Planning for the next rainy days

Vermont, along with many other states, still hasn’t recovered from the Great Recession, but it’s not too soon to start preparing for the next slump. The problem in the last recession—as in the recessions of 1981, 1990, and 2001—was that the economy slowed and tax revenues fell at the same time Vermonters were turning to state government for help.

Unfortunately, Vermont’s response was: Businesses are cutting back. Families are cutting back. Government will have to cut back, too. But as New Hampshire Gov. Maggie Hassan said recently in her Inaugural Address: “ Needs do not go away simply because we don’t fund them.”

State policy makers should develop a plan for how they will provide the additional help Vermonters will need the next time the economy tanks and revenues shrink.

A healthy savings account is a good place to start. Sadly, Vermont had three such accounts—known as stabilization reserve funds—totaling more than $100 million when the recession hit, but the administration and the Legislature refused to use the money and decided to cut services instead.

A report just released by the Center on Budget and Policy Priorities in Washington, D.C., points out the importance of putting money aside for economic downturns. The Vermont Legislature did create a new “rainy day fund” last year that could help the state be better prepared for the next recession. But adopting some of the CBPP’s recommendations would make for a stronger and more useful fund.

• There should be regular appropriations into the new fund as soon as the economy improves. Currently, a portion of any year-end surpluses goes into the rainy day fund, which means funding could be hit or miss.
• The goal should be to put aside an amount equal to at least 15 percent of the General Fund, which would be about $195 million in this fiscal year. The Legislature capped the new fund at 5 percent of the General Fund—about $65 million—which would have covered only the first of Vermont’s last five budget gaps.
• The funds should be accessible in times of need. The Legislature and administration resisted calls for using existing reserves during the worst of the Great Recession by saying that they needed to hold onto the money in case the recession got worse.

Now that the economy appears to be slowly picking up, many of these same leaders seem pleased that they didn’t use the reserves. While they couldn’t have avoided all of the cuts made in the last five years, they could have mitigated the worst of them. Before Vermonters get caught in the next downpour, policy makers should make sure adequate funds are set aside but, more important, they need to agree on how to read the weather report so there’s no argument about whether or not it’s raining.