Nevada ranks 43rd out of 50 states for its readiness for an economic downturn, according to a new study authored by Erick M. Elder and published by the Mercatus Center. The study’s ranking system was based primarily on the potential for a budget shortfall as determined by the size and stability of each state’s revenue stream, average expansion growth rates, average elasticity, and current rainy day fund (RDF) balance.
The following map shows how all 50 states rank in terms of preparedness for another economic downturn:
In 2006, prior to the beginning of the Great Recession, state budgets as a whole had a 30-year high balance (that is, a combined general fund balance + rainy day fund balance) of 11.5 percent of total expenditures.
In 2008, the total amount of state savings in RDFS was approximately $60 billion. (All but three states have some form of RDF: Colorado, Montana, and Kansas.)
Even so, on-tap funds were not enough to cover the decline in state revenues that began in 2008. The total shortfall experienced by states in 2009 alone was $117 billion, according to a study by Pew Charitable Trusts. As a result, RDFs were completely wiped out during the Great Recession. A whopping 41 states enacted budget cuts in 2009, and 39 states made cuts in 2010. In addition to the cuts, states collectively enacted tax increases amounting to nearly $24 billion in tax revenue in 2010 alone.
No one knows when the next recession may hit, nor do we know what its severity may be when it comes. Some economists believe a downturn seems imminent, while others think the U.S. is in relatively good shape.
Elder’s study concludes that Rainy Day Funds of 25% of total state expenditures would stave off 90% of the effects of even a severe recession. His research shows that a number of states – including Nevada – are nowhere near that number and are thus ill-prepared should another recession occur anytime soon.
Elder’s final word of caution is one that states like Nevada can confirm: increasing tax rates or reducing government spending in times of economic downturn can exacerbate business cycle volatility, rendering the time to recovery greater than it otherwise would be. The slow economic recovery in Nevada in recent years could be Exhibit A for Elder’s warning.
Nevada’s RDF totaled $267.6 million at the end of Fiscal Year 2007. The Legislature tapped the account to fill budget gaps in 2008, 2009, and 2011, and reduced the fund to zero in 2013. At the end of fiscal Year 2014, the state’s RDF totaled $28.1 million.
In accordance with Senate Bill 490 (passed during the 2015 Legislature), $28,061,106 was transferred from the Rainy Day Fund to the State General Fund for unrestricted use on August 12, 2015. The account had a zero balance at the end of Fiscal Year 2015.
In advance of the 2015 legislative session, the Stat Pack and RCG Economics published a policy piece on Nevada’s Rainy Day Fund, formally known as the Account to Stabilize the Operation of the State Government. The article recommended funding the account at a rate of 2% of annual revenue as forecast by the Economic Forum each year, up to a total balance of 20% of total General Fund appropriations.