States Have Record-High Cash Reserves to Help Blunt Impact of Recession

A U.S. $5 bill is seen in this illustration photo, on June 1, 2017. (Thomas White/Illustration via Reuters)

States across the United States are more financially prepared to weather a recession, with record-high cash reserves that are expected to increase further this year, according to the National Association of State Budget Officers (NASBO).

According to the latest data from NASBO, state reserves, also known as rainy-day funds, increased 58 percent over fiscal 2020 levels, to reach a new high of $121.8 billion in 2021, and continued growth in fiscal 2022 to total $134.5 billion, with 43 states recording year-over-year increases.

Prior to the COVID-19 pandemic, in 2019, rainy-day funds were already at a then-all-time high after decades of saving, NASBO said.

In addition, state reserves are set to rise to $136.8 billion this fiscal year, according to NASBO, which cited enacted budgets for the year. That would represent roughly 12.4 percent of their total spending, leaving them in a better position to handle a volatile economy and fiscal uncertainty.

“Governors are also taking additional steps to strengthen their fiscal resiliency and prepare for the next downturn, including saving money for natural disasters, paying off debt, using surplus funds for capital construction to reduce the need for new borrowing, making supplemental pension payments, and using one-time money for one-time investments,” NASBO said.

“These actions, combined with strong reserves, leave states well-positioned to weather a recession, whenever the next one strikes.”

Nearly 40 States Have Resources to Weather Recession

State and local governments together make up 11 percent of total spending in the U.S. economy, according to The Wall Street Journal, and unlike the federal government, must balance their budgets every year, meaning no deficit can be carried over into the next fiscal year.

State rainy-day funds are important stabilization tools used to support states and their citizens during periods of unexpected deficits or lower revenues that do not match expenditures, as well as potential recessions.

They ensure that state services such as public schools can continue to function and that money is regularly flowing to local governments while reducing the need for spending cuts or tax increases.

A Moody’s Analytics study found that 39 states have the resources needed to weather an economic recession, and four states could if they raise taxes or cut spending by less than 5 percent of their budgets.

However, seven states would have to resort to spending cuts or tax increases of more than 5 percent of their budgets in order to shore up enough resources, according to the study.

Those states which depend largely on tourism and consumer spending would be the most likely to struggle through an economic downturn, the study found, while those with agriculture and energy-based economies are in a better position to make it out the other side relatively intact.

Mixed Opinions on Possible Recession

“States have never been in a better position to make it through a recession,” said Emily Mandel, the study’s author. “State policymakers seem to have learned a valuable lesson from the Great Recession, a period when tax revenue losses far outstripped savings.”

According to the Moody’s study, North Dakota, Wyoming, Idaho, California, and Delaware were the states that amassed the most rainy-day funds.

The bottom five states with less than a 10 percent revenue gap are Illinois, Alaska, Arizona, Mississippi, and New Hampshire.

A separate study by Pew Research published in October 2022, however, placed Wyoming and Alaska in the top five states to hold higher rainy-day reserves.

The bolstered rainy-day reserves across states come as many experts are preparing for a recession this year.

Economists surveyed by The Wall Street Journal see a 61 percent probability that the United States will enter a recession this year, although they believe it will be shallow and short-lived.

However, the Biden administration remains optimistic about the year ahead.

Secretary of the Treasury Janet Yellen on Monday, for example, said that declining inflation and a robust labor market point to a path toward avoiding an economic downturn.

“You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years,” Yellen told ABC’s “Good Morning America” program. “What I see is a path in which inflation is declining significantly and the economy is remaining strong.”