State Fiscal Resilience Rankings

Measuring States’ Capacity to Withstand Federal Fiscal Retrenchment

State governments today operate within a fiscal environment that is increasingly shaped by decisions made in Washington. While the traditional conception of American federalism emphasizes a clear division between federal and state responsibilities, the modern reality is far more intertwined. Over time, federal financial support for state and local governments has expanded dramatically, both in scale and scope, leaving states more exposed to federal fiscal conditions than at any point in recent history. This growing interdependence would be relatively benign if the federal government itself were on stable fiscal footing. But it is not.

The United States is on an unsustainable fiscal trajectory. Federal debt held by the public has risen sharply over the past two decades and is projected to continue climbing indefinitely under current policy. At the same time, rising interest rates have begun to materially increase the cost of servicing that debt. Interest payments are now among the fastest-growing components of the federal budget, steadily crowding out other priorities. This dynamic is not merely a long-run concern but is already reshaping the composition of federal spending today.

Looking ahead, the federal government faces a looming fiscal crisis. As Veronique de Rugy has emphasized, the eventual depletion of the Social Security and Medicare trust funds will force policymakers to confront large and immediate funding gaps. When those trust funds run dry, benefits can only be paid out of incoming revenues, requiring abrupt benefit adjustments, significant new borrowing or large-scale fiscal consolidation. Financial markets, anticipating these pressures, may demand higher interest rates on U.S. debt, compounding the problem and accelerating the need for policy action.

In such an environment, federal policymakers will be forced to make difficult choices about how to close the gap between spending and revenues. But the range of politically feasible options is likely to be constrained. Major entitlement programs such as Social Security and Medicare are widely viewed as the “third rail” of American politics, making substantial reforms politically unpopular. Similarly, reductions in defense spending are often limited by national security considerations. While tax increases are frequently discussed, tax-based consolidation alone will not meaningfully improve our fiscal trajectory and could worsen conditions by hampering economic growth.

This leaves other areas of the federal budget as more plausible targets for adjustment. Among these, federal aid to state and local governments stands out as a particularly significant, and potentially vulnerable, category. According to historical budget data from the Office of Management and Budget (OMB) federal grants to states currently exceed $1.2 trillion annually and have grown substantially as a share of total federal spending. In the years following World War II, such grants accounted for just 2% to 5% of federal outlays. Today, they represent roughly 17% to 19%, reflecting a long-term shift toward greater federal involvement in areas that were traditionally state and local functions.

As the Hoover Institution’s John Cogan observes, the scope of federal spending has expanded to the point where “no state or local activity is beyond the reach of the federal government’s check-writing machine.” Federal funds now support not only major entitlement programs administered at the state level, but also a wide array of activities once considered firmly within state and local jurisdiction, from infrastructure and education to recreational and community development projects. This breadth underscores the extent to which state budgets have become intertwined with federal fiscal policy.

The implication is straightforward but often underappreciated: If and when the federal government is forced to retrench, states will not be insulated from the consequences. On the contrary, they are likely to be directly affected. With roughly 35-36% of state revenues coming from federal sources, any significant reduction in federal aid would create substantial budgetary pressures for state governments. These pressures could manifest as spending cuts, tax increases or both, potentially during periods of broader economic stress.

Given these risks, the question is not whether states will be affected by federal fiscal consolidation, but how well prepared they are to absorb it. Some states have built stronger fiscal foundations, maintaining lower spending levels, better-funded pension systems and larger budget reserves. Others remain more exposed, with higher spending commitments and greater reliance on federal transfers. Yet despite these differences, there is currently no widely used, comprehensive framework for evaluating state-level fiscal resilience to a reduction in federal support.

This gap motivated me to create a Fiscal Resilience Ranking. By systematically assessing key dimensions of state fiscal health, including spending intensity, liability funding, fiscal space, rainy-day reserves, revenue volatility and dependence on federal aid, this index provides a picture of how prepared each state is for a future in which federal support may be less certain.[1]

This is a first attempt at building a fiscal resilience ranking and may not be a definitive or final measure. There are undoubtedly dimensions of fiscal health not fully captured here, and reasonable people may disagree on how these variables should be defined or weighed. I welcome feedback and suggestions for ways that I can refine this framework.

The map below shows all 50 states with a fiscal resilience score. The lowest-scoring state is New Mexico with a score of 3.77 out of 10, and the highest-scoring state is Idaho with a score of 7.71 out of 10.

The table below ranks the 50 states from 1 to 50 based on their respective scores, along with the six sub-scores that make up the overall ranking score.

The overall ranking scores are the average score over the six sub-scores. The six sub-scores are defined as follows:

Spending Intensity
This measure captures state government spending per capita, reflecting the overall size and cost of government relative to its population. States with higher spending levels may face greater difficulty adjusting budgets in response to fiscal shocks, thereby reducing their resilience.

Funded Liabilities
This metric measures the share of long-term obligations, such as pensions and other promised benefits, that are backed by existing assets. Higher funded ratios indicate stronger fiscal health and a reduced need for future budgetary tradeoffs or abrupt adjustments.

Fiscal Space
Fiscal space is defined as the combined state and local tax burden as a share of state income, capturing how much additional revenue capacity a state has. States with already high tax burdens may be less able to raise additional revenue without risking economic distortion or diminishing returns.

Rainy-Day Fund
This measure estimates how many days a state could continue funding operations using only its budget stabilization reserves. Larger reserves provide a buffer against revenue shortfalls or external shocks, thus enhancing short-term fiscal resilience.

Federal Dependency Rate
This metric calculates the share of state revenues derived from federal transfers, grants and aid. States with higher dependence on federal funding are more vulnerable to federal fiscal retrenchment and policy changes.

Revenue Volatility
Revenue volatility is the standard deviation of year-over-year growth in total state tax collections. This metric captures the sensitivity of state revenues to economic conditions. States with more volatile revenue structures are more prone to cyclical revenue swings, increasing the likelihood of fiscal stress during downturns and reducing overall fiscal resilience.

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[1] Pension funding metrics are based on reported actuarial values, which rely on state-specific discount rate assumptions and may understate the true economic value of liabilities.