FOR IMMEDIATE RELEASE:
Thursday, March 11, 1999

CONTACT:  Henry Griggs, Michelle Bazie,
Iris Lav
,
Alan Berube
(202) 408-1080

State contacts listed below

MOST STATES ILL-PREPARED FOR RECESSION

All But 8 Would be Forced to Raise Taxes or
Cut Services Significantly in Future Downturn

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More than three-quarters of state governments could not weather another recession like the one that struck in 1990 without significant cuts in programs and services or substantial tax increases. To avoid a repeat of the budget disruptions of the early 1990s, state governments on average need to hold reserve balances of 18 percent of current expenditures, about double the current level, according to a new study.

The report, "When It Rains, It Pours," by the Center on Budget and Policy Priorities, is the first-ever to examine the fiscal health of 48 state governments, including their "rainy day"or reserve funds, against the backdrop of a possible recession. The study found that only eight states — Delaware, Indiana, Iowa, Maine, Massachusetts, Michigan, Minnesota and North Dakota — could bridge the gaps between revenues and expenditures that could accompany a downturn of the same length and severity as the recession of the early 1990s.

Meanwhile, in 11 states available reserves fall short of what would be needed by amounts equivalent to more than 20 percent of fiscal year 1999 expenditures: Idaho (33 percent), Oregon (29 percent), Texas (29 percent), West Virginia (28 percent), Wisconsin (25 percent), Tennessee (25 percent), South Dakota (25 percent), Nevada (23 percent), Utah (23 percent), New Hampshire (22 percent) and Georgia (21 percent).

Overall, at the end of state fiscal year 1999, state budgetary reserves are expected to fall $51 billion short of the $80 billion that would be needed entering another recession to maintain programs and services without raising taxes.

The report examines a hypothetical recession that begins in the middle of calendar year 2000 and assumes that states experience fiscal stress for the subsequent three years, parallel to the experience in the relatively mild recession of the early 1990s. It was prepared using data from the National Association of State Budget Officers, the National Conference of State Legislatures (NCSL) and state fiscal offices, and excludes Alaska, where general fund revenues come largely from the petroleum industry. Hawaii was also not considered because its economic health is affected by the condition of East Asian economies and heavy reliance on tourism revenues.

"Financial woes abroad should be a reminder that another U.S. recession is possible and even probable in the next few years," said Iris Lav, the Center's Deputy Director and a coauthor of the report. "Nobody is hoping for another recession, but it's only prudent to ask whether states have done enough to prepare for the next one."

The report notes that the fiscal structures of state governments, including requirements that state budgets be balanced each year or biennium, pose particular problems during economic recessions. As a state's economy enters a downturn, falling employment slows growth in state revenues, while rising poverty and unemployment increase the demand for state expenditures. Together, these effects create large budget deficits, which in turn force large tax increases or spending cuts at a time when residents are least able to deal with such measures.

"Although the last recession was considered relatively mild and officially lasted only nine months at the national level, many states faced fiscal shortfalls beginning in 1989 and continuing into 1992," said Alan Berube, a Center researcher and coauthor of the study. "While state reserve balances totaled 4.7 percent of expenditures when the recession of the early 1990s began, no fewer than 35 states faced a potential budget deficit at one point from 1990 to 1992, and many faced problems throughout the period."

To cope with the shortfalls of the early 1990s, states approved record tax increases and cut expenditures and services sharply. Programs for low-income households were particularly hard hit by reductions.

How Much Reserve is Enough?

The insufficient reserve levels held by states when the recession hit in 1990 may have been in part a product of a rule-of-thumb state-savings benchmark of "uncertain origin and even more questionable validity," the report notes.

After the fiscal downturns of the 1980s, many states established budget stabilization or "rainy day" funds designed to receive surplus revenues when a state's finances were healthy against a future slump. Currently 45 states have such a fund. The target level for those rainy day funds has typically been five percent of annual general fund expenditures, a figure widely held to be based on recommendations from NCSL and Wall Street analysts.

In fact, the five percent recommendation was intended to serve as guideline for reserves against normal contingencies, such as errors in forecasting revenues or unexpected outlays like settlement of a lawsuit. In a 1983 report, an NCSL committee suggested that a five-percent reserve level was "useful only when the economic weather forecast is 'overcast with a mild drizzle' rather than 'continued thunderstorms with flooding expected.'"

As noted, the reserves equaling 4.7 percent of expenditures that states held at the beginning of the last recession did little to ward off widespread fiscal crisis and distress. In the future recession projected in this report, a five percent reserve would be sufficient in only three states.

Hypothetical Recession: FY 2001-2003

Reserves As a Percentage of General Fund Expenditures Required to Weather the Next
Recession and Difference Between Required Reserves and Available Reserves

Required Reserves

Shortfall in Reserves

More than 20% 15% to 20% 10% to 15% 0% to 10% No Shortfall
More than 25% Idaho
Nevada
Oregon
South Dakota Tennessee
Texas
Utah
West Virginia
Wisconsin
  Nebraska    
20% to 25% Georgia
New Hampshire
Connecticut
Florida
Illinois
Kentucky
Missouri

No. Carolina
Colorado
Kansas
Ohio
New Mexico
Oklahoma
 
15% to 20%   Arkansas Arizona
Montana
Pennsylvania
So. Carolina
Maryland
Mississippi
Wyoming
Iowa
Minnesota
10% to 15%     Alabama New Jersey
New York
Rhode Island
Vermont
Virginia
Washington
Delaware
Indiana
Less
than 10%
      California
Louisiana
Maine
Massachusetts
Michigan
No. Dakota

As states consider their budgets for fiscal year 1999, there are important choices to be made about the amount of funds that will be held in reserve and about the disposition of "surplus" funds that are not saved for future contingencies. Among the report's recommendations:


When It Rains, It Pours
State Contacts

Alabama
Kimble Forrister
Alabama Arise
334-832-9060
Michigan
Sharon Parks
Michigan League for Human Services
517-487-5436
Arkansas
Richard Huddleston
AR Advocates for Children & Families
501-371-9678
Minnesota
Matt Shands
Minnesota Budget Project
612-642-1904
Arizona
Elizabeth Hudgins
Children's Action Alliance
602-266-0707
New York
Frank Mauro
Fiscal Policy Institute
518-786-3156
California
Jean Ross
California Budget Project
916-444-0500
North Carolina
Dan Gerlach
North Carolina Budget & Tax Center
919-856-2158
Colorado
Maureen Farrell
Colorado Budget Project
303-573-5669
Oregon
Chuck Sheketoff
Oregon Center for Public Policy
503-873-1201
Kentucky
Debra Miller
Kentucky Youth Advocates
502-875-4865
Tennessee
Beth Green-Sharber
Tennessee Budget Project
615-385-2221
Maine
Christopher St. John
Maine Center for Economic Policy
207-622-7381
Wisconsin
Joel Rogers
Center on Wisconsin Strategy
608-263-3889
Maryland
Steve Bartolomei-Hill
Maryland Budget & Tax Policy Institute
301-565-0505
Jon Peacock
WI Council on Children & Families
608-284-0580
Massachusetts
Jim St. George
Commonwealth Center for Fiscal Policy
617-426-1228

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