SC's savings account declined in 2022. Voters to decide if state should save more

Lawmakers spent much of this year advocating for South Carolina to increase its budget allocation for rainy day funds to 10% of the previous year's revenue from 7%. They said that the state needed to set aside more money to ensure that the government had enough to overcome economic headwinds, much like the ones they faced during the Great Recession and during the ongoing COVID-19 pandemic.

To that end, they passed legislation earlier this year to put two questions on the ballot:

One, should the state increase its allocation for its rainy day fund, to combat unexpected economic downturn, from 5% of the previous year's revenue to 7%.

Two, should the state increase its allocation to its capital reserves, intended to be used for improvements to infrastructure, from 2% of the previous year's revenue to 3%.

A new report by Pew Charitable Trusts gives an idea of why lawmakers pushed to put those questions on the ballot.

According to a data analysis conducted by researchers, states across the U.S. were estimated to reach a combined savings of a record $136.5 billion by the close of fiscal 2022. "That is enough money to cover state spending for a median of 42.5 days, or approximately 50%, more than just two years ago before the COVID recession," said Justin Theal, an officer on the state fiscal policy team at The Pew Charitable Trusts.

However, as per the report, South Carolina's savings account was set to take a hit in 2022.

In the last fiscal year, buoyed by the budget surpluses, thanks to higher than expected tax revenue growth and one-time federal aid, the state was sitting on $1.7 billion worth of rainy day funds. Researchers estimate that the fund will decline to $1.2 billion this fiscal year, as per data in the report. The 2022 fiscal year started on July 1.

That means that the strength of the rainy day budget, measured by the number of days the government could run if all it had was the rainy day budget money to funds its services, had declined. While in 2021, the state could run for just over two months− 74 days, to be specific.

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In 2022, that strength had declined as the state would only be able to run for 42.6 days.

Researchers collected their data from the "The Fiscal Survey of the States,” submitted by the National Association of State Budget Officers. The report, however, said that it was expected that revenue estimates could change, and for South Carolina, they did.

Earlier this year, the SC Board of Economic Advisors revised their revenue estimates and said that the rainy day fund would actually have $1.5 billion more than the earlier estimate of $1.2 billion.

"Pew provides a lot of valuable information," Frank Rainwater, Executive Director of SC Revenue and Fiscal Affairs said. "But I think a limitation of this report was they had to use projections that were available at the time. It appears that actual data from South Carolina showed better fiscal results, and we would have had a better score in their calculation had they been able to use more recent data."

A Sept. 2022 Moody Analytics report did a budget stress test to assess whether states were prepared for recessionary shocks.

South Carolina does not have enough savings in its rainy day funds to weather a moderate recession without having to resort to severe spending cuts or tax increases to close the potential budget gaps to come. According to the report, only 18 states, not including SC, have sufficient funds set aside to weather a moderate recession.

Those are the facts confronting voters are they step out to vote. As of Nov. 2, 11% − 383,063 of South Carolina's 3.7 million registered voters have stepped early into polling stations to cast their vote.

The urgency of reworking South Carolina's rainy day funds

The concept of rainy day funds or "economic stabilization funds" grew in popularity after the Great Recession between 2007 and 2009. Several states took massive hits to their ability to generate revenue and had to resort to emptying their coffers and making mid-year budget cuts to get by. Since then, the COVID-19 pandemic and the ongoing inflation crisis have only contributed to further economic challenges.

The state's rainy day funds have grown consistently over the last two decades, and so have its strengths to weather crises. For instance, in the 2009 fiscal year, in the thick of the recession, the state had emptied its reserves. In the year before that, the government would have run only for five days on the amount of reserves it had.

Compared to that in the fiscal year 2020, during another financial crisis, the state could run its operations for 49.9 days, and that grew to 74 days in the last fiscal year.

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However, the inflation crisis in the past few months has added to uncertainties.

"So many temporary factors like higher than forecasted tax revenue growth, and historic but one time, federal aid helped drive up record reserves across the states," Theal said. "But that trend is not expected to continue at the same pace through the end of this budget year."

While states have experienced unexpectedly strong financial conditions over the last two years, Theal said, policymakers are now facing this crucial inflection point where they would have to grapple with challenges, like the weakening economy as the Federal Reserve raises interest rates to get a handle on historically high inflation.

Meanwhile, the federal COVID-19 aid that came through is set to expire in the next couple of years. "So those are very real concerns on the minds of policymakers these days," Theal said.

As of now, the state's rainy day fund is the 25th strongest across the states. A near mirror image of the national trend, Theal said, and about the middle of the pack compared to Georgia and North Carolina.

Earlier this year, the General Assembly voted to add the two constitutional amendments to the ballot. Rep. West Cox, R-Anderson, who was the lead sponsor of the effort, had said back in February that it had become more and more expensive for the state to maintain essential government services.

"Our state is on sound financial footing due to the robust economy created by the citizens of South Carolina and the work of this legislature to ensure that we wisely appropriate tax revenues,” Cox said back then.

Though the measure passed with a majority, dissent came from Senate Majority Leader Shane Massey, R-Edgefield.

While he agreed with the increasing the "General Reserve," which would act as the primary stabilizing fund, was beneficial for the state. He was unsure about the Capital Reserve Fund since, despite the name, the money wasn't always used on capital projects such as building or road improvements, he said.

"This is a trick," Massey had said back then. "The capital reserve fund is not really a reserve fund. All that does is you keep it for a year before you figure out which projects you want to spend it on,” he said.

Massey said that lawmakers instead should put all the money in the General Reserve Fund.

In fiscal year 2021, the state had reserves worth $1.7 billion, as per data collected by Pew Charitable Trusts.

House Speaker Murrell Smith, R-Sumter, said in an October press release that a “yes” vote on the two upcoming constitutional amendments was a vote for fiscal prudence. "By boosting the rate requirements of our revenues to the General Reserve Fund and its Capital Reserve Fund, we will be better prepared for economic downturn, natural disaster, or budget shortfall," Smith said.

This article originally appeared on Greenville News: SC's reserves declined in 2022, voters to decide if SC will save more