Rainy Day Funds and TABOR Iris J. Lav, Deputy Director Center on Budget and Policy Priorities ...
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Transcript of Rainy Day Funds and TABOR Iris J. Lav, Deputy Director Center on Budget and Policy Priorities ...
Rainy Day Funds and TABOR
Iris J. Lav, Deputy DirectorCenter on Budget and Policy Prioritieswww.cbpp.orgTaxing and Spending Limits in WisconsinRobert M. La Follette School of Public AffairsJanuary 19, 2005
State Tax Revenues DeclineDuring and After Recessions
Change from Same Quarter - Previous Year
-15%
-10%
-5%
0%
5%
10%
1991 1993 1995 1997 1999 2001 2003
Adjusted for inflation and legislated tax changes. Source: Rockefeller Institute of Government.
1990s Fiscal Crisis Lasted Three Years
2.80%
6.20%6.50%
0%
1%
2%
3%
4%
5%
6%
7%
1990 1991 1992
Budget Shortfall
Recession Ends
Source: National Association of State Budget Officers
This One was Deeper and is Moving Into its Fifth Year
2002 2003 2004 2005 2006$0
$25
$50
$75
$100
Billio
ns
State Fiscal Years
Note: In most states fiscal years run from July 1 to June 30.
RecessionEnds
Rainy Day Funds Help Handle Multi-Year Deficits Between FY 2000 and FY 2003, states drew
down about $20 billion from RDFs to close budget gaps
States drew on other reserves for an additional $12 billion in funds to plug gaps
Budget deficits through FY 2003 were about $115 billion. Thus use of RDFs and other reserves closed more than ¼ of the gaps in the first few years of the fiscal crisis
States Tapped their Rainy Day Funds, Other Reserves
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
En
din
g B
ala
nce
as
% o
f
spen
din
g
FY00 FY01 FY02 FY03
Fiscal Year
Source: National Association of State Budget Officers, adjusted by CBPP
States Were Better PreparedFor This Fiscal Crisis At the end of 2000, states had total reserve
balances of $48.8 billion, or 10.4% of spending
Prior to the last recession of the early 90s, states had total reserve balances of only $12.5 billion or 4.8% of spending
But a 10.4% Reserve Proved Inadequate to Size of Deficits 2002 Deficit – $37 billion or 7.2% of spending
2003 Deficit - $79 billion or 15.1% of spending
2004 Deficit - $78 billion or 15.0% of spending
Wisconsin Wasn’t Prepared at All Wisconsin was one of only 10 states that did
not have any money in its Budget Stabilization Fund (RDF) at the beginning of the downturn
WI did have some surplus budget funds at
the end of FY 2000, but they were largely exhausted by the end of FY 2001
Wisconsin Faced Large Deficits A $1.1 billion gap opened during the 2001-03
biennium
A $3.2 billion hole heading into the 2003-05 biennium – a shortfall of about 14 percent of revenue for the two years
In absence of RDF, Wisconsin Got By With a One-time Fix Wisconsin — in essence — used its Tobacco
Settlement funds as a RDF
WI was scheduled to receive about $5.9 billion over next 25 years. Instead, it “securitized” for a one-time payment of about $1.6 billion
This strategy will not be available in a future
downturn
Shortfall Could Have Been Foreseen — and Prepared For Business cycles can be analyzed, along with
the patterns of how state revenues respond to them
A report CBPP wrote in 1999 simulated a FY 2000-2003 recession and projected that WI would have a $2.7 billion budget gap — in the neighborhood of what actually happened http://www.cbpp.org/3-11-99sfp.htm
Wisconsin Could Choose to Have an Adequate Rainy Day Fund The majority of states — 30 — deposit a
portion of their year-end surpluses in their RDF. This does not seem to work for WI.
Seems to be sense that WI will not save unless forced to do so
Some states have formulas that require deposits under specified circumstances: AZ, FL, ID, IN, MD, MI, MO, NM, OR, RI, TN, VA
Wisconsin Could Choose to Have an Adequate Rainy Day Fund Best way to assure RDF is filled may be to
appropriate deposits — and set a formula for the amount to be appropriated
For example, some states allow only 98 percent of forecasted revenue to be appropriated for programs and services. The other 2 percent can be appropriated to a RDF at the time the budget is enacted
Wisconsin Could Choose to Have an Adequate Rainy Day Fund Appropriations to the RDF would not preclude
adding budget surpluses to the fund at the end of the year
How Much Should States Save? Common benchmark of 5% is inadequate CBPP study – states on average would need
18 percent of a single year’s spending to weather a three-year downturn — WI needed 27 percent in the study
Government Finance Officer’s Association recommends 5 to 15 percent
Standard and Poor’s gives a “strong” rating to jurisdictions with reserves of 15 percent or more
Cap Should be Removed From BSF WI caps deposits into the BSF at 5% of
expenditures
Caps impede adequate savings:
from 1993 to 2000 States with cap ≤ 5% grew from 1.0% to 3.7% States with cap ≥ 10% grew from 2.3% to
9.0%
Would a TABOR Address the Cyclical Problem? TABOR lowers the revenue and expenditures
of a state, but it does not repeal the business cycle. Nor does it prevent multi-year deficits in a downturn
The states that had the lowest spending as a percent of GSP also had substantial deficits in the fiscal crisis; no particular relationship between spending level and deficits
Lowest Spending States(Spending as percent of GSP, 2001) FY 2004 deficit as % of budget
Texas 25%
Nevada 19%
Colorado 14%
Georgia 6%
New Hampshire 9%
Illinois 15%
Virginia 9%
2004 deficit is initial deficit going into the fiscal year. http://www.cbpp.org/12-23-02sfp.pdf
Population-Plus-Inflation Growth Formula Would Shrink State GovernmentsWhat if a strict TEL had been in place for all states since 1990?
5.0
5.5
6.0
6.5
7.0
7.5
8.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Sta
te O
wn
-So
urc
e S
pe
nd
ing
as
a S
ha
re o
f G
DP
Actual State Spending State Spending with TEL Since 1990
Source: CBPP calculation of NASBO data.
Note: “Own-Source” spending is the sum of general fund and other state spending.
$162.7 Billion
Or 21%
What Would $162.7 Billion Less Mean?States could cut: 78% of all state K-12 spending, or All Medicaid and transportation spending, or 1.6 times higher education spending, or 13 times all public assistance, or 4 times all corrections spending, or 60% of all other state spending
You Don’t Need TABOR to Reform Wisconsin’s BSF Use targets rather than caps. Target level
should be at least 15 percent of spending
Deposits should be an appropriation item in the budget, to assure they occur
Provide flexibility to use funds in a downturn
Avoid specific replenishment requirement