States deploy reserves and balances to manage budgetary uncertainties, deal with revenue forecasting mistakes, prevent severe spending reductions or tax increases when there are unexpected revenue shortfalls, and cope with unforeseen emergencies. Because reserves and balances are essential to managing sudden changes and maintaining fiscal health, these levels are watched closely.
According to a report by The Pew Charitable Trusts, if a recession strikes tomorrow and Nevada was forced to run only on reserves, the state government would be out of money in approximately 3.6 days.
The study determined that Nevada had just $39 million in its rainy day fund for the fiscal year 2017, and ranks 44th out of 50 states in how long government can operate solely on reserves. Nevada was not alone in this potentially dangerous budgetary mess. Three states including Kansas, Montana and New Jersey had no reserve monies at all. Across the board, the median time for all 50 states was roughly twenty days.
On the opposite side of the spectrum, Alaska and Wyoming lead the rankings, with each having enough reserves to run their respective governments for more than a year.
The Las Vegas Review-Journal said it is a low probability that any state would be forced to operate on just reserves. The report paints a troubling picture of what could happen to Nevada in the next economic downturn.
“The funds in those accounts are used to help offset revenue shortfalls and alleviate the need for spending cuts or layoffs during times of economic hardship,” said Las Vegas Review-Journal, adding that without enough reserves, a recession could result in exploding deficits. This would be bad news for the state’s S&P Global Ratings, as for example, the credit rating agency downgraded Massachusetts’ debt rating in 2017, citing its “failure to follow through on rebuilding its reserves.”
Robert Fellner, director of policy for the Nevada Policy Research Institute, said Nevada’s extremely low reserves is reflective of a “tax-and-spend mentality,” noting attempts by Gov. Brian Sandoval and the State Legislature to increase funding for K-12 education, including the 2015 commerce tax.
The state, Fellner added, “needs to get spending under control.”
The Journal noted that the state had nearly $270 million in reserves in 2007, enough to run the government for roughly 27 days. Then the recession hit, and by 2010, the fund was bone dry. Over the cycle, the state attempted to bring up the account’s balance, but financial stress in 2015 through 2016 emptied all funds.
“Every time we put a dime in there, we had to pull it back out just to keep the government running,” said Mike Wilden, chief of staff to Gov. Brian Sandoval, who took office in 2010.
Wilden said the state ended the fiscal year 2018, which ended on June 30, with $180 billion in the fund– good for about 14 days of government funding. The significant contributions to the fund have been tax revenues from recreational marijuana industry. Marijuana taxes add about $4 million per month into the account, which started in July 2017, Wilden said.
As for Nevada and a handful of other states with limited reserves, well, it is a race against time to increase state funds before the next economic slowdown, which could arrive as early as next year.