Missouri isn't saving enough money to avoid having to cut spending or raise taxes if there is a recession, state Auditor Nicole Galloway said Tuesday.
Galloway recommended that state lawmakers increase the amount in Missouri's Budget Reserve Fund to the maximum allowed under the state constitution and create a separate account to sock away even more money.
"Missouri is woefully unprepared for an economic downturn," she said.
Galloway is seeking the Democratic nomination to challenge Republican Gov. Mike Parson in the 2020 election, though the audit report was released in her official capacity.
A constitutional amendment adopted by voters in 2000 limits Missouri's reserve fund to 7.5% of net general revenue, or 10% if lawmakers approve a special appropriation for it, which they have not done.
As a result of the cap, Missouri started the 2020 fiscal year in July with $642 million in the reserve fund. Missouri's total state operating budget is $29.7 billion.
Galloway pointed to a 2018 study by Moody's Analytics that estimated Missouri would need almost $1.3 billion in reserve to survive a moderate recession without cutting spending or raising taxes, or about $2 billion to survive a severe recession.
Missouri's reserve fund can be used for two purposes. The governor's administration can tap into it for cash flow, so long as it is repaid during the same year — something that happens frequently. Lawmakers also can borrow from the fund in emergencies, so long as it is repaid over three years — an option that has never been used.
Galloway suggested that lawmakers pump up the fund to the maximum 10% of net general revenues. But because the fund is routinely tapped for cash flow, she also suggested the creation of a separate fund to ensure there is enough money during a recession. Money for that could come from existing revenue or growth in state revenue.
"I think this has to be a high priority," Galloway said. "When we're in the middle of an economic downturn, that's when it's too late, and we all know one is coming."
A survey of business economists released earlier this month forecast little likelihood of a recession over the next 12 months but a 69% chance of a recession beginning by mid-2021.
Senate Appropriations Committee Chairman Dan Hegeman said he was open to discussing putting more money into the existing reserve fund, though he said it already contains a "substantial amount of money that would carry us a long way through a problem."
Hegeman, a Republican from Cosby, was skeptical about creating a second fund to save even more money.
"Some would say you shouldn't collect taxes to just build fund balances — just to have the government have a lot of money — when the citizens could keep their wealth themselves. That's a fundamental tax philosophy," he said.