With fears of a recession in the next year continuing to grow, state leaders must start taking the necessary precautions to ensure that their states will be ready to endure the financial downturn. Without proper preparation, state lawmakers risk exacerbating the impact on taxpayers, who are already suffering from the sky-high inflation caused by President Joe Biden’s spending spree.  States that are unprepared for a recession are likely to seek a federal handout, costing taxpayers across the country billions of dollars.

Thankfully, many states are already taking steps to blunt the impact of a future recession.  A May 10, 2022, Pew Charitable Trusts report found that in fiscal year 2021, 35 states increased their emergency funds, bringing the total amount held in reserve to a record-high of $114.6 billion across the 50 states.  Despite record reserves, many states remain woefully unprepared for a recession.  

As Citizens Against Government Waste (CAGW) has noted, the mere presence of vast reserves does not mean that states will tap into them.  Indeed, by deciding to wait for federal aid, few if any states tapped into their reserves during the COVID-19 downturn.  Instead, state and local leaders relied on trillions of dollars in federal government assistance and many saw their reserve accounts increase.  

The federal response to the COVID-19 downturn shows the negative impact vast amounts of federal aid can have on the economy.  Observers from across the political spectrum have recognized the role that President Biden’s American Rescue Plan Act (ARPA) has had on the worst inflation in 40 years, which has had a devastating impact on families and businesses.  The money from the Inflation Reduction Act will prolong inflation while continuing to decimate state finances.

Flush with cash, many states and localities dumped money into projects that are either unconnected to economic recovery or will be unsustainable once federal funds dry up.  ARPA “recovery funds” have been spent on unrelated projects like a city-run nature center in McAllen, Texas, and synthetic turf high school sports fields in Pulaski County, Kentucky, among many other examples.  This decision to spend federal “relief” money on unrelated projects is not unique to the COVID-19 pandemic. 

A May 11, 2020, Reason Foundation report found that education funds from the American Rescue and Reinvestment Act (ARRA), the Obama administration’s $840 billion response to the Great Recession, were used on programs “like professional development, driver training for ninth graders, and gifted and talented education” in North Carolina.  However, once these funds dried up, state taxpayers were left on the hook to continue paying for programs that would not have been created or supported absent federal aid, and there will be a similar result from the ARPA spending.

Federal reserve funds also come with strings attached.  CAGW’s February 2022 report “Federalism and Federal Grants” documented several ways in which conditions on federal funds have been used to force states to adopt partisan policy priorities in exchange for relief.  For example, the Department of Agriculture’s evaluation criteria for the ReConnect Loan and Grant broadband program gave preference to applicants who “commit to net neutrality principles” and the failed Build Back Better Act would have forced states to prioritize “equitable outdoor access” for “underserved groups” when spending grant money.  In many cases, this system of coercive federalism has forced states and localities to spend money into projects that they would not usually support or lack the resources to maintain after federal funding dries up.

There are several steps state leaders can take to stymie the impact of a recession and emerge in a stronger financial position.  First, lawmakers at the state and local level must ensure that outstanding federal aid from the COVID-19 pandemic is spent effectively and efficiently and if they are permitted to retain any balance of unused money, add it to their emergency funds.  Second, lawmakers should invest in projects that will benefit taxpayers directly.  Finally, they should use their reserves before asking for a handout from the federal government.  As ARRA and ARPA have shown, federal funds billed as “relief” can do more harm than good.  If states use the money they have before requesting federal assistance, they can provide both short- and long-term relief to taxpayers. 

With proper preparation, states can ensure their finances, and those of their citizens, emerge with minimal damage should a recession occur.  A properly planned, state-based response will increase the chances that taxpayers will receive targeted, localized help that does not leave them on the hook for unsustainable projects or federally mandated partisan programs as they work to recover from a recession.