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Evan Horowitz | Quick Study

Mass. doesn’t have enough money in its rainy day fund

Massachusetts still hasn’t set aside enough money for the next recession, despite nine years of steady economic growth.

Independent analyses from Moody’s Analytics and S&P Global recently reached the same conclusion: Without additional savings, Massachusetts will struggle to fill the budgetary hole that even a moderate recession would create, leaving us vulnerable to a change in the economic winds.

The state government did make a real leap forward in 2018, adding roughly $475 million to the rainy day fund after five years during which the account stayed relatively flat or even shrank. That brings the total savings to $1.8 billion, or enough to fund state government for about two weeks.


But two weeks’ worth of ready money probably isn’t enough. Moody’s estimates that to sail smoothly through a moderate recession, states should be prepared to cover nearly six weeks’ worth of spending.

And while there’s some disagreement about whether that rule of thumb is realistic, Massachusetts’ piggy bank looks anemic, even when measured against its own past practice. Before the recessions of 2001 and 2007, the state had nearly four weeks of savings on hand.

Refilling our coffers the next time around won’t be easy.

This year’s big deposit was partly a fluke, made possible by the fact that President Trump’s tax cuts created some one-time incentives for people to prepay their taxes and sell assets. That boosted revenue here in Massachusetts, but only temporarily.

Also, US economic growth seems to be cresting, with high GDP numbers expected to fall back to earth in the coming quarters. Slackening growth will mean less surplus revenue to feed the rainy day fund.

Then there’s the final problem: Even if the state does see further revenue growth, the additional money may end up in the pockets of taxpayers. Massachusetts law includes a provision to automatically cut taxes when economic times are good, which is why the income tax rate has fallen from 5.3 percent to 5.1 percent since 2011, and may drop again to 5.05 next January.


If coffers were truly overflowing, the idea of returning tax dollars to taxpayers might make sense. But real surpluses have been rare, and these continual cuts to the income tax rate are a big reason the state has struggled to set money aside.

Taken together, these factors all seem to reduce the likelihood that Massachusetts will be able to replenish its savings anytime soon.

Which could really come back to bite us.

Rainy day funds are vital because states can’t just run deficits in bad times, the way the federal government can. Massachusetts is obliged to balance its budget by the end of every year, whether through tax hikes, spending cuts, or accounting gimmicks.

And that’s hard — sometimes nearly impossible —

because recessions hit state budgets on both sides. Not only does spending jump, as more and more jobless residents apply for things like state-supported health insurance and unemployment support, but tax revenues drop, because people who earn less end up owing less in income taxes. (They also make fewer discretionary purchases, which affects sales tax revenue.)

Moody’s estimates that a moderate recession would blow a $2.9 billion hole in the Massachusetts state budget, via a combination of $500 million in additional Medicaid spending and $2.4 billion of lost revenue.

And don’t look now, but a big recession like the financial crisis of 2007-2009 would leave the state $5.2 billion short.


Unlike last time, it’s not clear the federal government is ready to ride to the rescue.

During the most recent financial crisis, Massachusetts got billions in federal assistance to help maintain core programs in areas like health care, education, and infrastructure. But that aid package was marred by controversy, because it drove up the federal deficit.

And with red ink reaching record levels in Washington, today’s politicians may not have the stomach for another costly bailout, even if the states needed it desperately.

And that could leave Massachusetts in a potentially dire situation: with rising spending, shrinking tax revenue, insufficient savings, and little hope of federal aid.

We are not alone. Both Moody’s and S&P Global found dozens of states that are short on the necessary reserves. But that’s no consolation. It just means there’ll be more states competing for a limited pot of federal aid, if and when the economy goes south.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the nation. He can be reached at Follow him on Twitter @GlobeHorowitzy.