2027 Biennium Financial Outlook

The unusually high revenue collections seen in the past few years have leveled off and analysts predict steady, slow growth for upcoming revenue collections. The state financial picture is positive in the near future. State reserve funds are full and the state general fund has significant long-term positive structural position.

Staff have prepared a first look at the financial outlook for future revenue collections and "pressures" on the budget. In addition, staff have identified long-term financial considerations as legislators make decisions that set the base budget for the long-term.

The state financial outlook focuses on the state general fund, but draws comparisons more broadly when appropriate. The general fund is the primary source used by the legislature to fund education, public health and human services programs, prisons and correctional institutions, the judicial branch, the public defenders, and public safety. In addition, state general fund is often the only funding source available for lawmakers crafting new policy ideas, which creates pressures on this fund.

As you know, inflation is higher in recent years than it has been in decades.  The consumer price index (CPI) is the most common measure of inflation and while the first five years of the past decade had the lower inflation we have come to expect, or 7.8% over five years, the second five years saw a 22.3% price escalation due to the stimulus provided by the federal government.     

After the peak of Bakken oil boom and other high commodity prices in 2014, analysts expected declines in the Montana economy.  The legislature took many steps to understand the long-term implications of reliance on a commodity-based economy and to deal with the shortfall that occurred in 2017 due to the small Montana specific recession that occurred.  In spite of this recession, the final economic outcomes of the full five-year period of 2014 to 2019 was surprisingly strong.  Over that period, Montana’s population grew 5.0%, personal income grew 24.4%, and Montana General Fund revenue to the state grew 21.3%.  Factors other than a commodity boom offset the anticipated declines and continued growth and these other factors continued to grow and accelerate further in the second five year period.

While population grew a strong 5.0% from 2014 to 2019, earning Montana a second congressional district, the population growth from 2019 to 2024 was even stronger at 6.1%. 

Montana's personal income grew faster as well.  From 2014 to 2019 personal income grew a strong 24.4%.  Given the relevance of inflation in these two periods, it is important to review how inflation impacted this growth.  Over this short time period, inflation adjusted personal income grew 17.7%.  From 2019 to 2024 personal income grew 42.6%, but when adjusted for inflation, real growth was 24.1%. 

Likewise state general revenue grew faster.  From 2014 to 2019 state general revenue grew 21.3% and from 2019 to 2024 it grew 48.0% .  The inflation adjusted general revenue growth was 12.6% in the first half of the decade and increased to 21.0% in the second half.  Both of these are relatively strong real growth in general revenue. 

From 2019-2024, the growth in general revenue was faster than the growth in personal income.  Staff have identified three plausible reasons for this faster growth:

• higher interest earnings due to high interest rates and high balances of state funds
• taxes on capital gains income: the new residents that moved to Montana had a higher proportion of capital gains as a part of their income
• higher effective tax rates due to inflation's impact on the tax brackets

All three of these topics are discussed in more detail later in the report. The metrics discussed above are shown in the following table.

Looking further back to Montana's historical general revenue growth gives a more robust picture of Montana's revenues. From FY 2001 to FY 2010, Montana's general fund revenues grew at a compound average rate of 2.5% per year. The middle of the decade (2000's) was dominated by year-over-year revenue growth exceeding 10%, a product of the Bakken oil boom. Shortly thereafter, revenues declined 16.6% from FY 2008 to FY 2010 during the Great Recession. During the following decade (2010-2019), ongoing general fund revenues grew at approximately 5.0% per year. The decade began with strong revenue growth coming out of the Great Recession, followed by revenue shortfalls in FY 2016 and FY 2017, a result of declining commodity prices. Revenues then rebounded and grew at above average rates to end the decade, right before the onset of the Covid-19 public health emergency.  

In FY 2020, revenue growth was strong to start the year but slowed, ending nearly on par with FY 2019 as pandemic lockdowns and restrictions took effect. However, in FY 2021 and FY 2022 ongoing general fund revenues grew 17.4% and 26.7% respectively, a product of federal stimulus, high inflation, a strong stock market, and in-migration to the state.  In the years following the strong growth and into the Outlook period, it is appearing that revenue growth will be nearly flat for a few years and then grow modestly through FY 2029. Part of the flatness from FY 2022 - FY 2025 can be attributed to income tax reductions passed in the 2021 and 2023 Legislative Sessions. Moving into the next two biennia, revenues are expected to grow but at a rate slower than was experienced in the prior decade. This slowdown is due to an expected slowdown in the US economy, as interest rates remain high. Furthermore, as inflation slows, tax sources that are based on their price (oil, rental cars, accommodations) will also slow. Finally, the slowdown in inflation is expected to lessen the pressure to increase wages statewide. 

The growth in general revenue was faster than the growth in personal income.  Staff have identified three plausible reasons for this faster growth:   

1. Higher interest earnings due to high interest rates and high balances in state funds:  To combat high inflation, the Federal Reserve has increased interest rates. Prior to the increase in interest rates Montana experienced extremely strong revenue growth. As a result, cash balances were at record levels. The high cash balances, coupled with high interest rates, caused interest earnings that are deposited into the general fund to increase from $22.0 million in FY 2019 to a $118.4 by FY 2023. 
2. Taxes on capital gains: In recent years, Montana taxpayers have claimed significant portions of capital gains income on their filed tax returns. In addition, new residents moving to Montana have a larger share of capital gains relative to their total income compared to existing Montana residents. Personal income numbers for Montana, as reported by the US Bureau of Economic Analysis (BEA), do not include realized or unrealized capital gains or losses. As a result, while individual income taxes have increased due to strong capital gains, personal income numbers have not.
3. Higher individual income tax effective tax rates: Over the past five years, Montana’s individual income tax effective tax rate has increased. For purposes of this report, the effective tax rate is defined as fiscal year individual income tax collections divided by the total income claimed on Montana tax returns. This can be partially attributed to a phenomenon called real bracket creep. Montana’s income tax brackets are tagged to inflation, but when personal income grows faster than inflation more income is pushed into higher tax brackets. Furthermore, there is a lag between real-time inflation and when brackets are adjusted, which further increases the effect of real bracket creep. 

In November of even numbered years, the Revenue Interim Committee (RIC) hears revenue collection forecasts from legislative analysts and analysts representing the Governor's Office. The committee deliberates on the forecasts heard and adopts a three year state revenue estimate, known as HJ 2. This estimate is the official revenue estimate unless changed during legislative session. The general fund budget adopted during the upcoming legislative session must be balanced with revenues and may not exceed the HJ 2 estimate.

Given the importance of the revenue forecast, Legislative Fiscal Division analysts provide the financial outlook as an early look at what legislators might expect to see in November during the revenue estimate proceedings.

Legislative analysts predict slow growth. Strong growth of revenue collections generated from federal COVID policies have ended. Legislators should expect strong structural balance of the general fund and steady, average revenue collection growth of 3.0%.

Analysts compared state resource expenditure growth of general fund and state special revenue funds. State special revenue growth during the early 2000's was primarily due to increases in payments to local governments per HB 124 passed during the 2001 Legislative Session, which revised laws governing local and state government revenue collection and allocation. Adjustments to the hospital utilization bed tax and nursing facility bed tax in FY 2004, increased state special resources spending on Medicaid and Children's Health Insurance benefits. Medicaid expansion, implemented in FY 2016, which increased both state special fund and general fund expenditure growth.

General fund expenditure growth cycled up in 2008 nearing Montana personal income growth when the state provided a one-time-only $400 tax rebate. During the Great Recession 2009-2010, general fund expenditure growth declined below consumer price index until 2013. In 2015, as mentioned in the revenue section, Montana experienced a decline in commodity prices that led to revenue shortfalls in 2017. Legislators returned for a special session in November 2017 to reduce general fund spending. Since then growth in general fund expenditures has been slower than metrics like personal income and tracked or remained slightly above consumer price index.

The chart shows the growth in the state resource expenditures of state special revenues and general fund compared to the consumer price index (inflation) and personal income. The key takeaway from the chart is that state special and general fund government services grew slower than the economy (personal income), with the exception of 2006-2008, then trended down and flattened to stay just above inflation.

Analysts considered whether adjustments to state government appropriations since FY 2021 kept up with the growth in consumer price index (inflation) and the growth in wages. After analysis it was determined that statewide consumer price index adjustments were needed as well as possible catch-up inflation in certain areas of the budget.

The 2023 legislature adopted HB 13, the state employee pay plan, which provided authority to increase state employee base salaries by 4.0% or $1.50/hour, depending on whichever was greater, on July 1, 2023 and July 1, 2024. Using S&P Global consumer price index projections, staff calculated that the pay plan may increase by 2.5% in FY 2026 and 2.5% in FY 2027, with a high estimate calculated as a 5.0% increase in each year. The impacts range in cost from $67.4 million to $104.6 million ongoing general fund for the 2027 biennium.

The following chart shows state resources state special and general fund potential expenditure growth after applied inflation, catch-up inflation, pay plan, and other pressures and potential pressures to the budget. The key takeaway is that long-term forecasted expenditure growth remains within the range of personal income growth and the growth in inflation with population.

K-12 School Funding The state funded share of inflationary increases for K-12 education funding are primarily based on calculating the average of the past 3-years, then held at 3.0%.

 HB 15  (2023 session) provided inflationary increases of 2.7% in FY 2024 and 3.0% in FY 2025 for school funding. As the chart below shows, present law statutory applied inflation for K-12 funding lagged behind the growth in the consumer price index from FY 2017 - FY 2024. The three year lag on the present law statutory applied inflation calculation shows an increase above the consumer price index in FY 2025-FY2027, but the increase was held at 3.0%. The chart shows (light brown bars) the percentage increase of where present law statutory applied inflation would be if the formula was not held at the 3.0%.

The assumed lower BASE Aid inflation and the additional calculated catch up inflation is estimated to cost an additional $101.1 million general fund for the 2027 biennium. Potential pressure for higher inflation assumptions and debt service assistance for schools represents an additional $124.4 million general fund in the 2027 biennium.

The following chart shows the comparison between cumulative present law statutory applied inflation compared to the cumulative consumer price index growth and cumulative wage growth since 2020. While this comparison does not include changes in school funding outside the inflationary adjustments, it gives a sense of the expenditure pressures schools may face.

During the 2023 Legislative Session, budget needs were unclear due to the high level of federal funding available. All states received Elementary and Secondary School Emergency Relief (ESSER) Funds I, II, and III from the federal government designed to bring temporary funding to schools for coronavirus response and relief. The additional funding from ESSER may have provided a bridge for the gap between present law and inflation/wage inflation. The Office of Public Instruction reported at the Education Budget Interim Committee in September 2023, that of the total $593.4 million received in ESSER funding, $345.4 million was expended.

Legislative staff have prepared a K-12 school digital library (found by clicking the green button below) that offers legislators a detailed look at policy and funding choices made by previous legislatures.

Behavioral Health System for Future Generations Commission  HB 872  passed by the 2023 Legislature provided $300.0 million in one-time general fund transfers to the behavioral health system for future generations state special fund ($225.0 million) and the capital development state special fund ($75.0 million). Of the $225.0 million transferred to the behavioral health system for future generations, $70.0 million was approved for spending in the 2025 biennium, and $153.3 million was reserved for future appropriations. The legislation also established a commission to make recommendations to the Governor on investments in behavioral health for the future. Based on preliminary analysis from the Department of Public Health and Human Services draft report, estimates for recommendations costs may range from $10.7 million to $21.4 million in ongoing general fund for 2027 biennium costs and $31.0 million to $61.9 million in ongoing general fund for the 2029 biennium depending on the level of implementation.

Select Committee on Corrections Facility Capacity and System Development  HB 5  (2023 session) directed the select committee to focus on establishing an overall framework and implementation plan for long-term facility needs and immediate improvements for the Department of Corrections facilities. In the March 2024 select committee meeting, the Department of Corrections presented a  preliminary cost analysis  for the construction of two buildings; one for 256 additional inmate beds and one for program administration and additional staff. The preliminary one-time-only cost analysis is $53.0 million for the 256 bed building and $27.0 million for the administration building. Ongoing cost analysis would be at least $1.0 million annually for staff to support the new building.

Medicaid Expansion, set to expire on June 30, 2025 If the Medicaid expansion sunset is not extended, the estimated cost to the general fund is about $7.9 million for the 2027 biennium. The Medicaid insurance program is available for low income individuals. The Affordable Care Act (ACA) of 2010 expanded the Medicaid program in all states. In 2015, the Montana program was expanded to include individuals ages 19-64 earning less than 138.0% of the federal poverty level (FPL). The entire Medicaid program insures about 16.0% of the Montana population, down from about 25.0% pre-pandemic, including about 100,000 children. As of June 2024, there are about 83,000 individuals enrolled on expansion.

If expansion sunsets, the state will save an estimated $83.3 million general fund for the 2027 biennium, however certain individuals on the expansion waiver program would automatically qualify for traditional Medicaid and would simply move to the traditional Medicaid program. This would cost the state an estimated $91.2 million general fund for the 2027 biennium, as the federal government reimburses at a lower rate for traditional (63.91%) than expansion (90.0%). There would be a net general fund cost of about $7.9 million.

Legislative staff have prepared a Medicaid digital library (found by clicking the green button below) that offers legislators a detailed look at policy and funding choices made by previous legislatures.

Structural balance (when ongoing revenues equal or exceed ongoing expenses) is considered an important indicator of state fiscal health.

During the 1980's, 1990's and early 2000's, Montana's general fund was often structurally imbalanced resulting from global economic and commodity market fluctuations and special legislative sessions were frequent. By the mid-1990's Montana lawmakers enacted measures to contain costs in programs growing faster than revenues and delayed tax policy revenue reductions through phased in provisions, all in an attempt to achieve structural balance of the general fund. In short, the ability to get Montana on the path to solid structural balance took decades.

From 2009-2019, other measures besides structural balance were put in place to stabilize finances, like a dedicated wildfire suppression fund and the budget stabilization reserve fund. In 2017, Montana experienced a decline in the prices of commodities like wheat, coal, and oil which caused a decline in ongoing revenues, and the general fund structural balance went negative. Lawmakers were called to special session and reduced agency appropriations. Subsequently, regular legislative sessions in 2019 and 2021 focused on further stabilization of finances and additional resources were added to the budget stabilization fund and fire fund. As the image below shows, since 2019, Montana maintained a strong structural balance which is expected to continue through 2029.

The next chart shows anticipated structural balance when all pressures and potential pressures are added to present law and current service level expenditures. The chart shows continued strong structural balance.

Factors Contributing to Structural Balance Several factors contribute to structural balance. As stated previously, population in Montana increased 6.1% from 2019 - 2024. The Modernization and Risk Analysis Committee asked fiscal staff to study data from new resident individual income tax filers. Staff  reported  that for the calendar years studied, on average, new residents earned more than Montana residents. Increases in population and new residents that earn more result in increased individual income tax collections for the state.

Fiscal analysts examined another factor that may contribute to structural balance, the effective tax rate. For the purposes of this discussion, the effective tax rate is defined as fiscal year individual income tax collections divided by the prior calendar year’s total income claimed on tax returns. For twenty years or so the effective tax rate was about 4.0%, but in 2019 the effective rate began to increase and is now 5.3%. This growth means on average people are paying a higher portion in taxes to the state. When state tax collections increase, this may contribute to the long-term integrity of the structural balance of the state general fund.

The following table presents possible risks to long-term structural balance.

While fiscal analysts assume ongoing revenues will slowly grow in the next two biennia, continued reliance on income tax as the primary source of revenue collections places state financials at a higher risk of revenue volatility. Another area not studied is the corollary between increased population and the increased need for government services. As more individuals move to Montana, more needs may be required for things like the maintenance of roads and highways, increased public safety for cities, small towns, and state correctional facilities, additional public health and human services, and other types of government services.

When states achieve significant long-term structural balance, lawmakers often experience "pressures" to adopt policies that may upset the balance. From a state financial perspective, maintaining structural balance requires understanding the long-term revenue growth and the causes of that growth and then ensuring ongoing expenditures do not exceed that long-term growth.

Income Tax Policy Changes Over the past two legislative sessions there have been many pieces of legislation that significantly changed individual income tax policy. For example, the top marginal rate has been reduced from 6.9% to 5.9%. In addition, Montana Taxable Income (MTI) is now based on Federal Taxable Income, and the number of tax brackets was reduced from seven to two. With a strong structural balance, it is possible that the legislature may propose additional individual income tax changes in the upcoming legislative session. In the upcoming biennium, for every 0.1% that the top marginal rate is either increased or decreased, individual income tax liabilities would increase or decrease by approximately $23.0 million per year. For example, if the top marginal rate was decreased by 0.5%, moving from 5.9% to 5.4%, then tax liabilities would decrease by approximately $115.0 million per year.

Property Tax Policy Changes When Montana property owners received their property tax bills in November 2023, most saw upticks in taxes owed. Legislative committees requested that legislative staff analyze November 2023 property tax data and present their findings. FY 2024 saw the highest increases in both residential taxes paid and total taxes paid in dollar terms as well as year-over-year percentage increase. Residential property owners paid 24.5% more in FY 2024 than in FY 2023, which was the largest percent increase based on data available back to FY 2002. All property tax collections grew by 12.3%. Property tax rebates went to Montanans on their primary residences, for a total of $145.6 million in FY 2024. After rebates, FY 2024 still saw the largest increase in residential taxes paid as a dollar amount, but FY 2018 saw a higher percent year-over-year increase. Since legislative committees spent considerable time studying property taxes this interim and the Governor established a property tax taskforce, legislators may expect proposed legislation that impacts property tax policy during the upcoming 2025 Legislative Session.

Legislative staff have prepared a property tax digital library (found by clicking the green button below) that offers legislators a detailed look at policy and funding choices made by previous legislatures.

Pension Systems Montana’s two largest systems, the Public Employees’ Retirement System (PERS) and Teachers’ Retirement System (TRS) have a combined unfunded liability of $4.2 billion with amortization periods of 28 and 24 years respectively. When the remaining seven systems are included, the total unfunded liability is $4.9 billion. Montana’s combined pension unfunded liability is larger than the median state. According to the Pew Charitable Trusts  Fiscal 50 report , in fiscal year 2021, Montana's unfunded pension liability stood at 79.9% of the state's own-source revenue, compared with 49.1% for the 50-state total. Increased funding to these systems can pay down the unfunded liability faster, or help safeguard the systems if investment returns are lower than expected.  

Risk of Economic Downturn and Revenue Collections Fall Below Estimates The legislature uses econometric data from S&P Global. These datasets include a vast array of forecasts for various economic variables, including but not limited to Montana wage disbursements, Montana population, unemployment rates, stock market performance, and many more. These variables play a key role in forecasting Montana state revenues, and realized departures from these economic assumptions can result in decreased revenue collections. Currently, S&P Global projects slow growth of the U.S. economy in their baseline forecast, with unemployment slowly rising throughout the outlook period. In similar fashion, Montana’s general fund revenues are expected to experience slow growth through the outlook forecast period. While the baseline forecasts for both the U.S. economy and Montana revenues predict slow growth, S&P Global currently assigns a 25.0% risk of a shallow recession in the coming years. Since the baseline Montana general fund revenue forecast does not assume a recession, any slowing of the economy will produce a downside risk to the forecasts produced in this document. As always, the LFD will continue to monitor changes in the economy and revise forecasts accordingly. Federal Income Tax Policy Changes May Alter Taxpayer Behavior The Tax Cuts and Jobs Act (TCJA) was federal legislation that became effective on January 1, 2018, and many of its provisions are set to expire on December 31, 2025. If the TCJA does sunset on the scheduled date, then federal tax liabilities will increase beginning on January 1, 2026. Typically, when major tax legislation occurs at the federal level, taxpayers shift income from one year to the next to minimize their tax liability. This can cause unexpected increases or decreases in state individual income tax collections from one fiscal year to the next and adds increased volatility to an already volatile revenue source.  

Federal Action May Impact State Finances Montana’s state finances depend in part on federal action and federal funds. In federal fiscal year 2021 Montana’s percentage of state revenue from federal funds was 51.5% (Pew Trusts). This was a higher percentage than all but two other states (Alaska and Louisiana), and considerably higher than the 50-state average of 36.7%. Note that these percentages are higher than standard due to pandemic-related additional federal grants to states. Federal changes to the programs that generate grants to states could have a significant impact on the amount of state funds required to offer the current level of services: either positive or negative. New programs or increased federal spending on existing programs could reduce the amount of state funds required for programs like Medicaid, income support, and highway spending. Federal programs could also change in a manner that would shift more fiscal burden onto states. For example, The Congressional Budget Office “ Options for Reducing the Deficit ” publication (May 2023) cites “Reduce Federal Medicaid Matching Rates” as a potential cost-saving policy change. If federal matching rates for Medicaid dropped, states would need to provide higher levels of funding to maintain consistent Medicaid expenditures.

Federal Action May Impact State Infrastructure Finances The infusion of federal American Rescue Plan Act (ARPA) and Infrastructure Investment and Jobs Act (IIJA) funds have allowed many local governments to make significant upgrades to their water and wastewater infrastructure, and both the state and local governments to make needed improvements to their surface transportation systems.

There remains significant need for additional funds in order to upgrade and maintain these infrastructure assets at desired performance levels to meet the needs of an existing and growing population. The  U.S. EPA’s 2023 Drinking Water Infrastructure Needs Survey and Assessment report to Congress  cited $2.3 billion is needed over the 20-year period of January 1, 2021, through December 31, 2040, for Montana’s 2,162 water collection, distribution, and treatment systems to continue to provide safe drinking water to the public. And the  American Society of Civil Engineer’s 2021 Report Card for America’s Infrastructure  cited $363.0 million is needed to address identified wastewater system improvement needs of Montana’s 229 public wastewater systems, that 6.9% of Montana’s 5,266 bridges were structurally deficient in 2021, and that 30.0% of Montana’s roads are in poor or fair condition.

While the recent federal infusions for improvements to Montana’s infrastructure has significantly helped, there remains an opportunity to infuse additional state funds into existing infrastructure programs at a time when the Montana construction sector is geared up for the increased recent federal investment allowing Montana to continue to make further infrastructure improvements aimed to return the state’s and local government’s infrastructure to appropriate levels of service, and to decrease or delay the need for near-term increases in infrastructure fees or taxes.

Natural disaster(s) and the risk of additional appropriation authority Funding for the state wildfire suppression fund was adjusted in the 2023 Legislative Session to provide for a steady income stream. Risk of the state depleting the entire fire fund is low. The Governor's emergency appropriation authority was temporarily increased to $20.0 million in the 2025 biennium, however the risk is low that the emergency appropriations will be fully utilized.

Montana is in a unique financial place to make significant decisions for the future of Montana.  We have strong balances to cushion our finances from quick shocks.  We have a very strong structural position, with ongoing revenues exceeding anticipated costs for current services.  Yet, we have various risks for the future.  We have not addressed our pension liability as fully as other states.  Our population is concerned about housing costs, including property taxes.  Our revenue volatility has always been higher than most states, and with our increased reliance on capital gains tax, that volatility is greater and poses greater risk to our financial stability.  Federal income tax changes will compound the volatility of our revenues as individuals and corporations change their financial choices to react to the federal tax changes.  Capital investment needs in infrastructure have not been met and significant backlogs continue. 

The 2025 Montana Legislature will chart the course of our financial future and will have their work cut out for them.