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Inadequate Rainy Day Funds Leave States Vulnerable to Next Fiscal Shock

GFOA Newsletter: April 16, 2015

State governments haven’t yet rebuilt their rainy day funds following the Great Recession; on average, they have a little more than half the reserves they had in 2007. That’s according to a report from the Pew Charitable Trusts. This vulnerability has implications for the national economy because states facing deteriorating economic conditions would have to cut spending or raise revenue by a combined $21 billion, exacerbating economic weakness, according to Moody’s Analytics’ stress test of state finances (cited by Bloomberg). “Investors are monitoring states’ fiscal balances after seeing how reserves helped some governments weather the recession,” Bloomberg reported. For example, California’s credit was upgraded and its borrowing costs shrank after voters agreed to bolster rainy day funds. “We’re looking for stability and credit quality,” a municipal research group said in the article. “A rainy day fund is a symbol of conservative financial management.” States weren’t sufficiently prepared for the last recession; 2009 budget gaps totaled $117 billion, about twice the level of reserves, and more of a cushion might have allowed them to cut fewer jobs.


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