States poised to start spending?

Posted: March 25, 2013 in Uncategorized

After five years of austerity caused by the Great Recession and it’s aftermath, states may be getting ready to spend again — or at least to stop cutting back.

That’s my take-away from an article in today’s Wall Street Journal, which reports that state cash reserves are at their highest levels since 2008. The bounce-back in state revenue is fueled by increasing tax revenue from a rising housing market and higher employment levels. The National Conference of State Legislatures says that state cash reserves will increase by $3.4 billion to $41.4 billion this year, near to a level that economists consider healthy.

Rainy day funds serve several purposes:

  • They set aside money for future expected and unexpected expenses.
  • They enable state governments to borrow money at lower interest rates

Proponents of increasing rainy day funds argue that looming budget cuts caused by sequestration and higher health care costs will translate into higher state costs in the future, meaning that states need to stash more funds away now for future expenses. Opponents argue that cutbacks have already been so severe that restoring at least some of those cuts to promote economic growth and improve education, health care and other priorities is more important. Essentially, they are saying that the rainy day is occurring now.

I’m in favor of setting aside rainy day funds and maintaining them at a healthy level. Too many state budgets are balanced by smoke and mirrors, and an ongoing commitment to keeping rainy day funds at a sustainable level would result in healthier states and improve fiscal discipline.

That being said, too big of a rainy day fund does a disservice to taxpayers and state workers. Both groups have suffered under state budget austerity: taxpayers in that services have been cut back, significantly in some areas (a Michigan State Representative reports high school English classes with 46 students in them due to school funding cut backs) and state workers, whose jobs have been axed by the hundreds of thousands (the Labor Department reports that federal, state and municipal governments have shed 750,000 jobs since June 2009).

The fact that rainy day funds are getting plumper and that states are even having this debate over what to do with potentially excess funds is a positive sign to me that the government sector may at least become a neutral factor, instead of a negative one, in terms of economic growth and job creation. If the housing market keeps picking up, states and municipalities may be poised to spend more later this year and into 2014 and 2015, as real estates taxes are a significant source of budgeted funds for both entities.

That’s good news for the economy.

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