Yesterday, Gov. Inslee signed EHB 2965, which appropriates $200 million from the rainy day fund in response to the novel coronavirus outbreak. (I wrote in detail about the bill here.)

The Associated Press reports that other states are using their reserve funds for this purpose as well. Aside from the direct public health costs,

. . . states also are bracing for a potential ripple effect on their revenues. The cancellation of major sporting and entertainment events could mean less tax revenue from tourists and local residents. Directives to work and study at home instead of at offices, schools and colleges could mean less revenue from fuel taxes and public transit fares. And if some employees can’t go to work, that could put a damper on state income and withholding taxes while driving up spending for public welfare programs such as unemployment insurance and state Medicaid health care programs.

“It definitely has the potential to have a significant impact on state budgets — both on the spending and revenue side,” said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers.

“One positive, if you want to use that word, is that this is coming after a period where states have seen strong revenue growth for the past couple of years … and have been able to increase the size of their rainy day funds and reserves,” Sigritz added.

Indeed, Washington’s recent revenue growth has meant that our rainy day fund balance is the highest level it’s ever been, even after the $200 million appropriation. (That said, it would be even higher if the Legislature hadn’t directed millions of dollars away from the rainy day fund in recent years.)

Meanwhile, Pew notes that in this time of uncertainty states should maintain reserves lest circumstances require them to increase taxes or decrease spending. They give some good advice:

But how cautious should states be? No matter how events unfold, the current situation serves as an example of why policymakers need to think regularly about the resilience of their budgets. Circumstances outside the control of state governments—and that could have a significant impact on revenues and expenditures—tend to occur with little warning.

Pew recommends that states regularly perform budget stress tests:

Stress tests cannot predict how adverse events like those facing states today will play out, but they can help estimate the size of a budget gap under various scenarios. By considering a range of possible outcomes—from a milder impact to more severe—lawmakers can determine the amount of risk they are willing to accept.

As we’ve written, Moody’s has been preparing its own stress tests of states. Last year, they found that Washington was prepared for a moderate but not severe recession. Moody’s recommended, “To sufficiently protect their budgets and their economies from increased volatility and fiscal drag, state and local government policymakers should be investing in their budget processes and making stress-testing a higher priority.”