Moody’s Analytics has run a fiscal stress test “to gauge the potential fiscal shock that could be in store for states in the COVID-19 economy.” The test considers revenue shortfalls and increased Medicaid spending and finds that in the baseline scenario (in which business and travel restrictions are lifted in the second quarter of 2020), the fiscal shock to Washington is -$3.507 billion (15.8 percent of FY 2019 revenues). For the sum of states, the fiscal shock is -$157.837 billion (17.9 percent of FY 2019 revenues).

In the more severe scenario (in which restrictions are lifted in the third quarter), the fiscal shock to Washington is -$4.373 billion (19.7 percent of FY 2019 revenues). For the sum of states, the fiscal shock is -$203.262 billion (23.1 percent of FY 2019 revenues). According to Moody’s, for some states, the potential fiscal shock “would be equal to around twice the level of fiscal shock absorbed during the Great Recession. At least in modern times, we cannot find an example of such large amounts of potential stress over such a short time.”

Given Washington’s rainy day fund balance in FY 2019, Moody’s estimates that the state would use the entire balance and still need to cut the budget by 8.3 percent in the baseline scenario (the 24^th best position among the states). In the severe scenario, Washington would use up the rainy day fund and still need to cut the budget by 12.2 percent (the 25^th best position).

(Note that our rainy day fund balance at the end of FY 2019 was $1.618 billion. When the Legislature passed the 2020 supplemental this year, the fund was expected to have about $1.979 billion at the end of 2019–21. That accounts for the appropriation of $200 million from the rainy day fund for COVID-19 costs. However, it also assumes that the constitutionally-required annual transfer of 1 percent of general state revenues to the rainy day fund will total $505 million for the biennium. Given the downturn, it is unlikely to be that high.)

Moody’s finds that “states in the aggregate will not be able to avoid severe spending cuts or tax increases without additional support from the federal government.” They estimate that

it will require at least $200 billion in additional aid to state governments to get through the next state fiscal year without the weight of state budget cuts or revenue increases slowing economic growth. To get through fiscal 2022, that level of support to states grows to roughly $300 billion.

(Governors have asked Congress for $500 billion, on top of the $150 billion that has already been appropriated for states and some local governments. It doesn’t look like additional funding for governments will be part of the aid bill that could be passed by Congress this week.)

Additionally, Moody’s notes,

In general, those states relying on more volatile revenue streams, for example oil and gas severance taxes or very progressive forms of personal income taxes, see greater levels of fiscal stress in each of the two scenarios. Likewise, states with a heavy concentration in those industries most affected by the COVID-19 shutdowns, such as tourism, finance and energy, see greater levels of economic stress that translate into greater budget volatility.

In both scenarios, Washington’s fiscal stress levels fall in the middle of the states, reflecting our less volatile tax structure and our industry mix.

Moody’s has been running stress tests like this for the past several years (see here for what their Fall 2019 analysis found for Washington). They run alternative economic scenarios through models to see how they would affect state revenues and spending. As Moody’s notes, “the figures represented in this analysis are intended to help measure the potential magnitude of fiscal stress that states will experience, and are not a direct reflection of a state’s ability to weather that level of stress.” They recommend that each state run its own stress test to incorporate more detailed information.

Pew also recommends budget stress testing:

Budget stress tests help states estimate the potential financial shortfalls that could result from adverse events—a dramatic economic downturn, for example, or an outbreak of illness, such as the one caused by the novel coronavirus. Policymakers can use this data to plan ahead, helping to avert or limit a fiscal emergency and keep long-term priorities on track.

Similarly, stress tests can be used to more precisely target reserve levels for individual states. Several states are already using stress testing as part of their budget processes. For example, last year the University of Utah and the Utah Office of the Legislative Fiscal Analyst released a good overview of how Utah uses stress tests:

Like routine budget forecasting, Utah’s budget stress exercises are a consensus endeavor between the executive and legislative branches and follow a similar sequence, encompassing four major steps:

1. Defining the period of analysis and economic assumptions for stress scenarios.

2. Identifying and estimating the value at risk for both revenue and expenditures under stress scenarios.

3. Inventorying and categorizing reserves and other contingencies by ease of accessibility.

4. Comparing total value at risk to total contingencies to evaluate the sufficiency of these contingencies and overall resilience of the state budget.