Los Angeles And Other Cities Stash Money To Prepare For A Recession (#GotBitcoin?)
“Every year that the recovery lasts, it just makes the pressure around preparedness for a downturn that much more urgent,” said Mary Murphy, who studies rainy-day funds at the Pew Charitable Trusts. Los Angeles And Other Cities Stash Money To Prepare For A Recession
Local officials are feeding their rainy-day funds, hoping to ride out the next slump.
Pressured by declining revenue, local governments around the U.S. shed a half-million jobs in the last recession through layoffs and attrition, according to Pew. Everything from public safety to trash collection to school administration was on the chopping block. Some cities raised taxes and fees, too, but most cut spending to make ends meet.
States commonly use rainy-day funds to smooth the jolt from recessions, which can come quickly when sales- and income-tax revenue plummets. Thirty-one states boosted rainy-day fund balances in the last fiscal year, and 26 have projected increases this year, according to the National Association of State Budget Officers.
States may cut aid to local governments during recessions, and cities still have to balance their budgets, Ms. Murphy said. Many cities don’t lock away money in formal rainy-day funds, but they commonly set aside excess revenue as reserves. The amounts vary widely, though the Government Finance Officers Association maintains that enough money to cover two months of a city’s annual general-fund budget is a good benchmark.
Denver’s policy has been to keep reserves equal to between 10% and 15% of its annual general fund. During the last recession, the city delayed recruit classes for the police and fire departments, put off technology purchases and closed a motor-vehicle department branch. But officials also drew down its reserve by $62 million to soften the blow. The city expects to end 2019 with about $221 million in reserve.
In Las Vegas, city officials are holding more than 50 jobs open to save $6.4 million, out of concerns that the next downturn would only mean cutting those positions. It is also building up reserves, which recently stood at $132 million, 55% more money than it had set aside before the last recession.
“We are trying to position ourselves to be ready,” the city’s finance director Venetta Appleyard said. “We don’t want to be stuck being reactive.”
Cleveland has plumped its rainy-day fund to about $30 million, after adding $12 million since 2017. Even so, finance director Sharon Dumas told the City Council last month she thinks the city needs far more—roughly $160 million—to cover three months of general-fund costs.
Slow revenue growth has made it hard for many cities to rebuild reserves to prerecession levels, S&P warned in a recent report. “Should that rainy day come sooner than later, local governments might find themselves less able to withstand financial pressures while maintaining credit quality,” the report said.
In Philadelphia, officials haven’t put a dime in a rainy-day fund created in 2011, instead focusing on continuing priorities like shoring up its pension fund. But the current administration said it is committed to stashing at least $20 million there in the next fiscal year, starting in July, thanks in part to a record-high $368 million budget surplus. Even so, officials said they would need a $750 million surplus to hit the GFOA’s target.
“I don’t think you could talk to any big-city finance official and have them say they’re not worried,” Philadelphia’s finance director Rob Dubow said.
States Face Crunch If Fed’s Tool Kit Is Limited in Next Recession
Simulation by the Boston Fed shows the central bank’s inability to cut rates by the usual 5 percentage points would disproportionately hit certain states.
BOSTON—When the next recession comes, some states are likely to suffer much more than others if the Federal Reserve lacks ammunition to make economic downturns less severe, new research shows.
In recent downturns, the Fed has cut its short-term benchmark interest rate by about 5 percentage points to stimulate growth. But in the future, that might be impossible because rates are still historically low. The Fed’s benchmark rate is currently in a range between 1.75% and 2%.
“Monetary buffers have been depleted,” said Eric Rosengren, president of the Federal Reserve Bank of Boston, which sponsored the conference this weekend where the research was released. A decline in rates over the past decade means the Fed’s recent experience of running out of room to cut them after lowering them to zero will not be “a one-time event,” he said.
Mr. Rosengren and his co-authors, Boston Fed economists Joe Peek and Geoffrey Tootell, ran an experiment that shows how a recession might affect states assuming a traditional monetary-policy response, in which the Fed could cut its short-term benchmark rate by 5 percentage points.
Then they looked at two other alternatives. In both scenarios, monetary policy couldn’t fully respond because the Fed had raised rates to only 2% before the hypothetical downturn. But in the last scenario, regulatory, state and local, and federal fiscal buffers were also depleted because they weren’t built up before the recession.
The results show, unsurprisingly, that the last scenario is the grimmest. But they also show that the effects are distributed unevenly across states—some fare much worse than others when the Fed can’t cut rates as it traditionally has.
States with industries that are sensitive to both the economic cycle and interest rates—think of Michigan, with its heavy dependence on the auto industry—could face a much worse downturn than Midwestern states that are heavy in agriculture, which is less exposed to a cyclical downturn.
State of Policy
New research suggests changes in per capita personal income growth would hit some States much harder depending on how aggressively monetary policy can respond to a recession.
Take the first example, in which monetary policy is able to respond as it traditionally does. Here, 16 states avoid declines in inflation-adjusted-per-capita income, including many Southern states.
In the second scenario, where monetary policy is limited but the other policy buffers are available, all states experience declines in personal income. Midwestern states that depend on agriculture avoid some of the sharpest declines.
The Southern states that manage through the recession in the first simulation fare worse in the second example. In Alabama, for example, per-capita income falls 1.9%, versus nearly no change in the first simulation.
In the final scenario, the Southern states that didn’t see any income loss in the first simulation are “now among the states most severely adversely impacted when all policy buffers are insufficient.” Personal income falls even further, by 2.7%, in Alabama.
Mr. Rosengren highlighted three areas where policy tools, if deployed now, could help compensate for the potential dearth of monetary stimulus.
First, regulators could require banks to raise more capital in good times to prevent tighter lending from exacerbating an inevitable recession.
Second, the federal government could implement fiscal policies that automatically boost safety-net spending, such as unemployment insurance, during downturns.
Third, state and local governments can build up “rainy day” funds to cushion downturns. Unlike the federal government, states generally can’t run budget deficits, which typically leads to spending cuts and layoffs during a recession—a double whammy because private-sector employment and investment is often also shrinking.
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