Can States Blame the Economy for Fiscal Strains?

nasbo

Yes, in part, but no, in more important part

The “Great Recession” of 2007-2009 certainly challenged state government finances, along with firms in the private sector.  Last month, the National Association of State Budget Officers (NASBO) issued a report titled “State Budgeting and Lessons Learned from the Economic Recession.”  Based on research funded by the MacArthur Foundation, the report stressed the importance of learning from experience to limit future recession-related service disruptions, ‘enhancing the effectiveness of federal aid to the states,’ improving budgetary preparedness, and ‘highlighting sound practices.’

The chart above relies on data available on State Data Lab.  It shows the number of states with positive net revenue (a ‘balanced budget,’ in practice) and the number of states with negative real GDP growth from 2005 to 2012.  From 2007 to 2009, the number of states with negative real GDP growth rose from 6 to 42, while the number of states balancing their budgets fell from 48 to 6.   Clearly, the Great Recession had a marked impact on state budgets, and the ability of the states to live up to their ‘balanced budget requirements.’

But all states are not alike, and the report may have painted with too broad a brush.  The year 2009 was pretty nasty, to be sure, but focusing on the Great Recession’s worst year and drawing conclusions about the 50 states generally can miss important lessons from individual states.  In fact, looking across the last five fiscal years, there is pretty wide variation among states in truly ‘balancing their budgets’ – and some states hit hard by the recession have done better than others in managing their financing.

You can also look at the 50 states on two dimensions – the severity of the increase in the unemployment rate in the Great Recession, and the number of ‘balanced budgets’ they achieved in the five years ended 2012.  Looking at the results, there is little apparent relationship.  Some states with particularly severe recessions still had above average to good performance financially, while others did especially poorly financially despite average-to-relatively good economic conditions.

For example, seven states that had hard recessions but still posted average-to-above average balanced budget frequencies included Alabama, Arizona, Florida, Idaho, Nevada, Utah, and Wyoming. Conversely, five states with especially poor financial performance in light of their sensitivity to the economic downturn include Connecticut, Illinois, Kentucky, Louisiana, and New York.

Further research into results like these could not only highlight sound practices, but practices to avoid.  For example, Truth in Accounting’s latest estimate of “Taxpayer Burden” for the five states doing poorly financially despite average recessions comes to an average of $30,500; compared to an average of $0 (zero) for the seven states doing relatively well financially despite bad recessions, and an average of $8,600 for the other 38 states.  Truth in Accounting’s “Taxpayer Burden” metric summarizes current financial conditions among the 50 states from the point of view of their balance sheets — a product of long-standing practices, not just the recent recession.

And recessions should be expected when planning and executing financial strategy.  Blaming a recession for fiscal strains sourced in longer-term factors is a little bit like blaming the rain for making you wet because you went outside without an umbrella.  Granted, our latest and nearly-Greatest Recession was truly a thing of beauty, if you appreciate such things.  But to paraphrase Warren Buffett, when the tide goes out you find out who was swimming naked.  In that sense, maybe our Great Recession had a positive effect, in enhancing transparency for states where it wasn’t available previously.