Pennsylvania’s tendency in recent years to cover deficits through borrowing has led to a failure to build up a rainy-day fund and puts the state in danger of not being able to weather a future recession, according to a recent study.

A study by Moody’s Analytics stress-tested all 50 states to determine if their reserve funds were adequate to get through a moderate recession without severe fiscal pain. Pennsylvania’s reserve fund in 2017 was equivalent to negative 1.8 percent of revenues, and the analysis found the state needs at least 6.9 percent to weather a moderate recession.

“At the end of the [fiscal] year, they had a negative general fund balance, so they had a deficit,” Dan White, head of fiscal policy research at Moody’s Analytics, told Watchdog.org. So the state borrowed from fiscal 2018 funds to cover the gap, White said.

The Moody’s Analytics study found that Pennsylvania needed a smaller percentage of funds in reserve than many other states because both the state’s economy and its tax structure are stable. The economic stability may not be due to diversity in the state economy, White said.

“I would say it’s not necessarily more diversified, but it’s very heavily concentrated in areas that are relatively stable and are growing well regardless of the business cycle,” he said, adding that education and health care are among those economic sectors.

The Moody’s Analytics study identified 15 states that were in the danger zone in terms of inadequate reserve funds.

“The best advice I can give anybody, and this is the advice I’m giving the majority of state legislators I meet lately, is that the next two years, from an economic standpoint, are going to be as good as we’re going to see for a while,” White said, emphasizing that now is the time to take steps to build up rainy-day funds to weather future downturns.

Bob Dick, senior policy analyst with the Commonwealth Foundation in Harrisburg, characterized the fiscal state of Pennsylvania as poor due to a failure to control spending. But there are solutions, Dick said.

“One way to accomplish this is by the Taxpayer Protection Act,” he told Watchdog.org. If that legislation, which passed the Pennsylvania House last year, had already become law, the state would be running a surplus and would have been able to build up a rainy-day fund, along with offering some tax relief, Dick said.

The Taxpayer Protection Act calls for limiting annual growth in state spending to the rate of inflation, unless 75 percent of state lawmakers decided to exceed that limit.

“We must ensure we’re not going to taxpayers and asking them for more money,” he said, adding that Pennsylvania needs to reduce the scope and size of state government as well as address such issues as fraud and abuse.

Dick agreed with White that Pennsylvania’s economy has a tendency to resist some of the effects of recession.

“Pennsylvania is one of the last states to go into a recession and one of the last states to leave a recession,” he said.

Concern remains about the long-term health of the state due to a failure to address cost drivers such as education and pensions in the state budget, Dick said.

“If the state had been controlling spending, we wouldn’t have been seeing multibillion-dollar deficits,” he said.

In taking steps to cut spending and build up reserves, however, Pennsylvania needs to protect any rainy-day fund from exploitation by politicians, according to Dick.

“We need to make sure it’s not used for politicians to increase spending based on political whims of that fiscal year,” he said.

Matt Knittel, director of the Pennsylvania Independent Fiscal Office, also described the state’s lack of a rainy-day fund as a concern.

“It should be on policymakers’ radar screens,” Knittel told Watchdog.org.

The Independent Fiscal Office projects that the state will have a $79 million surplus for this year – after lawmakers passed a revenue package a month-and-a-half ago. In the following fiscal year, however, the IFO expects the state to run a $1 billion deficit.

To address that deficit, “something would need to be done, either spending curtailed or taxes increased,” Knittel said.

He also pointed to a five-year IFO budget outlook published in November that examined the state’s vulnerability in a future recession. If a recession struck at a time when general fund growth was projected at 3 percent, the downturn could cause an actual decline in revenues of 2 percent, creating an overall annual impact of $1.7 billion, the IFO report says.