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Half of the states expected to have enough of a financial cushion at the end of fiscal year 2014 to cover at least 24 days of operating expenses, a partial rebound to the levels they had before the Great Recession.
In a sign of improving fiscal health, states have been rebuilding their financial cushions since the end of the Great Recession in 2009. Still, estimated reserve levels at the close of fiscal 2014 were 17 days short of the median of 41 days’ worth of operating expenses that states had on hand in fiscal 2007, just before the downturn.
Only 16 states estimated that their 2014 reserves—rainy day funds plus end-of-year general fund balances—would exceed 2007 levels, measured in days of operating expenses.
After four straight years of increases, the median level of reserves fell from 33.1 days of operating costs in fiscal 2013 to an estimated 24 days in fiscal 2014. This trend was widespread, with 37 states reporting declines. The drop in reserve levels coincided with a fall in state tax collections, as high-income earners reacted to new federal tax rates. A number of states made up for lower tax receipts in 2014 by spending more from their end-of-year balances, resulting in the drop in reserves.
Projections for fiscal 2015, the current budget year, show median reserves for the 50 states continuing to decline to 22.3 days, with at least 32 state budgets anticipating lower levels than in fiscal 2014. However, those projections are based on amounts appropriated in state budgets and could change significantly by the close of the fiscal year.
According to states’ latest estimates for fiscal 2014:
States use reserves and balances to manage budgetary uncertainty, deal with revenue forecasting errors, prevent severe spending cuts and tax increases, and cope with unforeseen emergencies. Building up reserves and balances is a sign of fiscal recovery, but there is no one-size-fits-all rule on when, how, and how much to save. States with a history of significant revenue or economic volatility may desire larger cushions.
Because reserves and balances are vital to managing unexpected changes and maintaining fiscal health, their levels are tracked closely by bond rating agencies. For example, Moody's Investors Service recently cited efforts to rebuild reserves, including a voter-approved measure, as one reason it upgraded California’s credit rating.
This measure does not take into account additional resources that some states may have available to soften downturns, such as balances outside of their general funds or rainy day accounts, 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 Alex Boucher and Barb Rosewicz