Public Assets Institute > Policy Areas > Vermont Budget > Time to Rethink the Rainy Day Funds

Time to Rethink the Rainy Day Funds

In his budget address in January, Gov. Peter Shumlin urged the Legislature to increase the state’s reserves as soon as the economy improves and Vermont can start saving again. He’s on the right track. This recent recession has shown that Vermont’s rainy day funds are not adequate to respond to a serious economic collapse. But there is more the Legislature should do to update these reserve funds. One place they can look for guidance is a new report published by the Center on Budget and Policy Priorities in Washington, D.C., Why and How States Should Strengthen Their Rainy Day Funds.

Vermont’s reserve funds date back to the late 1980s. The General Fund, Transportation Fund, and Education Fund each has a stabilization reserve or “rainy day” account. By law, the amount in the reserves is not to exceed 5 percent of the fund’s prior year appropriation—although the Legislature can make exceptions. The General Fund appropriation for fiscal 2010 was $1.087 billion, so for this year there is $54.37 million in the General Fund rainy day account.

That’s less than a third of the $176 million budget shortfall the state faces for fiscal 2012. And $54 million would have replaced only a portion of the cuts the Legislature has made in the last three years.

The governor recommended that the Legislature raise the limit on the reserve funds to 8 percent of the previous year’s appropriations. But given the size of the problems Vermont and most other states have struggled with recently, the Center on Budget and Policy Priorities suggests that states should aim for reserves equaling 15 percent of annual appropriations. In Vermont’s case, that would be about $172 million in General Fund reserves based on today’s spending.

Rather than a cap, the Center suggests that states set targets. If Vermont had a target of 15 percent, the Legislature would have the flexibility to put aside more than that when revenues were particularly strong.

The Legislature also needs to establish clear guidelines for when the rainy day funds should be used. These funds were created in response to the recessions of the early 1980s and the early 1990s, when the state ran up big budget deficits to provide services that people need when the economy collapses. They were intended to fill some of the gap when a recession drives revenues down and the demand for service up.

Now, more than three years after the start of the worst recession since the Great Depression, Vermont is still hanging onto its rainy day funds, while many other states are using their reserves as intended. According to the Center’s report, 29 states have used as least half of the reserve funds they had on hand in 2006, either in designated rainy day accounts or General Fund balances. The report also challenges the assertion made by some Vermont officials that using the reserve funds will hurt the state’s bond rating.

There is no point in increasing these reserves to 8 percent, let along 15 percent, if we’re not going to use them. We’re cutting back on critical services now and making it harder for many Vermont families to care for elderly and disabled relatives. What a shame it will be to put them through all of this hardship while the state sits on $55 million that was meant to be used in situations just like this.

If Vermont had larger reserves—and tapped them when tax revenues shrank—we could better manage state government and see to Vermonters’ needs during future recessions.

Posted by Jack Hoffman on March 7, 2011 at 10:23 am

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