Balancing Act: Promoting Long-Term Fiscal Stability

Economic recovery from the Great Recession has been slow and painful and for many states, revenues are only now getting back to pre-recession levels. While the recession took states on a fiscal roller coaster ride, it also helped reveal the importance of planning for hard times long before they arrive and having a strategy in place to manage volatility.
A new series of reports by The Pew Charitable Trusts aims to provide state policymakers with a roadmap to help manage fiscal ups and downs and uncertainty. The first report in the series, Managing Uncertainty, looks at volatility across the 50 states, noting that the drivers of economic and revenue volatility vary widely.
“Revenue volatility poses a challenge for policymakers in every state, though the specific patterns and drivers of revenue fluctuations vary substantially across the country,” said Mary Murphy, an officer with the State Fiscal Health and Economic Growth project at The Pew Charitable Trusts and one of the authors of the report.
Pew recommends that states study their unique drivers of volatility and design budget policies that run counter to the economic cycle.
“Such practices can make saving during good years a reliable practice and can ensure funds are available when the next downturn occurs,” said Murphy.
One of the primary ways states have managed fiscal ups and downs over the past few decades is to use rainy day funds, sometimes called budget stabilization funds. Pew found, however, that balances on those funds can be inadequate to weather states through the more turbulent times.
For example, in the summer of 2008, states collectively had about $60 billion set aside. Just one year later, the Great Recession had wiped out those balances and left states facing a shortfall of $117 billion.
As a follow-up to Managing Uncertainty, Pew recently released Building State Rainy Day Funds, which takes a closer look at when, how and how much states are saving.
“The report examines rainy day fund deposit rules and caps across the 50 states, compares these policies with each state’s experience with volatility, and identifies best practices,” said Murphy. “This research is intended to help legislators refine or develop policies to harness tax revenue fluctuations to facilitate saving when it makes sense to save and lessen the need for difficult budget choices during future downturns.”
Pew’s work identifies strong practices policymakers can apply to their own states as they seek to smooth volatility over the business cycle.
“We have worked across a range of states this year—including Connecticut, Illinois, Utah and Minnesota—to assist lawmakers as they seek to implement rigorous studies of volatility in their states, connect existing studies to strong deposit rules to grow reserves, and to redesign rules around how much to save in order to effectively manage volatility,” said Murphy.
“We will continue to engage directly with policymakers interested in redesigning or implementing policies to strengthen reserves.”
Pew’s research will be discussed at the Fiscal and Economic Development Policy Committee session from 11 a.m. to noon Aug. 10 during CSG’s Annual Conference in Anchorage, Alaska. In addition to Pew’s research, attendees at this session will learn about the importance of export promotion, how states can encourage entrepreneurship and how states are approaching public pension reform.


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