States may be playing budget roulette, a nationally prominent economic forecaster told officials from throughout the country at a convention of 7,000 legislators in this gambling state.
And the day of fiscal reckoning may be just 18 to 24 months away when the entire nation is drawn into a recession and state revenues fall dramatically, he said."We are going to have a recession probably by late 1989 or early 1990," said David Wyss, economic forecaster and vice president of Data Resource Inc., Lexington, Mass.
Wyss' dismal forecast was unveiled Wednesday during the weeklong National Conference of State Legislatures, and it caught most state officials, including those from Utah, off guard. About two dozen Utah lawmakers are among the 7,000 legislators from around the nation who are gathered in Reno to discuss common problems and concerns.
"With the scenario Wyss painted, there is no way Utah could get into financial shape in time," said William Asplund, assistant director of the Utah legislative research and general counsel. "Utah is going to be facing even more and greater budget cuts if that happens."
Utah currently has $30 million tucked away in a rainy day fund designed for such fiscal emergencies. But to ward off the effects of a deep recession, the state would need at least three to five times that amount in a reserve account.
Wyss' report was particularly bad news to the many states that traditionally spend budget surpluses - or play budget roulette - hoping that lean economic times will never catch up with them. Like most other states, Utah has been forced to play budget roulette.
"We have not been operating in a world of budget surpluses," said Robin Riggs, associate general counsel, Utah Legislative Research and General Counsel. "For four or five years we have been cutting budgets and raising taxes to balance. We are playing it on the edge. We are playing budget roulette like every other state is, but there is not a whole lot the state could have done differently."
Even with impending budget shortfalls, Utah is in $30 million better shape than 18 other states who have no rainy day funds. And Utah is slightly better off than some states, such as Connecticut, which had a huge rainy day fund only to spend the money on questionable programs and employee pay raises.
Utah has had a rainy day fund for two years. The first year the fund had a sizable amount, but Gov. Norm Bangerter and the Legislature used those funds in the 1988 budget. The current $30 million was put in the fund this year, but there is nothing that will prohibit state lawmakers from spending those reserve funds in the 1989 budget.
"That's always the problem with a savings account," said Asplund, "the temptation is to spend it. Or in some cases to give it back to the taxpayer."
Wyss told lawmakers a recession will cost state governments about $30 billion nationally. But Utah, he said, should fare much better than a majority of states.
"Utah doesn't feel the adverse effects of a recession as much as the rest of the country, nor does the state feel the positive effects of recovery to the same extent," explained Riggs. "Our economic cycles aren't as violent as most states. That helps us in the bad times."
The states that will be most hurt by a recession are the heavy manufacturing states in the Midwest and South, and the lumbering states of the Pacific Northwest. States that rely heavily on energy production will be hurt the least "because they are already depressed and it can't get any worse," Wyss said.
The effects of recession in Utah will likely be felt the hardest in the growing aerospace industry, especially if the federal government cuts defense spending significantly. Demand for steel also drops during a recession, and that could affect Utah's rebounding steel industry. Utah's agriculture should be affected the least.
How certain is Wyss that a recession is coming? About 25 percent certain, which for economic forecasters is about the greatest level of certainty they will ever offer. "There's a recession coming, maybe not next year, maybe not the year after, but it is out there."
Wyss said a combination of international economic factors beyond the control of any individual state is leading inevitably to a recession, despite the fact the country is currently enjoying its second longest period of economic grow ever. The recession will likely be fueled by rising interest rates, rising wage demands and double-digit inflation.
Utah analysts say its doubtful Utah will ever be adequately prepared to face a significant downturn in the economy.
"With the pressures of education on the state budget the state has been and will continue to be in a spend-what-you've-got mode," said Asplund. "There hasn't been an opportunity for Utah to put anything substantial aside. For five years there haven't been surpluses to save."
Sales tax revenues will also fall as people defer some purchases. Sales taxes fund almost all other state programs.