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State, Local Cash Reserves Could Blunt Recession Effects

State and local governments’ record-high reserves of pandemic and stimulus cash could help cushion the impact of an economic recession, according to The Wall Street Journal (subscription).

What’s going on: “States will hold an estimated $136.8 billion in rainy-day funds this fiscal year, according to the National Association of State Budget Officers, up from $134.5 billion a year earlier, when they represented 0.53% of gross domestic product, the highest in records going back to 1988. This year’s figure would represent roughly 12.4% of their total spending.”

  • The reserves, much of which came from several rounds of federal fiscal stimulus funding, could make routine cuts unnecessary this year.
  • Thirty-nine state governments “have the reserves necessary to offset all the revenue expected to be lost in a relatively mild recession. Four more are within striking distance.”
  • Cities including Los Angeles, Chicago and New York City also have larger-than-usual discretionary funds.

Why it’s important: A coming economic recession is all but inevitable, according to the majority of those surveyed in a recent Wall Street Journal polling of economists.

  • While the downturn is likely “to be shallow and short-lived,” state and municipal government rainy-day funds could soften the blow.
  • “‘If [states] wanted to use their reserves and not adjust their budgets, it looks like those reserves would be there to cover most of these potential losses in a shallow recession,’ said Geoffrey Buswick, government sector lead at S&P Global.”

The NAM’s take: Said NAM Chief Economist Chad Moutray, “Infrastructure spending and increased investments in the U.S. will also provide tailwinds to the economy this year, helping to mitigate any headwinds coming from slowing growth and an uncertain outlook.”

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