State revenue sources will vary, so they’re important to distinguish to help gauge fiscal health. In fact, states will face unique challenges in fiscal-year 2024, which begins July 1, 2023, depending on where their revenue comes from.
Texas, for instance, relies predominantly on sales taxes, which in recent years were bolstered by historically high inflation that drove up prices for taxable goods and services. As such, the state enters its spring budgeting season with record projected revenues and in-hand reserves.
In contrast, California’s revenues mostly come from income taxes, especially those generated by high-salary earners and assorted capital gains. But some unpredictable financial burdens were especially hard-hitting, including job losses in high-paying tech sectors, a softening housing sector and volatility in the financial markets. Consequently, fiscal leaders project a $22.5 billion budget deficit for fiscal-year 2024, equal to approximately 10% of budgeted expenditures. Although substantial, we believe the gap is less dire than recent headlines portray. In fact, it can be effectively managed using just a few of the many tools available to California, and indeed all states, that typically help keep them high-quality bond issuers.
From Tighter Belts to Looser Deadlines: States Have the Power
States—especially those dealing with budget woes—can leverage a deep tool kit to get through difficult economic conditions. Line-item spending adjustments, cash reserves, raising taxes, job cuts or furloughs, shifts and delays in priorities or programs and borrowing authority are just a few levers at states’ disposal. Even better, states can be flexible in which of these levers they pull and to what extent. This is why, even when faced with shortfalls, no state has defaulted since the Great Depression. And it strongly contributes to the high quality of the broader muni market, where rating-agency upgrades have generally outnumbered downgrades, especially for the last 21 months (Display).