Rainy Day Funds: What Counts As Rain?

When it comes to tapping into rainy day funds, how much rain makes a day rainy? What justifies tapping into reserves? That’s the question the Pew Charitable Trusts seeks to address in its latest report, When to Use State Rainy Day Funds.

Despite most states experiencing strong revenue growth from fiscal 2003 to 2007, 22 states made withdrawals from their reserves at least once. Then when the Great Recession took a brutal toll on state coffers from 2008 to 2010, eight states did not tap into the rainy day funds at all.

Flawed withdrawal policies may be to blame, Pew opines. Pew examined 47 states’ withdrawal policies, and found that a significant number of states have unclear policies for when to make withdrawals. Six states, including Maryland, have no policies governing when to make withdrawals at all. Most states – 29 – do not have policies which allow for consideration of revenue or economic fluctuations when tapping into their rainy day funds.

At any given time, a number of considerations may factor into policy makers’ decisions over whether to tap into rainy day funds. The report cites Maryland lawmakers’ fear of a credit downgrade:

Lawmakers often cite their state’s creditworthiness as a reason for not withdrawing from their budget stabilization funds. During the Great Recession, Maryland’s stabilization fund stayed at about 5 percent of general fund revenue. As former Maryland Senator Barbara Hoffman noted, the state uses its Revenue Stabilization Account as more of a fail-safe, in part out of a desire to maintain its credit rating. “We don’t spend it, and that’s one of the reasons we have a triple-A bond rating in this state.”

In Maryland, the Governor may transfer funds from the Revenue Stabilization Account to the general fund “as necessary to support the operation of State government on a temporary basis,” so long as the General Assembly blesses the transfer, and it does not cause the account balance to drop below 5.0 percent of the estimated general fund revenues for that fiscal year.

Rather than focusing on withdrawal policies, Maryland has taken steps this past session to address budgeting around economic volatility by saving more conservatively. On March 31, Governor Larry Hogan signed into law House Bill 503, which codifies an approach recommended by The Department of Budget and Management, the Comptroller, and the Department of Legislative Services in their November 2016 report, Report on Revenue Volatility and Approaches to Reduce Risk to the State Budget.

The new law requires that the Revenue Stabilization Account or the newly established Fiscal Responsibility Fund receive a share of nonwithholding general funds above a cap that is based on the 10-year average nonwithholding revenues’ share of total general funds. Revenues from the Fiscal Responsibility Fund may only be appropriated in the second following fiscal year to PAYGO capital projects for public school construction, public school capital improvement projects, capital projects at public community colleges, and capital projects at four-year public institutions of higher education. The bill also specifies it is the State’s goal that 10.0 percent of estimated general fund revenues in each fiscal year be retained in the Revenue Stabilization Account.

Helpful Links

Pew: When to Use State Rainy Day Funds

Link to the Pew report

Report on Revenue Volatility and Approaches to Reduce Risk to the State Budget

Prior Conduit Street coverage on Maryland’s efforts to address economic volatility

House Bill 503: State Budget – Appropriations – Income Tax Revenue Estimate Cap and Revenue Stabilization Account