Maine has twice as much money in reserves as it had at the start of the Great Recession, enough to weather one or two years of a new economic downturn.

That’s the finding of a recent “stress test” of the state’s revenues and reserves, a requirement of the last biennial budget.

The $273 million Maine has in its budget stabilization fund – the most on record – could cover revenue shortfalls caused by a moderate recession for almost two years and support the budget for one year in a serious economic downturn. But it is not enough to offset revenue shortfalls over a five-year period, the study found.

Almost all $129 million the state had on hand in 2009 was spent to prop up the budget that year.

The state’s Consensus Economic Forecasting Commission and Revenue Forecasting Committee said in its October report that the state’s fund “is not sufficient to fully offset the revenue shortfalls estimated as the result of a moderate or severe recession” but would “provide the governor and Legislature time during the early stages of the next recession to make changes necessary to bring the budget back into balance.”

This is the first time Maine has tested its financial stability in the case of an economic downturn, a policy adopted by a growing number of states following the Great Recession that started 10 years ago.

“One of the issues that keeps coming up is that states should be preparing,” said Michael Allen, associate commissioner for tax policy at the Department of Administrative and Financial Services. “One way is to stress test their revenues. That could be a helpful guide to policy makers to decide just how much of a rainy day fund they might need.”

Although the stabilization fund is often referred to as the “rainy day fund” it is supposed to be used only to offset revenue shortfalls, not as a piggybank for state spending.

By law, a large portion of annual revenue surpluses are deposited into the fund, which is not supposed to be more than 18 percent of the state’s general fund revenue, which is about $646 million.

Outgoing Republican Gov. Paul LePage has touted deposits into the stabilization fund over his eight-year tenure. When he took office, the fund was “zeroed out” by the Great Recession and now it is at the highest level in the state’s history, spokeswoman Julie Rabinowitz said.

“Having a sufficient stabilization fund balance is essential to good governance,” she said. “It ensures that, during a financial downturn, the Legislature would not be forced to cut program funding indiscriminately; but rather would have a cushion to moderate spending reductions if revenues decline.”

LePage also wants the state to dedicate money to the fund annually instead of hoping for deposits from a budget surplus.

While the state has to put most of its yearly revenue surplus into the stabilization fund, it also has to balance it against present needs, said Rep. Drew Gattine, D-Westbrook, House chair of the Appropriations and Financial Affairs Committee.

“If you have bills you are not paying, is it really a smart idea to put money into your savings account?” Gattine said.

“We have to protect revenue, we need to make smart decisions on the taxation side,” Gattine added. “The Maine people have told us over and over again that they think people need to have access to health care and we need to fund their schools – we need to take that into account.”

TWO SCENARIOS

For the stress test, state analysts hypothesized the effects on state revenue based on falling wages and salaries, personal income and employment in a moderate and severe recession.

In a moderate recession scenario starting next year, the state would lose about 10,000 jobs and wages and salaries would fall by about 5 percent, but jobs and wages would rebound within five years. In that example, the state would have enough in its stabilization fund to maintain its budget without cuts for about 18 months.

A severe recession would hit the state much harder, according to the state analysis. In that scenario, Maine could lose as many as 38,000 jobs – a little more than 6 percent of all jobs – and see wages immediately decline by more than 7 percent. Recovery also would be much slower, and the state would not regain lost jobs or income within five years. The cash Maine now has on hand would be enough to cushion the budget for just over a year in that example.

In both cases, lawmakers and the administration have breathing room to resolve budget problems, Allen said.

“If you don’t have anything, you are probably immediately cutting spending and raising taxes at the worst possible time, when the economy is in a deep recession,” Allen said.

Maine is one of 11 states that have conducted financial stress tests since the Great Recession. Before 2008, only Minnesota had done a test, according to Pew Charitable Trusts.

In the last five years, Pew has advocated that states pay attention to their reserves and plan for an economic downturn, said Steve Bailey, associate manager of fiscal policy at Pew.

Last year, 26 states, including Maine, had rainy day savings that surpassed pre-recession levels.

“There has been a lot of progress about states thinking about their unique revenue situation and how much they need to put aside,” Bailey said.

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