COVID-19: Which states will face immediate budget issues?

States, without question, will face significant fiscal challenges as a result of the COVID-19 pandemic. Rhode Island General Treasurer Seth Magaziner warns that his state is “weeks, not months” away from running out of money. California Governor Gavin Newsom (D) says the pandemic could wipe out the state’s $21 billion surplus. Similarly, a recent study in Illinois warned that COVID-19 could cost the state $28 billion. Every state is going to be affected and policymakers will have to make hard budget choices moving forward, but some are better positioned than others. Reviewing a few fundamental data points helps sort states into those which are closest to the edge of a fiscal cliff and those which have more time to work out longer-term budget solutions. In order to determine which states are more likely to face immediate budget issues — between now and early summer — we examined a combination of three factors: (1) each state’s rainy day fund reserves, (2) unemployment rate (as of April 9, 2020), and (3) whether the state has finalized a budget for the current period. Each of these factors are indicators of the likelihood that a state will be forced to act more quickly to address fiscal problems resulting from the coronavirus-induced economic contraction. We condensed these factors into a single score for each state, and then ordered the states based on this score from “more likely to face short-term budget issues” to “less likely.” The heat map below highlights the states that are more likely to face immediate pressure to address fiscal shortfalls in the wake of the COVID-19 outbreak. Darker blue states are more likely to face immediate budget pressure mainly due to lower rainy day fund balances, higher unemployment rates (an indicator of greater negative economic impact), and lack of an adopted budget for their upcoming fiscal year. Grey states are less likely to face significant pressure in the short term based on these factors.

Our analysis shows Kentucky and Pennsylvania are the states most likely to face immediate budget problems. Six states fall in the next highest risk tier: Arkansas, Hawaii, Illinois, Louisiana, New Jersey, and New York. Several other states (Massachusetts, Michigan, Montana, Rhode Island, Vermont, and Wisconsin) have some risk factors for short-term budgetary issues and should be monitored, but are not, according to our metrics, among the most at immediate risk. Read the rest of the article, plus more about our methodology, on the MultiState Insider blog.