Federal Funding Volatility Patterns Can Inform State Budget Planning
A look at the trends and variations in how resources flow across policy areas, programs
Every year states receive billions of dollars from the federal government, which make up about a third of state budgets collectively and served as the largest source of revenue in 13 states in 2024. The amount of these federal funds fluctuates from year to year, which has significant effects on state finances and policymaking.
This is particularly true now, as major federal policy and program changes go into effect. But volatility in federal funding to states has a long history, and state officials need a clear understanding of the patterns and drivers of those shifts so that they can plan and budget for government services and activities.
Several factors can affect federal funding flows to states, including changing policy priorities, congressional action, nationwide economic conditions, or targeted federal responses to financial shocks. And although resulting swings in funding can complicate fiscal planning, they also, perhaps counterintuitively, can sometimes help stabilize state budgets. For instance, federal spending for certain programs, such as Medicaid and unemployment insurance, automatically increases when economic conditions deteriorate, helping to meet rising demand for services. For policymakers, however, any fluctuations, whether automatic or as the result of legislation, can create challenges if their scale and durability are not well understood.
To help policymakers identify trends within and drivers of federal fundings ebbs and flows, better plan for the long term, and budget more effectively for federally supported programs, The Pew Charitable Trusts, in partnership with the Urban-Brookings Tax Policy Center, examined federal funding volatility from 2002-23. For this analysis, the researchers created a scoring metric—based on historical federal funding data and an assessment of changes in the growth rate of those funds—to measure the volatility of federal funds to states over time. Volatility scores are expressed as percentage points, and the higher the number, the more substantial the variation in federal funding. (See separate methodology for more detail.)
The Urban-Brookings Tax Policy Center assessed volatility trends for more than 80 federal funding programs that make up most federal funds to states. This analysis breaks down those trends by looking at key programs and policy areas over various time periods.
Peaks in volatility align with national events and major policy shifts
Surges in federal funding have tended to coincide with major national events and policy shifts. As a result, the average annual federal funding growth rate has increased in years with economic disruptions and then subsided in subsequent years (see Figure 1), creating a cycle that has contributed substantially to overall federal funding volatility.
Federal funds to states grew during and after the Great Recession, driven by stimulus measures and the Affordable Care Act. The largest bump came in 2009, and elevated funding, compared with pre-recession levels, persisted in subsequent years. Similarly, federal aid provided in response to the COVID-19 pandemic raised federal funding growth rates in recent years.
The cycles of federal funding—with more flowing to states during certain periods—yielded different levels of volatility overall across time periods. (See Figure 2.) Breaking the historical data into five four-year spans reveals that, over the two decades studied, federal funding was the least volatile from 2016-19, followed by 2004-07 and 2012-15—all periods of relative economic stability.
The type of federal funds going to state governments also affects volatility. For example, the 2020-23 period had the second-highest volatility because of the makeup of federal support to states during the pandemic. Although the total federal pandemic aid to states was greater than the support offered during the Great Recession, it also came with more flexibility in how states could use it and longer timelines, which allowed them to maintain more consistent spending over time and resulted in less pronounced volatility.
Targeted support drives volatility
Federal policy changes enacted through legislation—such as the American Recovery and Reinvestment Act (ARRA); the Coronavirus Aid, Relief, and Economic Security, or CARES, Act; and the American Rescue Plan—led to a surge of funding to states. How those funding shifts contributed to overall volatility, however, varied. For example, federal funding for education was notably volatile after the Great Recession, in large part because of significant discretionary investments provided through the ARRA. (See Figure 3.)
Other trends have less to do with policy action and more to do with the makeup of programs and how they change with economic conditions. Many healthcare and public assistance programs grow more rapidly during economic slowdowns because federal funding for these programs increases automatically in times of economic stress when service demand increases. Medicaid and the Supplemental Nutrition Assistance Program (SNAP), for instance, experienced their largest percentage point increases during the Great Recession as unemployment rose and household incomes declined. However, policy efforts, such as temporary boosts to the federal share of Medicaid costs, also played a role.
Even small changes to large healthcare and public assistance programs lead to larger shifts in funding to states than do drastic swings to smaller programs because of the amount of funding that states receive for bigger programs. Five of the largest healthcare and public assistance programs—the Child Care and Development Fund (CCDF), Children’s Health Insurance Program (CHIP), Medicaid, SNAP, and Temporary Assistance for Needy Families (TANF)—accounted for about $770 billion, or over 70%, of total federal funds to states in 2023.
Many of these programs experienced significant increases in federal funding during the pandemic, contributing to the heightened volatility during this period. (See Figure 4.) The CCDF, for instance, saw a sizeable one-time infusion of funding under the American Rescue Plan, which led to it being the most volatile of the five programs in 2020-23.
Officials can use volatility data to make decisions
Policymakers know that federal funding can be volatile and that it is driven by a combination of economic conditions and policy decisions. The reality is that these funding streams are constantly evolving, and unforeseen shifts, even small ones, can create budgeting challenges for states over the short and long terms.
To support overall budget stability, state policymakers should assess the factors contributing to these deviations—overall and for particular programs and policy areas—and examine whether they are temporary or likely to last into the foreseeable future.
Rebecca Thiess is a manager and Maureen Hilton and Samuel Pittman are senior associates with The Pew Charitable Trusts’ managing fiscal risks project.
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