Looking in the rear view mirror: Comparing the Great Recession to today

June 16, 2020

By Shelby Kerns, Executive Director of the National Association of State Budget Officers (NASBO). Prior to joining NASBO on March 30, she spent a decade at the Idaho Division of Financial Management. Most recently she served as Deputy Director of the Idaho Department of Labor.

There’s been a great deal of news about the state budget crisis descending upon us in the wake of the coronavirus outbreak. No one knows what will happen, but one of the best ways to forecast the future is to understand the past. As a long-time budgeter and the new executive director of the National Association of State Budget Officers, I’ve endeavored, in the following blog, to give readers a broad, accurate background of the road that brought us to our current status.

The Great Recession was a grim time for state budgets. As the unemployment rate increased by 5.3 percentage points from November 2007 to its peak at 10 percent in October 2009, total state general fund revenue fell 8 percent in fiscal year 2009 and 2.65 percent in fiscal year 2010. Over the two-year period, states lost more than 10 percent of the revenue they rely upon to provide essential government services.

Despite federal aid in response to falling revenue, states were forced to make cuts to all areas of government. For example, to balance FY 2010 budgets, 35 states made mid-year cuts to elementary and secondary education, 37 to higher education, 37 to corrections, 31 to Medicaid, 22 to public assistance, 21 to transportation, and 38 in other areas.

Over the next decade, states applied lessons from the difficult years of the Great Recession. They had learned that they needed more money in the bank to weather an economic “rainy day” and states increased savings to an all-time high. In fact, going into the current crisis, a significant majority of states had higher reserve or “rainy day” fund levels as a share of their budgets than they had leading into the Great Recession. 

States also increased spending slowly, to help ensure they were living within their means. After those steep declines during the Great Recession, state general fund spending had just barely returned to inflation-adjusted pre-recession fiscal 2008 levels in fiscal 2019 in the aggregate. Half of the states still spent less from their general funds in fiscal 2019 than they did in fiscal 2008, after adjusting for inflation.

While the next downturn was never far from our minds and preparing for it was a hot topic of conferences, seminars, and internal meetings, the assumption was always that it would not be as severe as the last one. “That was the Great Recession,” we would say, “it’s called that for a reason.” The next recession was discussed as one that would be less deep and less protracted.

In February 2020, when my appointment as Executive Director of the National Association of State Budget Officers (NASBO) was announced, unemployment was at a 50-year low of 3.5 percent, and state revenues were on track to grow for a 10th consecutive year. Most states had multiple consecutive years of faster-than-expected revenue growth, leading to sizeable budget surpluses in many cases. 

Governors were in the midst of proposing their budgets for the coming fiscal year. They were focused on investing in key priorities while at the same time continuing to be cautious about taking on too many new ongoing spending commitments, in preparation for the next downturn. 

Then came COVID-19. In record time national unemployment hit 14.7 percent, the highest level since 1967 when data began to be tracked; travel and tourism ground to a halt; retail sales plummeted; and state and local governments shed 1.5 million jobs. Unlike the Great Recession, a more typical recession, which the U.S. was in the midst of before it was officially declared, states knew closing non-essential businesses would result in an economic downturn. But when faced with protecting public health and safety, there were few good options for governments. 

As a result, the revenues that states and territories depend upon to provide essential services, ranging from educating students to providing medical assistance to keeping communities safe, experienced a sudden and steep decline. Updated state revenue projections for the coming fiscal year show declines of 12, 18, 20, and even 30 percent, eclipsing what we experienced in the Great Recession. 

While it’s useful to look back at lessons learned from the Great Recession, there are also key differences with the current situation, as a public health crisis is layered on top of the present recession. States’ responses are evolving along with the pandemic and economic conditions, and I am sure there will be a new set of lessons learned from states’ experiences in 2020 and beyond.