governments in the U.S. are working with less room in their budgets.

The budget pressures come as a historic round of federal economic stimulus comes to a close. The federal government put over $800 billion to help state governments navigate the pandemic.

“Virtually every state made a tax cut. Virtually every state also increased employee pay for public employees,” said Justin Theal, a senior officer at The Pew Charitable Trusts’ Fiscal 50 project. “The implication is that fiscal flexibility is really declining across the states.”

This federal support, alongside the strong U.S. economy, boosted state finances and masked many long-simmering fiscal issues.

One analysis suggests that as many as 27 states are unable to finance their existing liabilities — most notably underfunded pensions owed to former public employees. The most indebted states, according to Truth in Accounting, include Connecticut, New Jersey, Illinois, Massachusetts and California.

“We find that about $70 out of a $1,000 in allocated [federal] aid ended up in pension contributions.” Oliver Giesecke, a research fellow at Stanford University’s Hoover Institution.

Emerging risks, including an aging population, deferred maintenance on infrastructure and more extreme weather threaten state budgets moving forward.

Watch the video above to learn more about the fiscal health of state governments.