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Is Virginia Prepared for the Next Recession?

In a new study published earlier this year by George Mason University's Mercatus Center, Erick M. Elder, professor of economics at the University of Arkansas at Little Rock, looks at how prepared the 50 states are to weather the next recession. The study's key finding is:

"To understand how prepared a state is to handle revenue shortfalls during a recession, policymakers need to answer two key questions: What target level of savings would be an appropriate buffer for revenue declines, and what proportion of possible recessions could the state weather with its current level of savings?"

Professor Elder provides this background:

"When recessions strike, state governments must often contend with revenue shortfalls resulting from declines in overall economic activity. Because many states have balanced budget requirements, falling revenues often mean states must raise taxes, cut spending, or do both. Most states have rainy day funds to smooth state spending across business cycles and reduce the need for tax hikes or budget cuts during recessions. Even with historically high rainy day fund balances before the Great Recession, many states did not have enough saved to avoid cutting spending or increasing taxes in 2009 and 2010. The rapid exhaustion of rainy day funds during the Great Recession raises the question of how well states have prepared for the next recession.

"A new study for the Mercatus Center at George Mason University examines the current condition of state rainy day funds from across the United States. By comparing the balances of individual states’ rainy day funds as a percentage of their annual revenue with various levels of potential revenue shortfalls based on recession severity, the study finds that the vast majority of states have not saved enough to weather the average decline in revenue associated with the full range of potential recessions.

"Credit rating agencies and professional organizations for state policymakers have suggested that states should aim to save enough to cover between 5 percent and 16.7 percent of their annual spending or revenue, but this one-size-fits-all solution ignores variances in business cycle duration and severity among the states. This study accounts for differences among the states by using state-level public finance data and economic indicators to create potential distributions of savings goals for each state."

The following map is color-coded to show how each state is prepared to weather the next recession:


On my last eye exam, my ophthalmologist made no mention of color blindness; consequently, that puts Virginia in the unprepared category. Or as the study's author says, "Virginia could weather a mild recession, but not an average or severe recession."

A more complete description of how prepared Virginia is to weather a recession is here, and includes:

"Based on its business cycle characteristics, Virginia would need $1.15 billion to make it through a recession of average severity if the state decided to rely on its combined rainy day fund and general fund balances rather than cutting spending or raising tax rates. To weather a severe recession (at the 90th percentile of all possible economic contractions), Virginia would need funds that make up 17 percent of its revenue, or $3.08 billion. Using its current rainy day fund and general fund balances, the state is not prepared for the revenue shortfalls that would occur during a recession of average severity."

The author provides the following chart comparing Virginia's available cash and amounts needed to weather a hypothetical recession:

Incidentally, we look forward to completion of the analysis of Arlington County's financial reserves, which the Arlington County Board directed the County Manager to complete by October 1, 2016. It's item #22 on the Board's guidance and notes that accompanied the adopted FY 2017 budget, and we growled about it on May 7, 2016, specifically:

"Reserves: The County Manager will provide, no later than October 1, 2016, an analysis of the County’s various reserves and funding levels, including criteria for utilization of certain reserves, which will inform a possible update of the County’s financial and debt management policies."

Growls readers are urged to tell their members of the Virginia General Assembly to make sure that Virginia is prepared for the next recession. Ask them for the answers to the two key questions raised by the study's author in the key finding. The following legislators represent Arlington County in the Virginia General Assembly: Senators (Adam Ebbin, Barbara Favola, or Janet Howell) and Delegates (Rip Sullivan, Patrick Hope, Alfonso Lopez, or Mark Levine). Contact information for members of the General Assembly can be found here  -- use one of the "quick links" to locate the senator and delegate who represent you.

And tell them ACTA sent you.


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