Fiscal-policy analysts commended Maryland and Virginia on Tuesday for clearly defining the purposes of their rainy day funds, saying their guidelines help avoid debates about how much reserve cash the states should save and when to spend it.
Experts from Pew Charitable Trusts examined the rainy day funds for all 50 states and found that Maryland and Virginia are among 19 that provide “explicit and narrow” objectives that provide “the clearest guidance to policymakers for determining an evidence-based savings target,” according to a new report from the group.
The analysts cited various state policies as national models, including a Maryland law that requires savings for future needs and for reducing the demand for tax increases when revenues are lower than expected; and a requirement in Virginia’s constitution that says the state can only use its reserve funds to fill a shortfall in an enacted budget.
Virginia earned additional praise for establishing clear rules that define the size of its rainy day fund and the extent to which the state can tap into it. State law limits the fund to 15 percent of average revenue collections for the preceding three fiscal years, and the state can only use the money to fill half of a budget gap — the rest must be made up through spending cuts or tax changes.
Pew did not prescribe specific guidelines for setting aside money, saying only that states should be clear about their objectives and rules.
“Ultimately, there is no right or wrong level for what a state’s budgetary risk tolerance should be,” the report says. “States may opt to guard against more or less risk depending upon their own spending priorities, obligations and political cultures.”
The analysts said many states struggle to decide how much money to set aside and when to withdraw the funds, because they lack a clear consensus on why their reserves exist in the first place.
“When a state’s reasons for saving are either unstated or poorly defined, policymakers lack the information necessary to match savings goals to needs, making it difficult to determine how much their state should save,” the report says.
Pew noted that Texas policymakers have been debating whether the state’s rainy day fund — which is the nation’s second-largest and is equal to 15 percent of the state’s general fund spending this year — was too big considering other pressing budget priorities, such as reducing its debt and investing more in transportation and water projects.
The analysts also found that few states study the volatility of their revenue collections to determine what level of savings they need to effectively manage the ups and downs of the business cycle. They said saving additional money could have helped them during the Great Recession, which lasted from December 2007 through June 2009.
Pew found that 16 states increased their savings caps or targets after the recession, suggesting their previous reserve levels were inadequate for a major economic downturn.