Friday, August 31, 2018
NOTES FROM THE SENATE, AUGUST 31,2018
LOOKING TO THE FUTURE - SOME STATES STUCK
Recent national news has highlighted the number of states that may be unprepared for the next budget crunch. Some states haven't yet built up the fiscal resilience to prepare for the next downturn. Data from the National Association of State Budget Officers compiled by the Pew Center on the States reveals that as a percentage of General Fund expenditures, 21 states had smaller rainy day funds in 2017 than they did in 2008. The median number of days' worth of general fund expenditures in rainy day funds was also around 19.8, with outliers in Alaska and Wyoming. Georgia's 2017 rainy day balance would support around 36 days of operations.
Rainy day reserves are important to rebuild following the downturn, because states are required to balance their budgets and can't run deficits. Many states are still recovering from the recession and haven't set aside the reserves for the future.
IS GEORGIA PREPARED FOR THE NEXT RECESSION?
Recently with the budget surplus for fiscal year 2018, it's hard to imagine Georgia won't continue with good times rolling right on and on. Embracing the benefits of a thriving Georgia economy and prosperous opportunities in the state is important, but so is saving for the next rainy day.
Georgia's conservative policies have prepared the state for shortfalls, and the state's emphasis on the Revenue Shortfall Reserve (RSR) has been noticed. A few weeks ago discussing the recent state bond sale, the bond rating agencies, including Fitch highlighted our "progress in rebuilding the RSR balance," Moody's mentioned our "persistent build-up," and S&P noted the states RSR "continued growth."
The FY 2017 figures had the RSR over $2.3 billion and with the figures ahead of budget RSR balances for the recently completed fiscal year 2018, Georgia should be on the way to a reserve of over $2.5 billion. These figures sound impressive, and they are, as Georgia's RSR equates to over a month of funding operations. As the eighth largest state and growing more population daily, Georgia is continuing to add to the RSR as a key to keeping the state in fiscal balance. With Governor Deal's leadership, and with the assistance of the leadership of the House and Senate, the state has sought to replenish reserves and leave the budget with some stabilization funds for any headwinds in the future.
OTHER STATES STRUGGLE
As a percentage of general fund expenditures, 43 states reported less than 10% in their rainy day funds. Also, alarmingly, 22 states have reserves less than 5% reported in 2017 including Tennessee (4.9%), Maryland (4.8%), Louisiana (3%), and Florida (4.5%) contrasted to states like Alaska and Wyoming that have significant balances. Georgia is at 11.3% of previous years revenues. The state law caps the reserve at 15%.
CAN THE GOOD TIMES LAST?
A recent Wall Street Journal article reviews the present economic expansion that began in 2009 and predicts a cool-off as early as 2020. The article ties the regular increases in interest rates to the full expansion, low unemployment overheated economy and predicts it cannot last.
ECONOMISTS LOOK FORWARD FOR ONCE
Famous for looking backward and only explaining what has already happened, economists are beginning to go on record predicting an end to this expansion. Some 59% in a recent survey predicted an end by 2020. Also, 22% predicted 2021 as the year, while a smaller number predicted an even earlier date of next year and the remainder a later date. Most blamed the overheated economy leading to increased Federal Reserve, raising of interest rates as the immediate cause of the end of the expansion.
HOW DO WE KNOW A RECESSION IS HERE?
The rule of thumb is that you are in a recession a year before you realize it. Part of the thinking driving these predictions lies in the length of the present expansion, apparently set to be the longest expansion since about 1854, according to Lou Crandall, and quoted in the WSJ article. He is the chief economist at Wrightson ICAP. The internet fueled expansion of the 1990's lasted about 10 years and there was a 106 month expansion in the 1960's.
PRODUCTIVITY MAY BE A POSITIVE FACTOR
The article states, some 71% of economists believe that productivity growth will grow more than expected. The belief is that growth will perpetuate the expansion. They believe tax cuts and code revisions will encourage investment.
WHAT CAN GEORGIA DO?
It would seem to me that continuing to build Georgia's RSR or "Rainy Day Fund" is one way of preparing for some future economic slowdown. Georgia's RSR stands at about $2.5 billion or a little over 11% of previous year's revenues. The constitutional limit is 15% and as the economy goes up, that number for the reserve will increase as well.