Fiscal States Improve, but Tough Choices Remain

The fiscal skies are clearing, but states still have some tough decisions to make.

Experts shared strategies states can use to improve their standing in a number of areas, including rainy day reserves, pensions and international trade, during Sunday’s session, Fiscal and Economic Outlook for 2015.

According to Mary Murphy of the Pew Charitable Trusts, state shortfalls outstripped savings nearly two-to-one during the Great Recession. Post-recession, however, state tax revenues are showing overall improvement.

With increased revenues, states are beginning to consider how they can rebuild the reserves they once had, but strategies differ widely across the country.

Twelve states have implemented plans to tie volatility to deposit rules. In California, for instance, an initiative on the November ballot would set aside a portion of the state’s capital gains tax revenues when they rise dramatically above annual averages for a rainy day fund. The initiative would also require a certain portion of the state’s general funds to be deposited into the reserve fund.

“Choosing to save can be a difficult choice,” Murphy said, but she that it’s an important one to ensure long-term fiscal health. A recent Pew report, “Building State Rainy Day Funds,” provides guidance to states as they determine plans to rebuild state reserves.

Similarly, states also have been working on efforts to boost pension funds with post-recession budget improvements. According to Dana Bilyeu of the National Association of State Retirement Administrators, most states have made adjustments to their retirement systems, ranging from benefit reductions to increased age of retirement eligibility to adjusting actuarial assumptions.

“We have seen that states … have tailored solutions to their own states,” said Bilyeu, and pension assets have rebounded significantly since the Great Recession.

Despite recent gains, she encouraged states to think about the long-term viability of pensions, cautioning that returns on pension fund investments can vary widely depending on the time period.

Jean Davis of Economic Leadership, LLC in North Carolina, encouraged states to think internationally to improve state revenues. “International trade and foreign direct investment are key components to states’ economic success,” she said. 

According to Davis, it is increasingly important for states to become globally competitive, as 80 percent of the world’s purchasing power is outside the United States.

“Legislators have tough choices to make, but supporting investment in international trade has a wonderful return on investment,” said Davis.