Report: Record reserves are giving states a budgetary buffer | Monday Morning Coffee

States, including Pa., have been saving for a rainy day. Here’s why that matters

By: - March 20, 2023 7:13 am

Republicans in the state House and the Gov. Josh Shapiro administration already are sparring over whether the state will have the cash the Democratic chief executive needs to fund his proposed budget for the fiscal year that starts July 1.

Last week, state Rep. Seth Grove, the ranking Republican on the House Appropriations Committee, warned that the state will have a massive budget deficit within three years if Shapiro’s spending blueprint becomes law as-is, the Capital-Star’s Peter Hall reported.

Shapiro’s $44.4 billion budget plan masks a structural deficit by drawing more than $2 billion from the state’s nearly $6 billion surplus, Grove, R-York, said.

Some new data from the Pew Charitable Trusts puts the state’s finances into a broader national context.

States’ combined savings reached a record high of $134.5 billion by the start of fiscal 2023, according to Pew. And “amid widespread, multiyear budget surpluses, states also reported the largest-ever annual increase in leftover general fund budget dollars,” the analysis found.

Some background:

Pennsylvania likely will be sitting on a projected budget surplus of more than $8 billion by the time it closes the books on the 2022-23 budget year on June 30, according to a recent report. And if you factor in the state’s Rainy Day Fund savings account, that total approaches something like $13 billion, the data show.

But it’s probably not going to last. In fact, if current trends hold, the commonwealth will be facing cumulative budget deficits totaling nearly $13 billion by fiscal 2027-28, that same research shows.

The situation on the ground:

The administration’s progressive allies have argued the state should make the most of the opportunity while it can — particularly in the face of a state court’s ruling finding the commonwealth’s school funding system unconstitutional.

Republicans, meanwhile, have argued the state needs to be more cautious.

“We’ve had billions of federal dollars come into the commonwealth …” Grove said last week, referring to the pandemic-era federal aid. “That’s why we have such a high surplus and rainy day fund currently.”

“All those gimmicks … mask that reality of a $2 billion deficit, structural deficit within the budget, and it’s something that needs to be addressed, the sooner the better, because it just will continue to get worse,” Grove said.

(Source: Pew Charitable Trusts)

Here’s a look at some national data, according to Pew:

  • Rainy day funds, also known as budget stabilization funds, hit all-time highs in 37 states by the end of fiscal 2022—the most in at least 23 years. A smaller number of states (17) reached the highest number of days they could run government operations using rainy day funds alone, due largely to a historic spike in annual spending levels during the same time.
  • Wyoming recorded the nation’s largest rainy day reserves as a share of operating costs (349.6 days). Two other states had more than 100 days’ worth of operating costs set aside: Alaska (185 days) and New Mexico (109.3).
  • Three states reported less than a week’s worth of operating costs in reserve: Illinois (six days), Washington (four), and New Jersey, which did not have any savings. (Illinois does not have a rainy day fund as defined by The Pew Charitable Trusts.)
  • Thirty-two states had increases in the length of time they could run government operations on rainy day funds alone compared with a year earlier. The largest gains were in Alaska (+101.6 days), Arkansas (+62.6), Kansas (+39), Nebraska (+34.8), and Maine (+34.7). The largest declines were in California (-47.9 days), New Hampshire (-22.3), North Dakota (-20.2), New Jersey (-19.9), and Colorado (-19). (Colorado does not have a rainy day fund as defined by The Pew Charitable Trusts.)
  • Most states (37) hit record-high rainy day fund balances, but total reserve levels still fell short of the national median (43.2 days’ worth of operating costs) in 18 of these states: Arizona, Delaware, Florida, Illinois, Indiana, Iowa, Mississippi, Missouri, Montana, Nevada, New York, Ohio, Pennsylvania, Rhode Island, Tennessee, Utah, Virginia, and Wisconsin.

“There is no one-size-fits-all rule on when, how, and how much to save. States with a history of significant economic or revenue volatility may desire larger cushions,” the analysis’ authors wrote. ” …The optimal savings target of state rainy day funds depends on three factors: the defined purpose of funds, the volatility of a state’s tax revenue, and the level of coverage—similar to an insurance policy—that the state seeks to provide for its budget.”

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John L. Micek

A three-decade veteran of the news business, John L. Micek is the Pennsylvania Capital-Star's former Editor-in-Chief.