Starting in 2025, the state should commit to long-term budget assessments.
The Arkansas legislative regular session convenes in Little Rock on January 13. At this point, pre-filed bills address health, education, environmental, and other issues. Governor Sanders has also provided the legislature with her biennial budget covering fiscal years 2026 and 2027. While the proposed budget covers two years, the state does not perform any long-term budget assessments or budget stress tests. These long-term analyses, typically of at least five years, are important to promote fiscal resilience.
Think of a family considering a long-term commitment, such as a mortgage for a new house, or a five-year loan for a new car. When deciding, the family must consider income over the life of the mortgage or loan. For example, do the parents have job security? Can they expect salary raises in the future? The family must also consider increases in expenses. Will inflation make every day needs more costly? Are there any big expenses in the near future, such as daycare or health costs?
A state is no different. Twenty states across the country have published at least one long-term budget assessment or stress test, according to The Pew Charitable Trusts. A five-year outlook helped Pennsylvania identify a growing budget gap between revenue and spending. A similar approach in Maryland revealed a shrinking structural surplus. Stress testing in Montana allows the state to predict and plan for budget shortfalls over the next 40 years. Utah used stress testing to reveal that billions of dollars could be lost under three economic scenarios, including recession and stagflation (the simultaneous occurrence of high inflation, stagnant economic growth, and elevated unemployment).
As the state of Arkansas is facing at least two major financial uncertainties, it is more important than ever that it undertakes long-term assessments of revenues and expenditures. First, economists can argue over the short- and long-term effects of the Trump Administration’s proposed tariffs but preparing for an eventual recession is important. In fact, since World War II, we have averaged a recession about every 6.5 years. Our last recession was the Covid Recession of 2020. A major recession would seriously reduce state revenues considering Arkansas is now giving away more than $2 billion each year in individual and corporate income tax thanks to cuts over the last 10 years.
Second, Arkansas must contend with the long-term fiscal impacts from Governor Sanders’ major policy initiatives. Even as Education Freedom Accounts –— the public tax-dollar vouchers for private and home schooling — become universally available in fiscal year 2026, the state has not released any long-term cost projections. According to the U.S. Census American Community Survey, there were more than 50,000 students enrolled in Arkansas private schools in 2023. If the families of all students currently in private school in Arkansas accept the vouchers, it will cost the state around $350 million every year. The governor’s proposed budget for 2025-26 calls for $188 million in Education Freedom Account funding, with an additional $90 million in set aside funding “to create a strong fiscal reserve for the program.” But this set aside consists of budget surplus from previous years. If voucher demand exceeds the budgeted $188 million in future years, the governor and legislators must identify additional, ongoing revenue because the use of surplus for annual expenditures is not sustainable (especially as surpluses have all but evaporated thanks to a decade of income tax cuts).
The LEARNS Act includes procedures for distributing Education Freedom Accounts according to seniority, as well as by designated priority groups, if demand exceeds budget. And the legislature has control over voucher expenditures as it must approve the state budget and appropriations. But so far vouchers have been touted as available to all families in year three and beyond. The uncertainty around Education Freedom Accounts demands long-term budget assessments. This is simply good planning and policy.
Long-term budget assessments and stress tests that consider both revenues and expenditures inform policy priorities and decisions. They help lawmakers predict budget deficits and act to prevent them. With the regular legislative session around the corner, it is not too late for the state to perform these assessments. As the governor and legislators consider additional revenue reductions and increased state spending on such things as private school vouchers and prisons, long-term budget assessment is imperative for fiscal sustainability. In 2025, the state should resolve to consider the long-term. Otherwise, our elected officials will make decisions in the dark.