States Slowly Replenish Reserve Funds
Half of the states expected to have enough of a financial cushion to cover nearly 30 days of operating expenses at the end of fiscal year 2013. Although states are restoring the reserves and balances that were tapped during the Great Recession, the median number of days was still 11 short of its pre-recession level.
For the first time in five years, no state in fiscal 2013 expected its combination of rainy day reserves and general fund balances to drop below zero. In another sign of improving finances, 16 states were on track to match or exceed the financial cushions they had before the recession, measured in days of operating expenses.
Although an increase in reserves and balances is a sign of fiscal recovery, there is no single best practice for determining what share of operating costs states should have on hand to deal with unexpected downturns or expenses. States with a history of highly volatile revenue performance may require larger cushions.
According to the latest state figures for fiscal 2013:
- More than two-thirds (39 states) expected to have more days’ worth of operating expenses in reserve than in fiscal 2009, when total state tax revenue and reserves simultaneously bottomed out.
- Alaska (794 days) and North Dakota (307 days) had the biggest reserves as a share of operating costs.
- The smallest reserves—with less than five days’ worth of operating costs—were in Arkansas (0 days), Illinois (1.8 days), and California (3.3 days).
Most Days of Operating Expenses in Reserve, FY 2013
|North Dakota||307 days|
|West Virginia||122 days|
Source: Pew analysis of data from the Fiscal Survey of States, Fall 2013, published by the National Governors Association and the National Association of State Budget Officers
Between fiscal 2009 and fiscal 2012, Arizona, California, Connecticut, Kansas, Oregon, Pennsylvania, and Washington drained their reserves and ended with a negative fund balance in at least one year, requiring them to borrow or transfer cash to cover operating costs.
A first look at fiscal 2014, based on amounts appropriated in state budgets, projects that median reserves for the 50 states combined will decline to 19 days, with at least 38 state budgets anticipating lower levels than in fiscal 2013. However, those projections often change significantly by the close of the fiscal year.
Because they are an indicator of state fiscal health, reserves and balances are tracked closely by bond rating agencies. For example, Moody’s Investors Service cited Arizona’s success in rebuilding its balances after a deficit just a few years ago as one of the reasons for upgrading the state’s credit outlook from stable to positive.
This measure does not take into account additional resources that some states may have available to cushion downturns, such as balances outside their general funds, so it may not reflect a state’s complete fiscal cushion. In addition, some states undertake considerable spending outside of the general fund, so comparisons across states should be made with caution.
Analysis by Robert Zahradnik, Aidan Russell Davis, and Alex Boucher