When & How States Should Strengthen Their Rainy … & How States Should Strengthen Their Rainy Day...
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When & How States Should Strengthen Their Rainy Day Funds Michael Mazerov, Senior Fellow www.cbpp.org [email protected] CSG West Fiscal Affairs Committee August 9, 2014
Transcript of When & How States Should Strengthen Their Rainy … & How States Should Strengthen Their Rainy Day...
When & How States Should
Strengthen Their Rainy Day Funds
Michael Mazerov, Senior Fellow
www.cbpp.org
CSG West Fiscal Affairs Committee
August 9, 2014
Center on Budget and Policy Priorities
cbpp.org
Rainy Day Funds
• Financial reserves deliberately and statutorily set aside for unanticipated declines in revenue due to slowdown/negative economic growth or a major unanticipated spending requirement
o E.g., natural disaster
o E.g., litigation loss (Michigan currently facing $1billion in refunds in tax case)
o Unexpected loss of federal assistance
• Objectives
o Minimize need for temporary tax increases – increasingly difficult to achieve
o Minimize need for temporary spending cuts leading to hardship – spending needs go up when recessions hit
o Reduces negative impact on state economy of cutting state spending
Center on Budget and Policy Priorities
cbpp.org
Aggregate State Rainy Day Funds and General Fund
Reserves: Recent History
Figure 1
States Build Reserves During Good Times for Use During Bad Times
*Figures exclude Texas and Alaska because the large size of their reserves, which are repositories for oil and gas revenues, obscures national trends.
Source: CBPP calculations of National Association of State Budget Officers data
Center on Budget and Policy Priorities
cbpp.org 4
cbpp.org
State Reserves Remain Below Pre-Recession Levels
Figure 2
State Reserves Remain Below Pre-Recession Levels
Source: CBPP calculations of National Association of State Budget Officers data
Center on Budget and Policy Priorities
cbpp.org
State Reserves in CSG West States, Year-End FY13
• Alaska 217.6%
• Wyoming 53.1%
• Montana 26.9%
• Colorado 18.8%
• Arizona 16.0%
• Hawaii 15.3%
• Nevada 9.9%
• New Mexico 9.8%
• Oregon 8.0%
• Utah 5.6%
• Idaho 4.1%
• Washington 2.3%
• California 0.9%
Center on Budget and Policy Priorities
cbpp.org
When Should States Replenish Their RDFs? (1)
• Some states have already begun to do so; in many cases, this is premature
o Nationally, state revenues have just recently – and barely – exceeded pre-recession levels (after adjusting for inflation)
o Doesn’t tax into account need for some real growth due to population increase (students, elderly), deferred infrastructure investment, etc.
o 35 states providing less funding per K-12 student in 2013-14 school year than before recession; 14 states have cut by more than 10%
o 48 states have cut per-student higher-education spending; average state spending 23% less per student
• Many states should still be reversing many of these cuts
Center on Budget and Policy Priorities
cbpp.org
When Should States Replenish Their RDFs? (2)
• When tax collections have recovered from the recession
o Inflation-adjusted tax revenues have reached pre-recession level (only true of 23 states as of end of FY13)
o Annual growth in inflation-adjusted revenues have matched pre-recession rates (32 states achieved as of FY13)
o These are minimum thresholds; again, doesn’t take into account additional needs from population growth
• When state economy has recovered from the recession
o Unemployment rates
o Per capita personal income
Center on Budget and Policy Priorities
cbpp.org
When Should States Replenish Their RDFs? (3)
• More urgent to begin replenishing now if RDF has dipped to dangerously low level
o Begin sooner, but do more slowly to spread restoration over larger number of years
• More urgent to begin sooner if state has particularly volatile tax base
o Energy/natural resource-dependent states
o States like California where volatile capital gains represent disproportionate share of income tax base
Center on Budget and Policy Priorities
cbpp.org
When Should States Replenish Their RDFs? (4)
• One-time fiscal windfalls are a prudent source of funding for RDFs
o States often underestimate revenues when economy first turns around after recession – leading to temporary surpluses
o Unanticipated boom in stock market
o Tax amnesties
o Major legal settlements
Center on Budget and Policy Priorities
cbpp.org
States Don’t Need to Wait to Improve Design of Their RDFs
(1)
• Create a RDF if your state doesn’t have one!
o Colorado and Montana still don’t (along with Illinois and Kansas)
• Loosen RDF caps
o Experience of last two recessions shows old 5% rule of thumb much too low
o No cap at all is best; 15% of General Fund spending at least
o 31 states cap RDFs at 10% of spending or less
o CSG states with RDF caps less than 15% are Arizona, California, Hawaii, Idaho, Oregon, Utah, Washington
Center on Budget and Policy Priorities
cbpp.org
States Don’t Need to Wait to Improve Design of Their RDFs
(2)
• Enact rules to mandate deposits in good economic times
o Should have mandatory deposit rules for all years with strong economic growth, not just deposits when there happens to be unexpected surplus
o E.g., fixed % of GF revenues (but suspend after recession)
o Washington enacted law mandating that forecasted revenue growth exceeding previous 5-year average by more than 1/3 goes into RDF
o Massachusetts enacted rule that tax collections attributable to capital gains in excess of $1B goes into RDF
o Hawaii eliminated rule that GF surpluses in excess of 5% must be rebated; legislature now has option to put into RDF
Center on Budget and Policy Priorities
cbpp.org
States Don’t Need to Wait to Improve Design of Their RDFs
(3)
• Eliminate unwise existing restrictions on RDF accumulation and use
o Eliminate rigid requirements that RDFs be replenished in set amount of time. Should be flexibility to defer until economy recovers. These requirements tend to restrict use.
o Eliminate limits on % of RDF that can be used in a given year
o Eliminate supermajority requirements for drawdowns
o RDFs are there to be used when they are needed!
Center on Budget and Policy Priorities
cbpp.org
Budgeting for the Future
• This presentation based on 4/14 paper of same title by Elizabeth McNichol.
• Part of a planned multi-report series, “Budgeting for the Future,” discussing 10 key fiscal planning tools we believe every state should adopt:
o Multi-year revenue and spending forecasts (beyond budget year(s))
o Multi-year fiscal notes on programmatic and tax policy changes
o Current services baseline on spending side of budget
o Consensus (legislative and executive) revenue forecasting process
o Independent legislative fiscal agency
o Independent review of pension funding assumptions
o Well-designed and adequate rainy day funds
o Comprehensive reporting and oversight of tax expenditures
o Regular oversight of pension funding adequacy and debt levels
o Regular budget and revenue status reports throughout fiscal year
Center on Budget and Policy Priorities
cbpp.org
Budgeting for the Future
• Overview report on all 10 tools, including list of which states have adopted each. See: Elizabeth McNichol, Vincent Palacios, and Nicholas Johnson, “Budgeting for the Future: Fiscal Planning Tools Can Show the Way,” Center on Budget and Policy Priorities, February 2014.
• Report issued just this past week on consensus revenue estimating
• In addition to report on RDFs, have issued previous reports on best practices in tax expenditure reporting and current services baselines
• For more in-depth discussion of RDFs, see: Elizabeth McNichol and Kwami Boadi, “How and Why States Should Strengthen Their Rainy Day Funds,” Center on Budget and Policy Priorities, February 13, 2011.
