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Georgia and other states have seen how so-called “rainy day funds” can be overwhelmed when a Category 4 economic hurricane rolls in.
After a recession in the early 2000s, the state built its reserve to $1.5 billion by 2007, a savings account that was equivalent to about 8% of what it spent in a year.
Then the Great Recession hit, and within a year two-thirds of it was gone to fill budget holes. Within two years the state had about enough money in reserve — $100 million — to fund state government for a single day.
When he took office in 2011, Gov. Nathan Deal — with an eye toward rebuilding the fund — began annually telling state agencies not to ask for more money. The record savings account Deal left Gov. Brian Kemp when he took office in 2019 could run state government for more than a month without any other revenue.
But the pandemic recession shortfall over the next few years could be a repeat of 2008-2010, if not worse.
Kemp has already used $100 million of the reserve to help fund the state's response to the pandemic. The federal government has also provided big money to help Georgia pay for costs associated with its coronavirus response.
A report out last week said that — at the same time health care and other costs are rising dramatically — the state could see a revenue shortfall of more than $4 billion over the next 15 months because the economic fallout will make a dramatic impact on income and sales tax collections, its two biggest sources of money. That's more than 10% of what the state typically spends in that period.
And that doesn’t include any potential shortfall the following year, when the economy could still be recovering.
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Other estimates have put the shortfall at $3 billion, still enough to wipe out the reserve.
Unlike the federal government, states have to balance their books at the end of the year.
The bipartisan National Governors Association sent a letter to Congress earlier this month asking for $500 billion to help states deal with lost revenue.
While state and city groups have called for a bailout, U.S. Senate Majority Leader Mitch McConnell, a Kentucky Republican, opposes giving cash-strapped governments federal aid to close any gaps, saying those suffering from steep declines should be able to declare bankruptcy and restructure their finances.
Dan White, the director of government consulting and fiscal policy research at Moody’s Analytics, a subsidiary of the Moody’s bond rating service, puts out an annual report stress-testing state finances, looking at how they would fare in downturns.
During a recent Volcker Alliance web briefing, White said that to get through a moderate recession, states need reserves amounting to about 12% of the taxes they normally collect. That puts Georgia’s savings account in the ballpark.
“The problem we are facing today is not something that is a moderate recession,” he said, so states may need closer to 17% to 23% if the downturn is severe. For Georgia, that means up to double what the state has in the bank.
“The encouraging thing is states have never been better prepared for a recession,” White said, noting record reserves nationally.
But there are huge differences from state to state. Georgia, with its history of fairly conservative budgeting, ranks near the top in his stress-test rankings, in part because of its reserve. Some of the states with huge savings also may see the steepest economic declines because their revenue is heavily tied to oil and gas production taxes. And then there are states such as Illinois, Kansas, Kentucky and New Jersey with little saved.
Scott Pattison, a former executive director of the National Governors Association and the National Association of State Budget Officers, said if the recession is as deep as many economists predict, some states can expect furloughs, layoffs and across-the-board cuts, and it will be difficult for them to maintain full funding of k-12 schools. Georgians saw all that during the Great Recession, when furloughs and layoffs were common and school spending cuts forced local districts to come up with more money and, in some cases, shorten the school year.
“It’s critically important to understand how severe this is and how difficult it is to deal with,” Pattison said. “What you are seeing from state fiscal officers is they are going to have to make some incredibly difficult decisions over the next few months.”
GEORGIA’S ‘RAINY DAY’ FUND
State reserves were quickly used up during the Great Recession and then slowly rebuilt. Below are the reserves at the end of each fiscal year. The Great Recession hit the state in 2008.
2007 —$1.54 billion
2008 —$566 million
2009 —$103 million
2010 — $116 million
2011 — $328 million
2012 — $378 million
2013 — $717 million
2014 — $863 million
2015 — $1.43 billion
2016 — $2.03 billion
2017 — $2.30 billion
2018 — $2.55 billion
2019 — $2.80 billion
Source: Governor’s Office of Planning and Budget