How Utah Stress Tests Its Budget
A resource for states looking to use these analytical tools to better manage economic ups and downs
Economic uncertainty is a common and recurring issue that policymakers and budget staffers contend with annually. In some years, states may enjoy record levels of revenue growth while, in other years, they may face budget shortfalls. Budget stress tests are a fiscal management tool that can help policymakers plan for and create appropriate, measured responses to potential economic downturns. Stress tests, which examine how the budget would be affected by a range of different economic scenarios, can help answer critical questions: Do we have enough in our rainy day fund if a recession hits? Is the state saving too much—or too little?
In a 2019 report funded by The Pew Charitable Trusts, the University of Utah’s Kem C. Gardner Policy Institute documented Utah’s stress testing process from the state’s 2015 and 2016 analyses. Working with the state, policy institute experts also produced a technical user guide to supplement the report. These documents provide a comprehensive view of Utah’s process and offer guidance for states conducting their own stress tests.
Utah’s stress testing process includes four broad steps:
- Define the period of analysis and economic assumptions for stress scenarios.
- Identify revenue and expenditure components at risk and estimate total value at risk under stress scenarios.
- Inventory and categorize reserves and other budget contingencies by ease of accessibility.
- Compare total value at risk to total contingencies to evaluate the overall resilience of the state budget.
Utah’s Office of the Legislative Fiscal Analyst also developed a fiscal toolkit to guide policymakers on when and how to respond to economic shocks. The order in which they use these tools may change, but Figure 1 displays how Utah legislators have approached recent downturns. When the value at risk and severity are high, policymakers’ actions tend to respond accordingly.
The Utah fiscal toolkit can be adapted to a state government’s unique priorities and may include a different order of budget balancing maneuvers.
Angela Oh leads research for The Pew Charitable Trusts’ state fiscal health project.
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