Some states, including Nebraska and Iowa, did a good job before the Great Recession in setting reserves aside in case of an economic downturn.
But many states did not, and they paid the price.
Now, the news organization Stateline reports, those states seem to have learned their lesson.
“The lesson learned is that, ‘Wow, in a downturn you really need those reserves,’ ” said Scott Pattison, who heads the National Association of State Budget Officers. “We needed what we had in the reserves and much, much more.”
The budget numbers prior to the Great Recession illustrate the point. For the 2007 budget year, Nebraska commendably ranked No. 3 among the 50 states in having a “rainy day” fund equal to 16 percent of annual general fund spending.
Iowa ranked No. 8, with cash reserves of more than 9 percent. The figures are from the Tax Foundation.
One reason for Nebraska’s strong performance was that many policy-makers remembered the troubles from October 2001, when the Legislature was called back for an emergency session to deal with a major revenue shortfall and had a cash reserve of only $45 million to fall back on.
In contrast to the Midlands’ fiscal preparedness for fiscal 2007, the numbers for many states were weak to downright abysmal, including: California at 4 percent; Missouri at 3 percent; New York, 2 percent; Wisconsin, 0.4 percent; and Michigan, 0.02 percent.
When the economic bottom dropped out, nearly all states faced huge budget headaches, but the challenges were greatest in states that had failed to maintain a healthy savings account. In the end, 40 states passed higher taxes or fees in response to the recession.
Some 17 states drained their reserve funds. The most dramatic example was Ohio, which saw its cash reserve plummet from more than $1 billion down to a mere 89 cents.
Things were no picnic for Nebraska, which faced a budget shortfall of nearly $1 billion by the start of 2011. But the state’s rainy day funds, which approached $600 million, provided an invaluable cushion that many other states could only envy.
Pattison’s state budget officers organization recently issued a lengthy report on rainy day funds. The organization — whose executive committee includes Gerry Oligmueller, Nebraska’s state budget director — recommends that states in general look to boost their rainy day funds in light of recent experience.
States that fund their cash reserve with unstable revenue streams such as capital gains taxes need to fund their reserves at a higher level than do states, such as Nebraska, that rely on a broad, relatively stable revenue stream, the group said.
Looking ahead, the Midlands states are continuing their conscientious attention to building back their rainy day funds. Nebraska’s is set to grow to $679 million (moving toward 17 percent of general fund revenues), while Iowa’s will be around $649 million, or 10 percent.
No doubt about it, Midlands policy-makers always face tough decisions in setting budget priorities, given important needs that include K-12 education, health and human services, universities and prisons.
But there’s an additional priority, too. Amid the numerous calls for higher spending, Nebraska and Iowa need to take care not to draw down their rainy day funds below a responsible level. Past experience shows the wisdom in resisting the temptation.