Rainy Day Funds? Who Needs Em? States Unprepared for Next Downturn

Revenues, dependent on taxes, did not recover from the last recession. However, pensions and Medicaid costs are up.

Despite a recovery going on ten years, States are Unprepared for Next Downturn.

Measured as a share of spending, 21 states had smaller rainy day funds in 2017 than they did in 2008, according to data from the National Association of State Budget Officers compiled by the Tax Policy Center. Rainy day funds help states preserve spending levels when their revenues plunge. Those reserves are especially important because, unlike the federal government, states don’t run budget deficits in downturns.

“There are levers that all the states could think about in terms of preparing for the next economic downturn,” Federal Reserve Bank of Boston President Eric Rosengren said in an interview with The Wall Street Journal. “It doesn’t seem like there is that much movement in that direction right now in many states.”

North Dakota had only 1.5% of its expenditures in a rainy-day fund in the 2017 fiscal year, down from 16.6% in 2008. Oklahoma’s rainy day fund had 1.6%, down from 9.3%. New Jersey emptied its rainy day fund in 2009 and has yet to begin refilling it.

Last week, New York State Comptroller Thomas DiNapoli warned that the state badly needed to replenish its reserves. New York will face budget shortfalls, reduced borrowing capacity and possible cuts to federal aid, he said in a report. “Yet, there are no plans to add to our reserves, leaving the state with little cushion in the event of an economic downturn,” he said.

There are some important exceptions. California’s rainy day fund was empty in 2008 but in 2017 held 8.5% of the state’s expenditures. Voters there passed a measure in 2014 requiring the state government to set aside money every year into the fund. That effort helped to drive overall state rain day funds to 6.8% of spending in 2017, up from 4.8% in 2008, according to NASBO.

California Here We Come

Well, not quite.

Anyone who thinks California is prepared for the next downturn is fooling themselves.

Taxpayer flight is massive and about to pick up.

Polls show an amazing [50% of Bay Area Residents Want Out](50 percent of Californians say they want to move out soon, poll finds).

I take such polls with a huge dose of salt. 50% are not going to leave. Yet, the sentiment is important.

The state is seemingly in better shape because its property bubble is fully re-blown and the tech bubble is in full swing.

The next downturn will easily wipe out both.

Mike "Mish" Shedlock

Comments (13)
No. 1-13
killben
killben

Mish,

Would you be able to throw some light on how the bubble seems to be ONLY getting bubblier by the day despite the Fed rate hikes and QT. The bubble appears unstoppable as of now. True of bubbles but this also means it could well go on for another couple of years...

Six000mileyear
Six000mileyear

It's highly doubtful the bubble is going to last beyond this year. The ~8 year cycle is in the hard down phase, and the ~4 year cycle just topped. Both cycles were pointing down when the housing bubble burst. There is also an ~18 year cycle topping. That one will dominate the investment theme for the next 6-8 years.

themonosynaptic
themonosynaptic

How many of the 50% who want to leave California also want to take their California level wages with them. It is nice to speculate about how much further your dollar will go if you moved to Bumfeck, Nowhere, but if you only get to take 60 cents on the dollar, or worse, nothing because there are no jobs, then CA suddenly looks a lot better. And the weather is nice.

themonosynaptic
themonosynaptic

"The state is seemingly in better shape because its property bubble is fully re-blown and the tech bubble is in full swing."

California property is on the same growth path as the global GDP plus inflation that it has been for over two decades. There was a large bubble from 2001 thru 2008 but the property levels wrt to wealth in the state, the U.S. and the World are at the same level they have been at historically. Sure there are extreme hotspots like SF, but SF also has FB employees who want to live there (Silicon Valley is a cultural desert of steakhouses and BMW dealerships) whose median salary is $240K+.

As usual, the most frothy parts of the economy are likely to be hit when the next recession comes, but the last recession saw little nominal impact to SF property prices, and the surrounding property is like layers of an onion in 10% decrements from SF until you get to 25+ miles from the city, where you see far more whiplash.

The tech bubble is in full swing, and one of the common phrases is that "data is the new oil" - this phrase has a double meaning - the first is that data is now the energy source for the new economy (let's see what happens in the next downturn to see how resilient this is). The other meaning is that data companies have replaced oil companies as the largest, by market cap, in the World.

If we really are moving to a digital World, and I suspect we are, then the network effect dictates that there is a winner-take-almost-all aspect to the successful companies.

China is trying to keep U.S. digital companies out of its 1B person market to allow local companies to build a local network effect, and it is working. However this rhymes with the practices of the centrally directed economy of Japan in the 1980s and we have to see how China reacts once it faces its first real recession. Will its local digital powerhouses be able to withstand a flailing and desperate Beijing that is trying to control its people when they burst the "Chinese Dream"?

regular-taxpayer
regular-taxpayer

This does not fit as a comment for this post, but I thought you might find it interesting. https://www.tomshardware.com/news/china-zen-x86-processor-dryhana,37417.html AMD has just made a deal that effectively transfers its x86 chip IP to China - that should weaken a bit Trump's trade war arsenal.