Most states used "rainy day funds" in recession

WASHINGTON Thu Feb 3, 2011 4:21pm EST

Student protestors hold signs while they block the Sather Gate at the University of California at Berkeley March 4, 2010 to protest against fee increases and budget cuts. REUTERS/Kevin Bartram

Student protestors hold signs while they block the Sather Gate at the University of California at Berkeley March 4, 2010 to protest against fee increases and budget cuts.

Credit: Reuters/Kevin Bartram

Related Topics

WASHINGTON (Reuters) - Almost all U.S. states relied on their "rainy day funds" when the economic recession began to ravage their budgets, showing that the reserves will be critical during the next downturn and states should consider putting even more money away, a think tank said on Thursday.

The Center on Budget and Policy Priorities, which closely tracks states' fiscal situations, found that over 70 percent have used their reserves to address budget gaps.

"States with rainy day funds were able to avert over $20 billion in cuts to services and/or tax increases in the recession of the early 2000s and again in this most recent recession," CBPP said.

The recession that officially ended in 2009 created an historic revenue collapse in many states and some blunted the effects at first by tapping their reserves.

Fairly quickly, though, states turned to slashing spending and hiking taxes and by early 2009 they were also relying on more than $150 billion in help from the federal government.

At the beginning of the recession, 41 states had rainy day funds and reserves that totaled at least 5 percent of their budgets. By 2010, only 22 states had reserves, CBPP said.

A report released by Michigan Governor Rick Snyder on Monday said the state's rainy day fund has been drained to just $2.2 million -- not enough to cover 30 minutes of state government operations -- from $1.2 billion in fiscal 2000.

"Because state shortfalls have been so much larger in the recent recession, reserves have played a more limited role this time around, closing less than 5 percent of state budget gaps, on average," CBPP found.

But "if states had maintained larger rainy day funds equal to 15 percent of spending they would have had $85 billion ... on hand," the center added.

All states except Vermont must by law end their fiscal year with balanced budgets. Over the course of the recession, states wiped out $425 billion in budget gaps and "will continue to face large shortfalls in fiscal 2012 and beyond," CBPP said.

For most states fiscal 2012 begins in July.

While struggling states currently may not have the dollars to deposit into a rainy day fund, they may find that political will to build up reserves is strong, CBPP said.

"The experience of the fiscal crisis is fresh in people's minds. This has led taxpayers to critically examine what went wrong with their state budgets and what could have been done to mitigate the situation," it said.

CBPP said that voters in Hawaii, North Dakota, Oklahoma, South Carolina and Virginia passed measures in November to strengthen their funds.

(Reporting by Lisa Lambert; Editing by James Dalgleish)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
Patsie wrote:
Under former governor Engler, Michigan began to use up any and all reserve funds, roads and other infrastructure improvements were not funded and taxes were lowered. Under former governor Grandholm, there was no (zero)agreement/cooperation between the governor and the republican senate on necessary tax increases or spending cuts. Newly elected governor Snyder now faces a structural deficit which will be difficult to address; no reserves, crumbling infrastructure, and with public services seriously degraded by prior spending cuts.

I am hopeful that Governor Snyder will approach restructuring with due regard to the long term. Once Michigan has gutted its essential public services, it will be much more expensive to rebuild them in the future. We need to decide what kind of state we want to be in the future as we cope with the current crisis.

Having grown up in a minimum services and low tax state, I don’t see that minimum government and low taxes produce a desirable state to live in. Maybe it is time to begin looking again!

Feb 04, 2011 10:11am EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Full focus