State rainy day funds reach record high

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States squirreled away a record amount of cash reserves in rainy day funds in fiscal 2019 in an encouraging sign they will be better prepared for the next recession than they were for the Great Recession.

A new survey by the National Association of State Budget Officers reports these reserves had a median balance of 7.6% of a state’s general fund in fiscal 2019, compared with 4.7% in fiscal 2007 prior to the onset of Great Recession in December of that year.

Two consecutive years of moderate to robust revenue growth have fueled this rise in rainy day fund reserves, according to NASBO. State revenues rose 4.5% in fiscal 2019 following a 6.9% bounce in fiscal 2018.

These reserves, which some states refer to as budget stabilization funds, are expected to rise to 8% in fiscal 2020, according to the NASBO Fall 2019 Fiscal Survey of the States. The survey was conducted prior to the enactment of Michigan's budget for its fiscal year that began Oct. 1 or enactment of North Carolina's biennial budget. Most states began their fiscal year July 1.

NASBO said 41 states increased their rainy day fund balances in fiscal 2019, and 32 states are projecting increases in fiscal 2020.

Immediately after the Great Recession officially ended in June 2009, states had depleted their rainy day balances to only 1.6% of general fund spending.

Since then, states have made a deliberate effort to replenish those funds. Arkansas, Kansas and Montana established rainy day funds over the last couple of years, making their use now universal among the states, NASBO said.

Kathryn Vesey White, NASBO’s director of budget process studies, told reporters in a conference call Monday that states view their rainy day funds as an important tool in managing a downturn, but not the only one.

“The assessment of how long a downturn is likely to last and how deep it is expected to be, those variables play into how a state uses a rainy day fund,” White said.

NASBO President Marc Nicole, who is deputy secretary of the Maryland Department of Budget & Management, said that when the economy begins a downturn the rainy day fund gives a state some time to address the problem.

“I do think that maybe because of the fiscal crisis, maybe we are a little more cognizant now as budget agencies to have a larger reserve,” said Nicole. He noted that Moody’s and S&P have both done stress tests of state budgets to determine the amount needed to weather a modest recession.

In another positive sign, NASBO reports none of the states made any midyear budget cuts in fiscal 2019 because of revenue shortfalls.

However, four states — Hawaii, Minnesota, Nebraska and Oklahoma — did make a combined $116 million in cuts for other reasons.

Two years earlier, 22 states were forced to make $3.5 billion in midyear budget cuts because of shortfalls.

Instead, 27 states reported making midyear spending increases in fiscal 2019 totaling $10.7 billion, for a net midyear increase of $10.6 billion in general fund spending. NASBO said that revenue surpluses from fiscal 2018 and upward revisions to fiscal 2019 revenue estimates provided most of the resources for these increases.

The extra spending was targeted for purposes ranging from disaster recovery to child welfare services, and rainy day fund deposits.

There was more positive evidence in the report. Only six states reported having to close budget gaps in 2019 with their combined shortfall totaling $1 billion. Nine states reported having to address shortfalls totaling $9.3 billion during deliberations on their fiscal 2020 budgets, but only three continue to have shortfalls which NASBO described as modest in size.

Surplus funds and reserves that states may use for cash flow liquidity, reached a new all-time high in both nominal dollars and as a share of general fund spending in fiscal 2019, totaling $113.2 billion — or 13% of general fund spending, NASBO said.

Two years earlier, states ended fiscal 2017 with $79.4 billion in balances, or roughly $34 billion less. Total balances are budgeted to decline to $93.2 billion in fiscal 2020, as states plan to spend down some of their accumulated ending balances in the current budget cycle, particularly for one-time expenditures.

Forty six states reported their general fund revenues exceeded their fiscal 2019 targets. Two states reported that revenues came in on target while only two states came in below their budget forecasts.

All three of the largest source of state revenues — personal income taxes, corporate income taxes and state sales taxes — grew in fiscal 2019.

“Personal income tax collections grew as a result of both the payroll withholding component and a second consecutive year of higher-than-usual collections from non-wage income sources,” NASBO said.

The report said corporate income tax revenue “saw robust growth in fiscal 2019, as corporations had an incentive to shift taxable income from 2017 to the 2018 tax year to take advantage of a reduction in federal tax rates.”

Sales tax collections were boosted by the Supreme Court’s Wayfair decision which affirmed the ability of states to collect taxes from online remote retailers.

NASBO also said 37 states reported authorizing across-the-board salary increases in fiscal 2020, the highest number doing so since 2007.

This marks the highest number of states reported as doing so in the Fiscal Survey of States since fiscal 2007, prior to the Great Recession, another sign of strong state fiscal and economic conditions.

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