With economic downturn on the horizon, states and local governments are well positioned financially

Following a few difficult years, communities across the nation are facing a potential economic downturn. Experts speaking at a roundtable discussion hosted by the Volcker Alliance and the Penn Institute for Urban Research say local and state governments are fiscally ready for whatever comes next.

“On average, tax revenues are up almost 5% over the past year,” said Eric Kim, senior director of Fitch Ratings and a panelist on the recent webinar, “Special Briefing: State and Local Budgets in Uncertain Times.” With most communities having managed the pandemic well, “reserves are at an all time high” and liabilities are managed. Given the steps administrators have taken in the last few years, Kim said local and state governments should be able “to ride out what could be a moderate recession at this point.” He noted his firm is looking to the future with “cautious optimism with some hints of concern” that are driven by fluctuating inflation.

Shelby Kerns, executive director of the National Association of State Budget Officers and another panelist, said states have seen strong revenue growth in recent years and a rapid increase in rainy day funds. Combined with a high total balance level and intentional steps administrators have taken following the Great Recession to improve their financial outlook, governments are better positioned to take on an economic dip than they were prior to “any recession in our memory.”

“In fiscal 2022, general fund revenues grew 14.5%, and that followed a year of growth that was over 16% in fiscal year 2021,” Kerns said. “Those numbers actually exceeded what states expected to collect.”

Many states saw revenues exceed expectations by 25% or more.

Compared to the leadup to the Great Recession, Kerns said states have three times the financial cushion they had in 2007. They’ve invested in pension funds, paid down debts, and put money into savings for disaster emergencies and medical expenses.

In Colorado, revenues were up 24% last year, according to Lauren Larson, director of Colorado Governor’s Office of State Planning and Budgeting. 

“We are measuring our trend line from pre-pandemic, and we are now exceeding our pre pandemic trend line,” Larson said. 

The last two recessions reduced the general budget by about 17%, Larson said. This year, they’re planning for a 15% hit.

“But even after those income tax reductions, we’re still going to be refunding in the forecast in rebates to taxpayers,” she continued, noting the state has in the last few years issued refunds of up to $750. “This is sizable money in people’s pockets.”

Larson said the state has also set aside money anticipating match requirements of the Bipartisan Infrastructure and Jobs Act.

“We’re not only swimming in cash, but we’re spending it very judiciously,” said William Glasgall, Volcker Alliance’s senior director, public finance and a Penn IUR fellow.

But with an economic downturn looming, not every state or community is in an ideal position. California is facing an estimated $18 billion deficit based on the governor’s preliminary budget.

“We do believe the risk of a recession is heightened. It’s very uncertain. It’s not a baseline assumption,” said Gabriel Petek, legislative analyst for California. He noted the state doesn’t plan to dip into its reserves to cover the gap.