Preparing for the Inevitability of the Next Recession

The California State Capitol in Sacramento.

The California State Capitol in Sacramento. Shutterstock

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Some states and localities are more ready to deal with an economic downturn than others.

Nobody knows for sure exactly when the next recession will come or how bad it will be. But it’s a fairly safe assumption that any new governor taking office in 2019 will have to deal with more challenging economic conditions during their term. California Gov. Jerry Brown recently told reporters: “It’s going to happen. We maybe have two years if we are lucky.”

After rebuilding California’s finances and his state’s economic might in recent years, Brown will be leaving office in a few months. His likely successor, Lt. Gov. Gavin Newsom, will deal with whatever comes next. But as Fitch Solutions wrote in July, California’s “next governor will benefit from structural changes made over the last decade that will heavily affect how the state's budget performs through the next inevitable recession.”

Similarly in Georgia, “the next governor owes Governor [Nathan] Deal a great debt” for the $2.5 billion in fiscal reserves his administration has built, former state House Appropriations Chairman Ben Harbin told the Atlanta Journal-Constitution last week.

When the next economic recession takes hold, the impacts will be felt in different ways depending on the state and locality. While California and Georgia may be better positioned to deal with a downturn, there are other states that aren’t in as good of shape— state government rainy day funds in places like Connecticut, New Jersey and Kansas show they are less prepared.

Officials who do budget forecasting or figure out how to finance major infrastructure projects have many variables to juggle, including being ready for the next recession when tax revenue is likely to soften or tank.

In and around booming Seattle, for instance, there are some storm clouds gathering around the voter-approved expansion of Sound Transit’s Link light-rail system. Beyond locally-raised revenue from within the Sound Transit taxing district, the expansion also assumes a certain percentage of federal contributions to finance construction, which is less certain in the Trump administration.

Sound Transit Link light rail in Seattle. (Shutterstock)

Sound Transit General Manager Peter Rogoff delivered some bad news at a Sound Transit board meeting in late July: Cost estimates for the Link extension to Federal Way have jumped by $460 million more than had been earlier forecasted, thanks in part to the increasing costs of construction—Trump’s steel tariffs have made it more expensive for state and local governments and agencies to build new or improving existing infrastructure.

Rogoff, who previously led the Federal Transit Administration during the Obama administration, said at the board meeting, according to Seattle Transit Blog: “Sound Transit has the financial strength to withstand increased project costs, or lower than anticipated federal funding or tax revenues, or a recession, but a combination of any two or more of these factors would put considerable stress on the agency’s ability to deliver projects on schedule.”

Across the country in Baltimore, officials have also expressed some concerns about what could come with a recession. City finance officials have cautioned that property tax revenue could “fall more rapidly than it did after the housing bust a decade ago,” according to the Baltimore Sun, which reported in late July that “the city has a far thinner cushion in the event home values go south again.”

In Idaho, where the state’s economy is booming, Bonneville County Chairman Roger Christensen told the Post Register recently that the county government aims to have a good fiscal reserve to tap should conditions sour. "They're healthy enough to carry us through about a year," Christensen told the Idaho Falls newspaper. "That's what we try to budget for, to have enough reserves so that if things went completely in the tank, you'd be able to run the basic operations for about a year."

When the things completely tanked a decade ago, federal officials used tools they had to try to lessen the blow and boost job growth and the economy. But when the next recession hits, the federal government will have less flexibility to assist states and localities than it did a decade ago.

As Route Fifty’s Bill Lucia reported in April:

Dan White, director of public finance research at Moody’s Analytics, said when it comes to federal assistance to states in the next recession, “I don't think they can count on getting as much as aid as they have in the past.” If this proves to be true, it will be even more important for states and local governments to plan and prepare for gloomier economic times.

“If they don't have rainy day reserve funds, enough to get them through the next recession, at this point, then they're already too late,” White added. “But any little bit can help.”

Ready or not. As the U.S. economy continues to hum along, there are inevitably choppy economic waters ahead.

Michael Grass is Executive Editor of Government Executive’s Route Fifty and is based in Seattle.

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