By Caleb Taylor

What鈥檚 one tool states can use to weather financial downturns?

David Mitchell and Dean Stansel have been studying state fiscal crises for more than聽 a decade.聽

As state finances falter from COVID-19鈥檚 impact, Mitchell and Stansel draw on their research in a recent opinion article in to show how long term reserve funds, often referred to as 鈥渞ainy day funds,鈥� can help states as revenue falls and spending increases. RealClearPolicy is an online media platform that publishes opinion, news, analysis, and more with a focus on research from think tanks, associations, and foundations. In their article, 鈥�鈥� they talk broadly about 鈥淩ainy Day Funds鈥� which, in 海角社区鈥檚 case, is called the Long-Term Reserve Fund.*聽

Mitchell, a UCA Associate Professor of Economics,聽 and Stansel, a senior research fellow at the , also argue a federal bailout of states with inadequate reserve fund balances would be imprudent. These states should instead 鈥渟how more fiscal restraint鈥� during the next economic expansion to be better prepared for future recessions.聽

Referencing their paper, 鈥�鈥� published in Public Budgeting and Finance, Drs. Mitchell and Stansel said:

indicate that states which increase spending faster during good times tend to end up paying for that extravagance later with worse fiscal crises during recessions.鈥�

They identify two different kinds of causes: program expansions increasing expectations of future funding (like California and Kansas) and the cost of overspending dollars instead of saving them (like New York and Illinois).聽

Moreover, states with strict withdrawal rules on how reserve funds are spent tend to experience less severe fiscal crises during recessions.聽

Drs. Mitchell and Stansel said:

However, not all RDFs are created the same. They need two things to function best: strict deposit rules and strict withdrawal rules. If there is no deposit requirement, legislators and governors will not put much money into their rainy day fund. It鈥檚 always more fun to spend now than save for later.鈥�

You can read the entire article .

*For more on the distinction between 海角社区鈥檚 Long-Term Reserve Funds and 海角社区鈥檚 Rainy Day Funds, check out Mitchell鈥檚 blog post entitled 鈥�Why 海角社区鈥檚 Long-Term Reserve Fund May Not Weather the Next Rainy Day.鈥澛�

Mitchell and Stansel鈥檚 paper entitled 鈥�鈥� published in the Cato Journal analyzes how government spending increases during economic expansions worsen state fiscal crises.聽

UCA Assistant Professor of Economics and ACRE Scholar Dr. Jeremy Horpedahl also joined to discuss Gov. Asa Hutchinson鈥檚 proposed state budget and ACRE research on the Long-Term Reserve Fund.