The Citizens Research Council of Michigan Recommends that
the State Keeps Putting Resources into the Rainy Day Fund
Putting Dollars Aside in Good Times will help make
the Next Economic Downturn Less Painful
Lansing, Mich. – November 16, 2017 – The Citizens Research Council of Michigan’s newest State Budget Note examines how prepared the state is for the next recession. Particularly, is the state’s rainy day fund sufficient in size to help the state avoid the need for major expenditure reductions or tax increases?
“Economic forecasters are gathering today at a conference in Ann Arbor to share their insights about the direction of the national and state economies,” said Eric Lupher, Citizens Research Council President. “We don’t know when the next recession is coming, but we know one will come and it is important that the state takes prudent actions now to prepare.”
Three key takeaways from the Citizens Research Council’s new State Budget Note, Preparing the State of Michigan’s Budget for the Next Recession:
- Michigan’s rainy day fund is being refilled after sitting empty for many years at the end of the last recession.
- Current deposits are insufficient for anything beyond a very mild economic downturn. Michigan should continue efforts to build up reserves in that fund.
- Michigan’s rainy day fund is designed very well to conserve money that has been saved for a recession, but the savings cap might limit the effectiveness of the fund. Once savings reach the fund cap, lawmakers should consider raising the amount that can be saved in the rainy day fund.
While Michigan and the nation as a whole are in the midst of one of the longest economic expansions in history, Michigan’s experience to start the 21st century demonstrates that policymakers need to plan ahead to prevent the worst effects of an economic downturn. Despite having more than $1 billion saved in the state’s rainy day fund prior to the tumultuous economy of the early 2000s, Michigan quickly spent those savings and had nothing in the bank to help defray the severity of the Great Recession that started in 2007.
While the rainy day fund has recovered, and has $890 million in the bank, questions remain on how prepared Michigan is for the next recession. Currently funding is only about half of what studies suggest as a healthy amount and one-third of the amount allowed under state law.
“As a state that is especially susceptible to economic cycles, and with Michigan’s fiscal model that has governments at all levels – universities, school districts, local governments, etc. – dependent on state funding for their operations, it is especially important that Michigan invests in its rainy day fund during good times to help get it through the down times,” said Mr. Lupher. “We encourage the Legislature and the Governor to remain vigilant in adding to the rainy day fund.”
The full report is available at no cost on the Citizens Research Council website.