Financial and Management Opportunities and Challenges in 2025: Strategies for Success

Despite declining federal funding, continued pension underfunding, and Amnesty International’s promises (or threats) to change everything, the state budget is on a slow growth path.

Prepare for the Economy of 2025: The Most Urgent Financial and Management Priorities

artificial intelligence:

Artificial intelligence (AI) has been around since the 1950s, but its sudden emergence as a consumer product and its potential to disrupt nearly every business and industry has state lawmakers scrambling to address AI. Twelve states already require agencies to study AI, its uses, and its impacts, and half of the states have passed laws to address the technology’s application to government and the broader economy.

AI has incredible potential to process data, automate repetitive tasks, and generally make many jobs more manageable for humans. Yet lawmakers are scrambling to prevent potential downside risks. Last October, President Joe Biden issued a presidential decree setting guidelines for the “safe and reliable use” of AI, while the European Union approved a comprehensive set of policies last month.

In September, California Gov. Gavin Newsom directed state agencies to develop guidelines for the productive use of AI in the state. And this month, Sen. Bill Dodd introduced a bill that would require state agencies to warn users when using AI.

Much of the discussion has focused on the impact of AI on the public, including the case of a teenager who was abused by the images it generated. Other bills are expected, such as one passed in New York last year that would ban deep public impersonation. But the push for regulation is also spreading into the political realm. States such as Florida, New Hampshire and South Carolina are considering legislation that would limit or ban the use of fake images, known as “deepfakes,” in elections. “I think AI will be used in presidential campaigns,” said Michael Ahn, a professor of public policy at the University of Massachusetts Boston. “There will be active collection of voter information and use of it for more effective political campaigns. But that brings with it potential privacy violations.”

The question of who owns the data used in AI has led to a number of significant legal challenges. Elected officials will be keen to set limits on what information is publicly available. But technology experts say they shouldn’t be too quick to ban tools that are still in development. “The risk of bad legislation leading to unintended consequences can be as great, if not greater, than bad technology,” said Daniel Castro of the IT and Innovation Foundation for the EU Package. “Unfortunately, it’s much easier to fix technology than it is to fix bad law.”

Read also: “Discover the top 7 jobs that will earn you a million dollars a year: These are the jobs you need”

Budgets:

As the stream of federal funding that has driven double-digit growth and record surpluses in state budgets over the past several years begins to wane, state budgets for fiscal year 2024 reflect a return to business as usual, with modest increases in spending overall.

States have long understood that federal aid has a time limit, says Katherine White, director of budget process research at the National Association of State Budget Officers (NASBO). States have used fiscal recovery funds mostly for one-time investments and to improve their fiscal flexibility. However, the combination of reduced federal aid and lower tax revenues could create difficulties.

NASBO estimates that the rainy day fund balance at the end of fiscal year 2023 will increase from the previous year, but that the overall balance (the rainy day fund plus the closing balance of the general fund) will decline in 2023 and 2024. Although state tax revenues are projected to decline by 0.3% in 2023 and 0.7% in 2024, Pew’s analysis shows that tax revenues in most states will remain higher than they were before the pandemic.

Meanwhile, spending pressures continue. Insurance market volatility is a major concern, says Shane Kavanaugh, senior research director at the Government Finance Officers Association (GFOA). Insurance against cyberattacks and natural disasters like extreme heat, wildfires, floods, and hurricanes could become prohibitively expensive, if not impossible, for some municipalities. Soaring health care costs are another concern.

There is growing pressure to invest more in affordable housing, immigration support services, and technology upgrades. Payroll increases may be needed to rebuild depleted workforces. Local governments will need to address declining federal funding for schools and child care.

According to GFOA’s Kavanaugh, the budget process relies on productive discussions among competing interests. Political wrangling at the national level has already changed the tone of conversations in state and local governments, and Kavanaugh fears that will only get worse as the political battle heats up this election year. “That doesn’t bode well for sensible, wise decisions on budgets and fiscal issues in general,” he says.

Pensions:

Pensions, however, remain a trillion-dollar problem. States have improved the health of their pension systems over the past decade, but many remain severely underfunded. Last year, the average return on pension investment was 7.5 percent. As a result, the average pension funded ratio for state and local governments is expected to rise from 74.9 percent to 78.1 percent, according to the Equitable Institute. The underfunded ratio has declined in the past year, but it still stands at $1.44 trillion.

No state is currently in the red (just a few years ago, several states were in the red). However, according to the Pew Charitable Trusts, although states have increased their pension contributions by 7 percent annually since 2008, 21 states have not contributed enough to prevent the underfunding from growing.

State and local governments now account for more than 5 percent of pension spending, a much higher percentage than they did at the start of the 21st century. “Overall, pension funds are on a better trajectory than they were before the 2008 global financial crisis,” said Jean-Pierre Aubry, deputy director of state and local government studies at the Center for Retirement Research at Boston College.

But states need to plan for future periods of instability and account for recessions. “A very promising exercise that half of the states are doing now is stress testing,” said David Drane, senior research fellow at the Pew Center on Public Sector Retirement Systems. “States can now plan for what bad [financial] times might bring and change their policies to avoid excessive risk.”

States are reducing the number of employees remaining in old defined benefit plans by shifting new hires into defined contribution plans similar to 401(k) plans. While this is cost-effective, the challenge for states with fewer active employees is getting them into the old system. As states grapple with labor shortages, at least some policymakers are trying to revitalize the system. Last summer, Kentucky Gov. Andy Beshear, a Democrat, called for a defined benefit system for state troopers. “When defined benefits were taken away, soldiers and officers left,” Beshear said. “Pensions are a promise I will always keep.” Kentucky’s pensions have long been among the worst funded in the country. “It’s fair to assume that there will be significant additional contributions to the pension system,”

 House Speaker David Osborne said during upcoming budget negotiations.

Read also: Smart Banking: How Cloud Computing and Advanced AI Will Transform the Dynamic Financial Landscape

Taxes:

Both red and blue states have cut tax rates in recent years. The downward trend in individual and corporate tax rates has slowed, but it hasn’t stopped in 2023. “This is a remarkable trend in recent history,” says Jared Walczak, vice president of government projects at the Tax Foundation. “I’ve never seen so many [state tax] cuts in such a short period of time and never had an issue so hotly contested.”

Thanks to federal COVID-19 bailout money, many states were sitting on surpluses, and lawmakers were willing to return some of it to taxpayers. The effects of their choice will be felt in the coming years. As revenues start to decline, the state tax pendulum could swing in the opposite direction. One exception is the property tax. As home values ​​rise, some states may try to favor homeowners by adjusting tax rates. On the income side, some Democrats are still pushing for higher taxes on the wealthy. In Massachusetts, the first state budget to include a millionaire’s tax approved by voters in 2022 will be adopted this year.

In Minnesota, farmers and laborers won a Democratic majority last year, moving the state closer to adopting the “common reporting rule.” The complex change would allow states to collect corporate taxes based on a company’s total global profits. It’s a controversial concept that has potential drawbacks and benefits for states. Minnesota would be the only state in the country to fully adopt the rule, but other states, including New Hampshire and Vermont, are considering similar rule changes in 2024. As an uncertain tax system, it could gain momentum or stall depending on economic and political conditions.

Read also:Innovative ways to make money from TikTok in an easy and effective way

Workforce:

The labor shortage persists in the United States. According to the U.S. Chamber of Commerce, even if all unemployed people found jobs, there would still be 3 million unfilled positions. This labor shortage is certainly widespread in the public sector due to several factors, including pandemic-related fatigue, the ongoing wave of baby boomers retiring from the public sector, and the decline in the number of adults participating in the labor force in the general population.

 Total public sector employment remains below the level it was in early 2020, just before the pandemic. Cities, counties, and states are struggling to compete with private employers that are actively hiring and can often offer salaries that the public sector cannot afford.

 Earlier this year, the Police Executives Research Forum found that resignations were up 50% compared to pre-pandemic levels. About 90% of school districts are struggling to find teachers for the year. There are a few jobs that aren’t in trouble: In December, the Arkansas Department of Corrections asked Gov. Sarah Huckabee Sanders to mobilize the National Guard to fill a vacant prison guard position.

The public sector is currently exploring new strategies to increase the number of applicants. In addition to increasing salaries, bonuses, and flexible retention programs, employers will reassess the barriers that prevent underserved and underemployed groups such as youth and racial and ethnic minorities from applying for jobs by 2024, so that the public sector will increase hiring based on skills rather than a college degree or other educational background. Special attention will be given to bringing in people with transferable skills and experience from the private sector and other jobs, ensuring that they are hired at the right level rather than resetting the career ladder.

Hawaii passed legislation in July to allow spouses of active-duty military personnel to bring their professional licenses from other states to the state, thereby encouraging the use of professional licenses from other states. The idea could spread to other states this year, as public sector organizations seek to better utilize the 13 percent of unemployed military spouses.

“One of our goals is to look at non-traditional groups like veterans, reservists, National Guard, or military spouses,” said Carla Woodson Welch, CEO of the Public Sector Human Resources Association. “It’s really hard for these groups to enter the workforce. The public sector workforce is one of the key places that can really benefit from their services because they’re already connected to a sense of mission and purpose.”