States warned, graded on budgetary lessons

Two recent reports examining the state of the states’ budgets and resources have some warnings for those involved in the budgeting process. A study by Moody’s Analytics reveals that many states are not prepared for the next recession while a study from the Volcker Alliance examines how states are making their spending decisions, with the hope that clear budgets will help inform the public.

Stress-Testing States, by Moody’s Analytics, examines the preparedness of states’ finances to endure economic downturns. To weather such a downtown, a state needs at least 10 percent in reserves to avoid cuts to spending or tax increases, Moody’s maintains. But it found the typical state has only 8 percent of their budget in reserves, and if the next downtown is as severe as the 2007-09 recession, the reserves would need to be closer to 16 percent. Findings from the study show that 16 states currently have the reserves they need, 19 states have most of the funds and 15 states have significantly fewer funds than needed for the next recession.

While the study presents a best case scenario based on fund balances, the authors note that those balances are not always equivalent to available reserves. Taking action before a recession hits could help a state more clearly designate the purpose of the funds. Other key factors in establishing resiliency are the amount of flexibility inherent in a state’s budget process and the specific policy goals outlined by legislators, the study posits. Considering all the elements and learning from the last recession, which hit states particularly hard because of changing tax structures and an increasing role of Medicaid, planning a well-crafted reserve policy and flexibility are the best tools to prepare for the inevitable next recession, say the authors.

The most recent recession and the slow growth in the U.S. economy in recent years have intensified budgetary pressures in many states according to the authors of the Volcker report, Truth and Integrity in State Budgeting: What is the Reality?. As a result, the Volcker Alliance undertook its largest project since its founding in 2013 with a study of the budgetary and financial reporting practices of all 50 states for fiscal 2015 through 2017 in terms of their timeliness, comprehensiveness, transparency, and willingness to fund current expenditures with recurring sources of revenue rather than one-time infusions. It emphasizes the importance of clear budgets to inform citizens, and maintains that a better-informed public should provide decision makers with incentives for transparency and accuracy in setting out spending and revenue reporting.

The report focuses on five critical areas that explain methods used to achieve budgetary balance, as well as how budgets and other financial information are disclosed to the public. States were given grades of A to D-minus for their procedures in estimating revenues and expenditures; using one-time actions to balance budgets; adequately funding their public worker retirement and other postemployment benefits; overseeing and using rainy day funds and other fiscal reserves; and disclosing budget and related financial information. In addition to assigning grades, the Volcker Alliance proposes a set of best budgeting practices for policymakers to follow.

States that received high marks for the budgetary procedures include Washington, in the use of its Economic and Revenue Forecast Council in budget forecasting, New York for its use of generally accepted accounting principles (GAAP) for budgeting, Wisconsin for its funding of its pension liabilities, and Indiana for its rainy day fund legislation and clear guidelines for the use and replenishment of assets.