UPRO - Rainy Day Reserves Are Helping States
2023-03-26 04:23:00 ET
Summary
- Unprecedented growth in reserve levels can provide an additional fiscal tool for state governments.
- Even with a global pandemic and significant economic uncertainty, state rainy day funds have continued their positive growth trend in recent years and have contributed favorably to our stable outlook for U.S. states.
- While some states are facing more financial pressure than others due to their unique tax regimes and specific economies, strong rainy-day funds will help alleviate credit concerns in the near term.
By Stephen Cowie
Unprecedented growth in reserve levels can provide an additional fiscal tool for state governments.
Even with a global pandemic and significant economic uncertainty, state rainy day funds have continued their positive growth trend in recent years and have contributed favorably to our stable outlook for U.S. states. During the pandemic, tax receipts largely from high income earners and significant federal aid via $195 billion from the American Rescue Plan fueled the dramatic growth of state reserve levels. While these funds are, in essence, excess discretionary funds specific to each state, it’s important to note that this growth trend has spread across many states. In fact, as per the National Association of State Budget Officers, 30 states have reserves in excess of 10% of their general fund expenditures. It’s now estimated that states will hold an estimated $136.8 billion in rainy-day funds this fiscal year that will help preserve their credit metrics. Even Fed Chair Jerome Powell has recently said that state and local governments “are really flush these days” and considering tax cuts. Additionally, Moody’s Analytics has estimated that 39 states have the reserves necessary to offset all revenue to be lost in a relatively mild recession.
As we now enter the normal budget cycle for states for the forthcoming year, negotiations continue in full force across state legislatures, with increased attention being directed to the risk of slower economic growth. While the specifics of each state’s budget proposal continue to emerge, we believe state credit quality remains stable in the near term. One major reason for our constructive outlook is the significant and unprecedented growth in state rainy day reserve funds in recent years. These reserve levels can provide, if needed, an additional fiscal tool that gives states greater financial flexibility.
While some states are facing more financial pressure than others due to their unique tax regimes and specific economies, strong rainy-day funds will help alleviate credit concerns in the near term. For example, the State of California’s reserve position in excess of $35 billion, or approximately 11% of its fiscal 2023 budget, will help as the state addresses a $22.5 billion deficit projection for fiscal 2024. While we do expect that states will adjust their budgetary projections accordingly, these rainy-day funds can be a great liquidity tool, if needed, for state budget directors.
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Rainy Day Reserves Are Helping States