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Hawaii has enough in cash reserves to weather next recession, report says

October 19, 2017 - 4:12pm

HONOLULU — Hawaii state government has tucked away enough in cash reserves to weather the next “moderate” recession, according to the economic research firm Moody’s Analytics.

A new report by Moody’s called “Stress-Testing States” found that states are typically holding about 8 percent of their budgets in reserve. However, to navigate the next moderate recession without having to resort to tax increases or serious cuts in spending, the states generally will need at least 10 percent in reserve, according to the report.

Moody’s estimated Hawaii holds more than 11 percent of its annual budget in reserve, which meant this state fared better in the stress-test analysis than most.

Hawaii state government finished out the last fiscal year on June 30 with a healthy general treasury budget surplus of about $894 million, and Gov. David Ige’s administration expects to close out this fiscal year with an $810 million cash balance.

That does not include about $310 million in the Emergency Budget and Reserve Fund, also known as the “rainy day” fund, said state Director of Finance Wesley Machida. It also does not include the more than $182 million in the Hawaii Hurricane Relief Fund, which also was tapped to help balance the state budget during the Great Recession.

“We’re trying to make sure that we build up sufficient reserves so that if there’s any downturn, whether it be in the economic market or unforeseen events that occur that would require additional funds to cover much needed services, that we would have sufficient reserves available,” Machida said.

Hawaii and other states were generally unprepared for the Great Recession from 2007 to 2009, which triggered nationwide budget woes that prompted state and local governments to cut nearly 750,000 workers from their payrolls over five years, according to Moody’s.

Those layoffs arguably made governments more efficient, but that abrupt loss of mid-wage jobs also disrupted local economies, which was largely to blame for the weak recovery from the recession, according to Moody’s. State and local government employment still has not bounced back to pre-recession levels, according to the report.

Eight years after the end of the recession, it is “an inescapable economic reality that there will be another a recession, regardless of how high-flying the economy may appear,” said Dan White, head of fiscal policy research at Moody’s Analytics, in a statement announcing the report.

To gauge how ready the states are for the next downturn, Moody’s economists ran individualized “stress tests” of all 50 states to estimate how much in reserves each state would need in the event of a moderate or a severe recession. A severe recession was defined as one with impacts comparable to the Great Recession.

For Hawaii, the study found that the combined impact of a slowdown in tax collections and the increased cost of Medicaid from a “moderate” recession would hit the state with a “fiscal shock” of nearly $700 million.

A “severe” recession would impose a fiscal shock in Hawaii of more than $935 million, according to the study.

Moody’s concluded that Hawaii and 15 other states now have the resources on hand to withstand a moderate recession with “limited fiscal disruption.” The best-prepared states were Alaska, Wyoming, West Virginia and Texas, with Hawaii ranking 11th.

White said it is “only prudent” that states prepare themselves for what will surely be some hard times ahead.

“A lesson of the Great Recession is that states must formulate targeted reserve levels with intentionally crafted policy goals in mind,” said White. “Planning for the next recession involves the difficult balancing act of putting away enough money today to prepare for a future downturn, without stunting the current economic expansion.”

Machida acknowledged that Hawaii is not ready yet for a downturn comparable to the Great Recession, “but we’re getting there,” he said.

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