Many U.S. states have been slow to improve their finances nine years into the economic expansion. That raises a risk they won’t be prepared when another downturn hits, making them susceptible to big spending cuts that make that next recession worse, according to a Wall Street Journal analysis. State governments have been grappling with tepid revenue growth and heavy pension and Medicaid costs. In many places that has resulted in smaller reserves. Measured as a share of spending, 21 states had smaller rainy day funds in 2017 than they did in 2008, according to data from the National Association of State Budget Officers compiled by the Tax Policy Center. Rainy day funds help states preserve spending levels when their revenues plunge. Those reserves are especially important because, unlike the federal government, states don’t run budget deficits in downturns. Most states rely primarily on income and sales taxes to fund their budgets. That makes them particularly vulnerable during recessions, when layoffs result in lost incomes and scaled-back purchases. At the same time, recessions put pressure on state spending as demand for government services, such as unemployment insurance and Medicaid, soars. In previous recessions, the federal government stepped in with spending to keep states afloat. That may be harder to do next time because federal debt is rising rapidly. “There are levers that all the states could think about in terms of preparing for the next economic downturn,” said Federal Reserve Bank of Boston President Eric Rosengren. “It doesn’t seem like there is that much movement in that direction right now in many states.”
