Three years after the pandemic threatened a cataclysmic hit to U.S. state and local governments, their finances look rosier than they have in decades.
Balances in rainy-day funds hit all-time highs in 37 states by the end of the 2022 fiscal year. That's the biggest tally in over two decades and marks an improvement over last year's record, according to an analysis by The Pew Charitable Trusts.
Analysts and budget officials use the fund balances as a proxy for the overall financial health of governments. Their growth reflects a mix of factors such as surprisingly strong tax revenues and the effects of federal aid to stimulate the economy when it shut down at the onset of the pandemic.
"Rainy-day funds are many states' first line of defense against filling unexpected budget gaps," said
To be sure, states may need to dip into rainy-day funds if efforts to cool the economy by the Federal Reserve prove to have gone too far with the unfolding chaos among U.S. banks. But in the meantime, states are benefiting from swelling reserves.
States' combined savings reached a record $134.5 billion by the end of fiscal 2022, according to data from the National Association of State Budget Officers. That could keep each state's government running for a median of about 42 days.
"It's a bit stunning if you take a step back," given the scale of the pandemic's economic hit, said Eric Kim, an analyst for Fitch Ratings. "Here we are a few years out and states are in as good a fiscal situation as we've seen in quite a while."
New Jersey — which didn't set aside any rainy-day funds — has paid down several billion dollars of outstanding debt. Meanwhile, Illinois — the state with the lowest credit rating — has seen a string of upgrades thanks to tax revenue growth, increased reserves and reduced liabilities.
Tax hauls, tax cuts
Many states have also seized on the surpluses as an opportunity to fund some of the biggest tax breaks in decades. Almost two dozen states slashed personal or corporate income-tax rates and more than a dozen enacted temporary relief in 2022, amounting to $15 billion in total cuts for fiscal year 2023.
Republican lawmakers in Mississippi even proposed eliminating the state's personal income tax, its
Still, the good times could be coming to an end. Both Fitch Ratings and Pew see state tax revenues moderating amid inflationary pressures, higher interest rates and economic softening like weak consumer spending. But rainy-day funds could help cushion a sudden blow, Kim said.
"States have a lot of tools to manage through any expected volatility," he said.
