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Need for Rainy Day Fund Critical to Stability of Finances

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By Lowell L. Kalapa

Back when the state was rolling in greenbacks, the 1990 Tax Review Commission criticized state officials for holding on to substantial surplus dollars in the state general fund on the basis that such surpluses were needed to guard against bad times.

Although the commission recommended that a special “rainy day” fund be set up to obviate the argument that public officials needed to hang onto surplus tax dollars, that idea, like many other recommendations of the commission, was ignored. Of course, hindsight is far more clear than foresight. Looking back, had taxpayers demanded that lawmakers implement the rainy day fund when the state had money, they would not be as hard pressed as they are today to find the funds to keep the doors of government open.

But that is water under the bridge. The question is whether or not lawmakers should pursue the establishment of a “rainy day” fund. After all, the administration has indicated that it wants to put away some of the tobacco settlement windfall into such a fund. While putting the money into a savings account is a good idea, the idea is only as good as the assurance that the fund will not be raided in the future for less than appropriate purposes.

Given the experience with the prior administration which set up all sorts of special funds into which they stashed general fund revenues, taxpayers are cynical when it comes to the concept of special funds designed to retain tax dollars. However, based on the tax review commission’s recommendation, if the “rainy day” fund is constructed carefully, it can serve the taxpayer well by expunging any and all reasons for government to hold on to excess tax dollars.

The concept of a “rain day” fund is to set aside moneys when times are good for the state that then can only be used when there are insufficient funds to insure the health, safety, and welfare of the community. A good “rainy day” fund would require that a super majority of the legislature be required to approve any expenditures from the fund. A good “rainy day” fund would be capped at a certain level to insure that it doesn’t just become a slush fund to store surplus funds. This cap can be set as a percentage of general fund receipts so that the absolute number of dollars will be allowed to grow as the economy that produces those revenues grows.

A good “rainy day” fund should provide that lawmakers must put away funds when times are good and not use the excess funds to expand the size of government. For example, it has been deemed prudent that the general fund realize a balance of 5% of revenues to insure fiscal soundness for bond holders. The “rainy day” fund provisions could require that all or a part of the funds in excess of that 5% threshold be appropriated into the “rainy day” fund.

Inasmuch as the state constitution provides that taxpayers get a refund whenever the general fund balance exceeds 5% of revenues for two consecutive years, not all of the funds in excess of the 5% threshold should be plopped into the rainy day fund.

Another consideration in constructing the fund is how it would interact with the state expenditure ceiling. Inasmuch as the funds are coming out of the general fund, should that transfer or appropriation be counted against the ceiling? Similarly, how would expenditures from the “rainy day” fund affect the spending ceiling if those expenditures are being used to continue providing public services.

It would appear that when money is being put away for savings in the “rainy day” fund, it is NOT an appropriation for public programs and therefore should not be counted against the ceiling. On the other hand, if appropriations from the “rainy day” fund are being spent on public services and programs, then that means those dollars are buying more “government” and should be counted against the ceiling.

Finally, the list of purposes for which lawmakers can use the money in the “rainy day” fund should be explicit. No salary increases, no legislative costs, and no additional hiring of personnel should probably head the list of purposes for which lawmakers cannot use those moneys. And what happens when the cap on the rainy day fund is reached? Next week we will take at a look at the mandated refund provision.

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