Weathering the Next Recession: How Prepared Is Michigan?

  • Erick M. Elder

    Professor of Economics, University of Arkansas at Little Rock

Rainy day funds are a key tool that most US states use to help mitigate the fiscal stress caused by economic downturns that reduce state government revenue. States can use rainy day funds in combination with their general fund surpluses as a buffer against revenue declines. The chart below compares Michigan’s available rainy day fund and general fund balances from fiscal year 2015 with what the state would need to weather recessions of varying degrees. Michigan could weather a mild recession, but not an average or severe recession.

See “Weathering the Next Recession: How Prepared Are the 50 States?” for a complete explanation of the methodology used to calculate Michigan’s recession preparedness. The data used in that report are from fiscal year 2014.

Michigan

Based on its business cycle characteristics, Michigan would need $1.39 billion to make it through a recession of average severity if the state decided to rely on its combined rainy day fund and general fund balances rather than cutting spending or raising tax rates. To weather a severe recession (at the 90th percentile of all possible economic contractions), Michigan would need funds that make up 35 percent of its revenue, or $3.65 billion. Using its current rainy day fund and general fund balances, the state is not prepared for the revenue shortfalls that would occur during a recession of average severity.