State of the States: Are rainy days here again? In four charts, the pandemic’s pain

The long downturn that accompanied the 2008 financial crisis was brutal for U.S. states and municipalities, and some were only just back on their feet when the COVID-10 pandemic began, shuttering economies, sidelining workers, and costing big bucks for emergency personnel, health care and more.

This downturn is likely to be vastly different than the Great Recession, but it’s still worth watching states and locals closely, if only to see if the lessons from last time have been learned.

In this ongoing series, MarketWatch takes a look at different facets of the local experience. The good news is that no states have all of the COVID cards stacked against them. The bad news is that few states have none.

Big savings gaps

When the corona crisis erupted in March 2020, it was the end of state fiscal years. Most states already had their fiscal 2021 budgets locked down, and most entered the downturn with much more in savings —“rainy day funds” — than they had on the eve of the Great Recession.

But there’s great variation by state: Wyoming could fund nearly an entire year’s worth of general spending with money it had set aside. Kansas, Pennsylvania and Illinois could not even last one week.

It’s worth noting that rainy day funds are a reflection of a legislature’s internal governance and foresight. The fact that Democratic-leaning New Mexico has one of the biggest rainy day funds, while red states like Pennsylvania and Kentucky are among the least-prepared suggests that the narrative of blue-state overspending and Republican thrift is false.

The map above shows the top five and bottom five states for rainy day fund balances, according to a Pew analysis of fiscal 2020 budgets. More recent data from the National Association of State Budget Officers shows how the management of rainy day funds is a work in progress. Some states authorized spending from savings in the waning months of 2020, and some are even now making adjustments to their fiscal 2021 plans.

NASBO notes, “Total rainy day fund balances as a percentage of general fund spending declined from 9.1% in fiscal 2019 to 7.9% in fiscal 2020… States have reported a $12.2 billion projected decline in rainy day fund balances from fiscal 2019 to fiscal 2021, though it is important to note that usage of rainy day funds in fiscal 2021 is ongoing.”

Dependence on tourism dollars

Three states are highly dependent on tourism dollars, and an October analysis from Pew shows how hard the pandemic shutdowns have hit. In Nevada, for example, more than one-quarter of all jobs are in the industry.  Hawaii’s FY21 revenue will likely be nearly one-fifth less than its pre-COVID forecasts.

But if the category is defined as leisure and hospitality, rather than just tourism, plenty of other places that may not be prime vacation destinations are also in trouble. Think not just of attractions like DisneyWorld
but casinos and restaurants — places locals go.

Montana, Wyoming, South Carolina, Colorado and Louisiana (a big convention destination) are the next five states with the greatest share of total 2019 employment devoted to leisure and hospitality. But when sorted by the greatest job losses from February 2020 through September, Hawaii, Washington, D.C., New York, Vermont and Massachusetts are in the worst shape, Pew found.

As of December, a more recent accounting than Pew’s analysis, those big job losses meant a wide variation in jobless rates: from 9.3% in Hawaii to 3.1% in Vermont.

Retail reliance

There’s a lot of overlap between state economies that are highly dependent on leisure and hospitality and those where sales taxes make up a big chunk of their revenues. NASBO figures show Florida, which has no personal income tax, is most dependent on sales tax, as noted below.

The Tax Foundation notes that consumption taxes are “generally more stable than income taxes in economic downturns,” and that while consumption initially dropped during the early weeks of the crisis, spending and sales tax revenues have largely recovered.

States have a big advantage in this downturn compared to the Great Recession: the 2018 South Dakota vs. Wayfair
Supreme Court decision, which expanded the ability of states to collect sales taxes from online retailers.

Still, with so much of the economic pain centered in the leisure and hospitality sectors, it will be important to watch the states that are dependent on both types of taxes.

Unemployment claims

Revenues aren’t the only thing state budget-watchers are concerned about. The downturn is also exacerbating spending overages, particularly on unemployment claims.

Typically, when Americans who work for employers are laid off involuntarily, the unemployment money they claim comes from a federal-state partnership. States administer the programs, and have their own unemployment insurance trust funds, but can borrow from the federal government if they deplete their own reserves.

The sharp spike in unemployment during the Great Recession, and the tepid recovery that followed, forced 36 states to borrow from the federal fund, according to the Tax Policy Center.

It remains to be seen how devastating this downturn will be. As of early February, 19 states had borrowed from the federal government, according to an analysis prepared for MarketWatch by the Tax Foundation, in amounts ranging from $20 million in Georgia to nearly $19 billion for California.  The Golden State had about $3.3 billion in its state trust fund in January 2020, just before the crisis hit, making it among the best-prepared of the 50 states, but the magnitude of the job losses last spring overwhelmed the system.

Like the rainy day funds, the state unemployment insurance system doesn’t respect “red” and “blue” boundaries. The states with the most reserves going into the crisis were Democratic (Oregon and Washington) and Republican (Florida and Michigan). Those that have borrowed the most cross the political spectrum, including New York, Texas, Illinois and Ohio.