One Way Local Governments Can Prepare for a Recession

By Nathan Ju

Since 1945, the United States has withstood 11 recessions identified by the National Bureau of Economic Research (NBER). But only less than a year after the shortest recession in history following the COVID-19 pandemic, the United States once again finds itself at the tipping point of another recession. However, throughout the past century, there has been substantial research done and defensive measures put in place by the government to protect its cities in anticipation of another period of economic downturn. 

Based on historical research, cities can best prepare for the potential recession looming over the country with rainy day funds.

The Effects of Recession and How to Survive Them

Recessions tend to lead to lower revenues and in turn higher rate of lay-offs and closures if not carefully planned. During the 2008 financial crisis, the United States lost a total of 8.6 million jobs, the GDP fell by 4.3%, and the national unemployment rate doubled to 10%. However, despite the grim statistics, there have been cases where businesses and cities were able to withstand the seemingly fatal damage of a recession. Amazon famously survived the 2000 dot-com crash through careful cash flow management and selling off $672 million in convertible bonds just weeks before more than half of its competitors went bankrupt. It was only with this cushion that Amazon was able to survive what likely would have been certain doom for the company. Similarly, states and cities can prepare for incoming recession by building their economic stabilization funds, or more commonly known as “rainy day funds.” 

Rainy day funds are used to provide cities with a grace period at the start of an economic downturn. This allows states to maintain programs and mitigate layoffs without increases in tax or cuts in spending. States can then use this time to decide what its next steps should be in order to lessen the impact of the downturn, how much time will it take before federal aid arrives, and create plans to help individual communities and citizens who may be at higher risk of being affected. In an article published by Smartasset, 5 of the top 10 most recession-proof cities were located in Texas. This achievement can be attributed to its $10.7 billion rainy day fund, allowing the state to maintain relatively high employment levels and home values while other states begin to crack under the pressure of the recession.

Rainy Day Funds Are Still Scarce, but Making Large Impacts Across the Country

Despite this, rainy day funds are still rare at local levels. In a study done by Pew Charitable Trust, it is stated that “among the governments of central cities in the 30 largest U.S. metropolitan areas, only 16 have funds codified in ordinance or statute. And some of these do not have concrete rules governing the funds’ use.” One city that maximized the use of rainy day funds during the height of the pandemic was San Antonio, Texas. Scott Huizenga, the director of management and budget of San Antonio stated, “We redirected funds to services that could help ease the pain of the pandemic, such as housing, health and emergency services.” Detroit, Michigan also exercised its rainy day funds, creating a workshare program that allowed employees to retain health benefits and collect unemployment insurance. Steve Watson, the budget director of Detroit stated that they had “begun preparing for the next recession by growing the rainy day fund and investing in improved revenue estimating programs.” Cities could greatly benefit from investing in a rainy day fund; a rainy day fund can help stabilize communities in the current post-pandemic environment and prepare cities for a potential looming recession in the following years.

Impact of Colu Technologies, Helping Cities Brace for Recession

Some cities in the United States have already begun working with tech companies such as Colu to stimulate local economies and help small businesses stay afloat during these uncertain times. By incentivizing users to shop at local businesses, Colu’s platform allows for cities to maximize their city budgets and prepare their rainy day funds. In an article written by AP News, it is stated by the U.S. Small Business Administration that for every $100 spent at a small business, $48 stays in the community. However, when the same $100 is spent at a big-box store or national retailer, only $14 stays. Colu’s push to motivate citizens to support their local businesses and governments has already proven great success in cities such as Akron, Ohio and Boston, Massachusetts, and San Mateo County, California

August 8th, 2022