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Despite a recovery going on ten years, States are Unprepared for Next Downturn.

Measured as a share of spending, 21 states had smaller rainy day funds in 2017 than they did in 2008, according to data from the National Association of State Budget Officers compiled by the Tax Policy Center. Rainy day funds help states preserve spending levels when their revenues plunge. Those reserves are especially important because, unlike the federal government, states don’t run budget deficits in downturns.

“There are levers that all the states could think about in terms of preparing for the next economic downturn,” Federal Reserve Bank of Boston President Eric Rosengren said in an interview with The Wall Street Journal. “It doesn’t seem like there is that much movement in that direction right now in many states.”

North Dakota had only 1.5% of its expenditures in a rainy-day fund in the 2017 fiscal year, down from 16.6% in 2008. Oklahoma’s rainy day fund had 1.6%, down from 9.3%. New Jersey emptied its rainy day fund in 2009 and has yet to begin refilling it.

Last week, New York State Comptroller Thomas DiNapoli warned that the state badly needed to replenish its reserves. New York will face budget shortfalls, reduced borrowing capacity and possible cuts to federal aid, he said in a report. “Yet, there are no plans to add to our reserves, leaving the state with little cushion in the event of an economic downturn,” he said.

There are some important exceptions. California’s rainy day fund was empty in 2008 but in 2017 held 8.5% of the state’s expenditures. Voters there passed a measure in 2014 requiring the state government to set aside money every year into the fund. That effort helped to drive overall state rain day funds to 6.8% of spending in 2017, up from 4.8% in 2008, according to NASBO.

California Here We Come

Well, not quite.

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Anyone who thinks California is prepared for the next downturn is fooling themselves.

Taxpayer flight is massive and about to pick up.

Polls show an amazing [50% of Bay Area Residents Want Out](50 percent of Californians say they want to move out soon, poll finds).

I take such polls with a huge dose of salt. 50% are not going to leave. Yet, the sentiment is important.

The state is seemingly in better shape because its property bubble is fully re-blown and the tech bubble is in full swing.

The next downturn will easily wipe out both.

Mike "Mish" Shedlock