The COVID-19 pandemic ushered in an atypical period for state and territory budgets marked by record-breaking revenue growth, unprecedented levels of surplus funds, and a sharp uptick in one-time expenditures. Recently, state fiscal conditions began to “normalize” as revenue growth slowed, collections came in closer to forecast, and states had less new recurring and one-time money to spend, bringing the recent era of substantial, widespread surpluses to a close.
In examining state expenditures and budget conditions, it can be helpful to understand the impacts of states’ unique revenue performance of recent years. Drawing on data from NASBO’s Fiscal Survey of States, this analysis seeks to illustrate the scale of the general fund revenue surpluses states experienced during the years following the onset of the COVID-19 pandemic, as well as their impacts on state expenditures and balance levels. Note that this analysis focuses only on state general funds, and does not consider the role of federal funds - including enhanced federal aid related to COVID-19 – in state budgets, aside from the indirect impacts federal stimulus had on general fund revenue collections.
Defining "Surplus"
When referencing a “surplus” within the context of state budgeting, this term is often assigned differing meanings, such as:
- Revenue surplus – the amount by which revenue collections exceed forecasted revenues when original budget was enacted.
- Unanticipated ending balance / budget surplus – the amount by which the general fund balance at year-end exceeds the projected balance when the original budget was enacted. This amount reflects any “revenue surplus”, adjusted upward or downward depending on how spending compares to original appropriation amounts.
- Operating surplus – the amount by which revenues exceed expenditures in a given fiscal year or budget cycle.
- Ending balance – occasionally, a state may refer to the entirety of its general fund ending balance as its “surplus”.
For the purposes of this analysis, “surplus” mainly refers to the first definition (revenue surplus). Most of states’ recent budget surpluses (using the second definition above) were the product of revenue surpluses, though a smaller portion was attributable to spending coming in lower than budgeted, due mainly to the unanticipated use of federal funds in place of general funds for certain program areas.
States Accumulated Large Revenue Surpluses Over Multiple Fiscal Years
In fiscal 2021 and fiscal 2022, states experienced record-setting revenue growth that far exceeded expectations when budgets for those years were adopted. Most states enacted their budgets for fiscal 2021 in the early months of the COVID-19 pandemic during spring 2020, when economists were predicting tax revenues to decline, in some cases dramatically. Instead, state general fund revenue collections in fiscal 2021 grew 16.6 percent compared to the prior year and exceeded enacted revenue forecasts by roughly 20.4 percent. A small portion of this growth can be attributed to the deferral of revenue from fiscal 2020 to fiscal 2021 for some states as a result of delayed tax filing deadlines. However, most of that growth was attributable to other factors, including the impacts of federal stimulus measures, a strong stock market, the recent enabling of online sales tax collections, and robust consumer demand – especially for goods which are more likely than services to be taxed.
Those same factors, along with rapid inflation, contributed to a similar state revenue performance again in fiscal 2022, with revenue collections growing 16.3 percent year-over-year and exceeding enacted revenue forecasts by 21.6 percent. These annual revenue growth rates in fiscal 2021 and fiscal 2022 marked the two largest year-over-year increases on record since the Fiscal Survey of States began in fiscal 1979. Fiscal 2023 brought a resounding end to double-digit annual revenue growth for states in the aggregate, reflecting the impact of recently adopted tax cuts, a weaker stock market performance in calendar year 2022, slower inflation, a high baseline in the prior year, and other drivers. However, the vast majority of states still ended the year with revenue surpluses, which in some cases were sizable, and aggregate general fund revenue collections in fiscal 2023 exceeded fiscal 2019 levels by 33.1 percent.
On net, from fiscal 2020 to fiscal 2023, states overall accumulated unanticipated revenue surplus funds totaling $416 billion, with “surplus funds” defined as the amount by which actual general fund revenue collections exceeded enacted revenue forecasts, as reported in NASBO’s Fiscal Survey of States (see textbox for an explainer on the different definitions of the term surplus). Figure 1 illustrates the revenue surpluses by fiscal year. To understand the impact of this level of surplus on state budgets, this analysis will next turn to look at the spending side of the equation.
States Spent a Portion of Surplus Funds, Largely for One-Time Purposes
Similar to tax collections, state general fund expenditures have also seen considerable fluctuations in recent years, both in the aggregate and within individual states. This can be expected since state spending levels are dependent on how much revenue states collect. Due to balanced budget requirements, states enact their spending plans based on how much revenue they expect to collect based on their forecasts. However, in fiscal 2021 and fiscal 2022 – and to some extent, in fiscal 2023 as well – revenue collections far surpassed those enacted forecasts, leaving states with large sums of surplus funds. Some of these funds were spent, largely on one-time uses, either later that fiscal year through supplemental appropriations or in a subsequent fiscal year. Figure 2 depicts the impact of the former, illustrating how actual general fund expenditures exceeded originally budgeted spending in fiscal 2021 and fiscal 2022. (This did not take place in the aggregate in fiscal 2023, mainly due to unique budget circumstances in California that affected the overall figures.)
On net, from fiscal 2020 to fiscal 2023, states in the aggregate spent $73 billion more from their general funds compared to what they originally planned to spend in their enacted budgets for those years.
The impact of spending revenue surplus funds in a subsequent fiscal year can be observed to an extent in Figure 3. For example, the substantial revenue surplus states recorded in fiscal 2021 led to higher spending growth in fiscal 2022 as states spent a portion of those prior-year surplus dollars on one-time uses that year. Examples of such one-time investments include capital projects, technology upgrades, supplemental pension payments, rainy day fund deposits, employee bonuses, and tax rebates. Similarly, states spent surplus funds from fiscal 2022 and fiscal 2023 in subsequent years as well, which explains why spending growth in those years outpaced annual revenue growth. This dynamic is likely to continue, at least in some states that continue to hold prior-year surplus funds in their balances (to be discussed below). Once spending is no longer being impacted by one-time expenditures supported by surplus funds, this could have a dampening effect on state general fund spending. When interpreting data on state fiscal conditions, it will be important to distinguish one-time spending declines resulting from this dynamic from recurring budget reductions.
Figure 3
Most Surplus Funds Remain in State Balances
States directed a portion of the surplus funds they accumulated to additional expenditures, including many one-time investments. However, as of the end of fiscal 2024, most surplus funds were still held in states’ general fund ending balances, while another significant portion had been deposited into states’ rainy day funds – reserve funds intended for use primarily in the event of an economic downturn to help stabilize state budgets. Together, states’ general fund ending balances and rainy day fund balances make up total balances, as defined by NASBO.
Total balances swelled during the period from fiscal 2021 to fiscal 2023 when states experienced large revenue surpluses. After a slight decrease in fiscal 2020 to $111 billion, total balances increased to nearly four times that level by the end of fiscal 2023 to reach $437 billion. Total balances have begun to decline from that peak but remain significantly elevated compared to the pre-COVID landscape, as shown in Figure 4. It is also worth noting that “total balances” only include rainy day funds and general fund ending balances. States hold additional balances in a range of other special purpose funds not included in these figures. In fact, a number of states directed one-time surplus funds in recent years to special purpose funds (for example, a capital projects fund or environmental/conservation fund). Those transfers may or may not show up in their expenditure figures depending on states’ Fiscal Survey reporting practices.
Figure 4
This analysis will now look separately at the two components of total balances – rainy day funds and general fund balances – to better understand the impact of prior-year surplus funds.
Rainy Day Funds Swelled as a Result of Surpluses
Rainy day funds, dedicated reserves established to supplement general fund spending during a revenue downturn or other unanticipated shortfall, are a key component of states’ total balances. All 50 states report having at least one rainy day fund or budget stabilization fund. As noted earlier in this analysis, states experienced record-breaking revenue growth in fiscal 2021 and fiscal 2022, and accumulated an extraordinary amount of surplus funds during those years as this level of growth was not anticipated when states set their budgets. Some state reserve policies automatically direct all or a portion of their unanticipated general fund balance (or surplus) to rainy day funds or make deposits based on overall revenue growth or growth in a particular revenue source. Thus, many states saw rainy day funds swell during this period as a direct result of state revenue performance. In addition to these automatic deposits, many state policymakers made decisions to appropriate one-time surplus funds to their reserve accounts.
After a slight decline from $79 billion in fiscal 2019 to $77 billion in fiscal 2020, deposits fueled mainly by revenue surpluses led rainy day funds in the aggregate to increase to $183 billion by fiscal 2023. Growth in rainy day fund balances was widespread, with the median rainy day fund balance as a percentage of general fund expenditures rising from 7.9 percent in fiscal 2019 (already an all-time high at that time) to 12.7 percent in fiscal 2023. General fund spending totals in recent years have included a sizable amount of one-time expenditures, so it is worth noting that as a percentage of ongoing operating expenditures this percentage would be even larger. While overall rainy day fund balances decreased in fiscal 2024, this change was mainly driven by a withdrawal from one state’s operating reserve that had also recorded disproportionate growth in its reserve balances in the preceding years. Most states have continued to increase the size of their rainy day funds, with the median balance increasing to 13.5 percent in fiscal 2024 as a percentage of general fund expenditures. As of the end of fiscal 2024, states held $155 billion in their rainy day funds, and this level is projected to tick up in fiscal 2025. (See Figure 5)
General Fund Balances Saw Tremendous Growth and Remain at Historically High Levels
Comparing State-by-State Balance Levels and Changes Over Time
NASBO often receives questions about comparing rainy day fund balances across states, or looking at changes over time in reserves or total balances in specific states. There are many nuances to be aware of when attempting to compare balance levels state by state, some of which are referenced below.
Rainy Day Funds
- States vary in terms of the deposit methods, withdrawal restrictions, target sizes, and other policies related to their rainy day funds. Some states may hold multiple rainy day funds that serve unique purposes, and states may interpret NASBO’s definition of rainy day fund more narrowly or broadly in selecting which funds to include in their reporting. States with a more volatile revenue structure may be more likely to hold a larger rainy day fund balance than a state that heavily relies on more “stable” revenue sources.
General Fund Balances
- In addition to taking into account whether the state includes its rainy day fund within its general fund balance (discussed separately in this analysis), it is also important when interpreting general fund balances to note that in a number of states, a portion of that balance may be routinely designated or reserved to be spent in a subsequent fiscal year. For example, New York State set up a new reserve, held within its ending balance, to collect Pass-Through Entity Tax (PTET) receipts to pay out tax credits to those entities in the subsequent year. As another example, South Carolina routinely reports a portion of its general fund ending balance is reserved or designated for carryforward and nonrecurring appropriations in the subsequent fiscal year.
Large Balances & Other Fiscal Resiliency Actions Will Help States in a Tighter Budget Environment
Overall, states and territories have used their surplus funds in recent years to strengthen their fiscal position by increasing their cash balances and dedicated reserves, as well as by funding actions to further enhance their fiscal resiliency. They utilized these one-time dollars to make supplemental pension payments, fund capital projects to reduce the need to borrow, increase funding for deferred maintenance, pay down debt early, and support other investments that will yield long-term financial benefits, while limiting the use of surplus funds for new ongoing spending commitments. With these forward-looking actions, states have demonstrated fiscal responsibility and a focus on long-term structural balance that will pay dividends as they transition to more “normal” revenue growth and budget conditions.
Even after investing one-time surplus funds accumulated in recent years for one-time purposes, states’ general fund ending balances remain elevated in the aggregate. However, based on reviewing current revenue collections data, NASBO expects to see minimal (if any) new revenue surplus funds added to state coffers in the current fiscal year. Meanwhile, slower recurring revenue growth – more in line with pre-COVID trends – is expected to continue. This will translate into a tighter budget environment in which new money is limited and states must weigh the allocation of scarce resources towards competing priorities. Remaining prior-year surplus funds provide both a tool for investment and for managing budgets in this more constrained environment. Additionally, states’ rainy day fund balances – many now at all-time highs and/or their legal maximum levels – provide a valuable contingency tool to help states close budget gaps and guard against potential uncertainty ahead.