Wisconsin needs to double its reserves in order to weather a moderate economic recession, according to a report from Moody Analytics. The report assumes decreasing tax revenue during recession and rising Medicaid costs to determine the amount of fiscal shock a state would be dealt if the eight-year run of economic growth reversed.
Moody’s ran a stress test on each state, judging how ready they were for a moderate or severe recession. Most states were not prepared when the Great Recession came in 2008.
“Almost every state was forced to take some form of extraordinary fiscal action by raising revenues or cutting spending [in 2008],” wrote Dan White, the report’s author. “Encouragingly, a majority of states ultimately passed this test, but too many are still woefully underprepared for the next change in the business cycle.”
Wisconsin has approximately $300 million in its budget stabilization fund, the government equivalent of a rainy day fund. The fund sat mostly dormant from its inception in 1985 but received significant contributions in 2012 ($109 million) and 2013 ($153 million).
If taxes collected in Wisconsin come in higher than anticipated, state law requires 50 percent of that difference be put into the budget stabilization fund. In the 2017-19 budget, Governor Scott Walker added an additional $20 million to bring the fund up to $300 million.
Wisconsin is tied for 33rd nationwide in its readiness to absorb a moderate economic recession, according to Moody’s, based on the difference between the actual fiscal reserves the state has versus the amount it would need to cover decreasing revenue in the event of an economic slowdown.
“The moderate recession scenario is roughly in line with what economists would characterize as a ‘normal’ recession,” wrote White.
The report indicates that, in a recession, Wisconsin would be dealt a fiscal shock of $1.504 billion between tax revenue shortfall and increased Medicaid spending before the economy recovers. To absorb that without a severe increase in taxes or decrease in spending, Wisconsin needs to double its reserve funds to approximately $600 million.
Increasing reserve funds is not always politically viable, as large reserve funds tend to concern taxpayers who may think the government is hoarding cash that could be put toward services or decreasing the tax levy.
But reserve funds are becoming a hot topic given the likelihood of a recession in the next few years.
“It has been more than eight years since the end of the last recession, the third longest period of expansion in U.S. history, and many are rightfully beginning to look ahead to the next economic downturn,” wrote White.