Tax Foundation reports on state rainy day funds; Washington ranks about in the middle. Recession will test all.

As the pandemic hammers the national economy, an examination of state budget reserves is timely. The Tax Foundation map above provides a good national look at how well states are prepared. The numbers vary dramatically. Tax Foundation analyst Janelle Cammenga writes, 

This week’s map looks at what percentage of a state’s general fund expenditures could be covered by the money in its rainy day fund (or funds). Because state revenues and budgets vary widely, looking at this percentage instead of dollar amounts alone allows us to compare how much a state has been saving, and exactly what those savings mean.

The TF analysis pegs Washington’s rainy day fund at 8% of general fund expenditures, ranking our state No. 26. Cammenga notes,

Of the 50 states, Wyoming has the most robust rainy day account, covering 109 percent of its annual general fund expenditures with $1.6 billion. Alaska comes in second with 52.6 percent of its annual expenditures ($2.3 billion). North Dakota (30 percent and $727 million) and New Mexico (26.8 percent and $2 billion) follow behind. Notably, each of these states relies heavily on revenue from oil and gas production and other resource extraction. Because of the revenue volatility associated with these industries, which were struggling predating the COVID-19 pandemic-related economic contraction, such states often deposit a substantial amount of excess revenue from severance and related taxes into rainy day funds in years when prices and production are high.

At the other end, well, things look pretty shaky.

Kansas and Illinois have the least in their rainy day funds—Illinois with very little (only $4 million), and Kansas with nothing at all. Kansas implemented its rainy day fund (the Budget Stabilization Fund) only recently, in 2016, one of the last states to do so.

The story of Washington’s reserves is perhaps a bit more complicated than this snapshot. The Washington Research Council’s recent budget analysis said,

The budget leaves an unrestricted ending fund balance of $917 million. It appropriates $200 million from the budget stabilization account (BSA, or the rainy day fund), leaving about $1.979 billion in the BSA. Together, total reserves are about $2.896 billion.

That’s about 5.5% of biennial spending of $53.1 billion. 

It’s likely all states will be tapping reserves soon. And it’s likely all will find them inadequate. Washington’s in better shape than many. 

A Deloitte Insights economic outlook by Dr. Daniel Bachman posits three recession scenarios. Even the best and most probable case is not good.

Our scenarios are designed to demonstrate the different paths we might expect the US economy to follow in the wake of the COVID-19 outbreak. In the first two scenarios, we assume that the disease outbreak begins to recede by the beginning of May, and people are able to return to normal activities during the late spring and summer. In the third scenario, outbreaks of the disease continue to affect economic activity for over a year.

The COVID-19 recession (50 percent probability): The immediate impact of COVID-19 is a huge drop in economic growth. GDP falls by almost twice the amount of the average postwar recession but begins to recovery in late 2020 as the disease is brought under control. Aggressive monetary and fiscal policy help jump-start the recovery, as does recovery abroad. GDP falls 2.3 percent in 2020 but starts recovering in 2021 and rises at a fast rate in 2022 and 2023 before settling in at a long-term level of 1.6 percent.

Scenarios two and three are progressively bleaker.

Financial crisis and deep recession (30 percent probability): Economic activity plunges as the COVID-19 outbreak affects both the economy’s supply side and demand side. The shrinking economy uncovers weak financial structure in some economies and sectors, particularly those that have a substantial debt burden. This stresses the financial system and adds to the problems of companies that are more robust financially, as lending dries up. The combination of supply-side limits, weak demand, and financial crisis throws the economy into a recession. Quick, substantial fiscal and monetary intervention creates enough demand to lift the economy out of recession by mid-2021, and 2022 sees a strong recovery.

Long hard trek to recovery (20 percent probability): As the economy struggles to recovery from the initial recession, regional outbreaks of COVID-19 continue for about two years, or a bit longer than the 1918–19 outbreak of Spanish influenza. Each regional outbreak is accompanied by interruptions of economic activity in that region. This is compounded by overall slow growth, as consumers put on hold big-ticket purchases such as automobiles and home renovations. As the disease’s impact dissipates, the US economy struggles to recover.

Much more at the link