Several States' ’Rainy Day’ Funds Sit Unused

BATON ROUGE, La. -- While budget deficits threaten to cripple government services across the country, a handful of states with billions of dollars socked away in "rainy day" funds for troubled financial times are discovering they can't use that money to offset their cuts.

Amid the worst financial crisis facing states in decades, stringent rules governing the use of reserve funds have tied the hands of lawmakers in nearly a dozen states even as they consider raising taxes, slashing health and social services and shuttering education programs.

About three-fourths of states have used rainy day funds in the past three years to alleviate budget cuts, but some have had difficulty accessing the money or have shied away from doing so. They would have to repay it quickly or were worried it would hurt their bond ratings.

In some states, the rules governing the funds are so strict that the savings accounts are off the table for crafting next year's budgets.

This has some questioning the very point of having a rainy day fund. In Louisiana, lawmakers have haggled for two years over whether to make changes to the law governing the fund. Supporters of a revamp say if the Great Recession isn't a rainy day, what is?

"The purpose of the rainy day fund is to use it when times are bad, so you don't need to complicate getting to the money," said Elizabeth McNichol of the Center on Budget and Policy Priorities, a Washington, D.C.-based think tank.

Others contend states cannot use rainy day funds constantly to close recurring budget shortfalls or as an excuse to avoid making difficult tax and spending choices.

"I'm not saying we should never use the rainy day fund. But not every day is a rainy day, and you have to make sure you're not using it as a crutch to mask everyday problems," said Louisiana Treasurer John Kennedy, a Republican. "We intentionally set restrictions on the rainy day fund when we amended the constitution to make certain that access to the fund is temporary and targeted."

The bulk of the reserve funds were set up within the last three decades to help soften the blow of economic downturns or cope with natural disasters. The rules vary widely on how money gets deposited and how it can be withdrawn.

The National Conference of State Legislatures estimates that states will have closed multiyear budget gaps totaling $530 billion by the time the recession's impact has ended.

Thirty-seven states have tapped into rainy day reserves over the last three years to help alleviate budget cuts, according to a review by the National Association of State Budget Officers. Alabama, Connecticut, Idaho and some other states have drained their funds entirely to plug budget gaps.

Others have such onerous rules that they have used their reserve dollars only in a limited fashion, or not at all.

In a recent report, the Center on Budget and Policy Priorities says 12 states require that reserve funds be replenished quickly when used, making them almost useless in a steep downturn with plunging tax revenue. Ten states require a two-thirds vote of lawmakers to use the funds, discouraging some legislatures from even attempting to get to the dollars.

Five states don't have rainy day funds at all.

In Louisiana, the debate over just what constitutes a fiscal "rainy day" has fixated lawmakers since 2009 and ended up in litigation after state legislators withdrew nearly $200 million. About $644 million remains in the Budget Stabilization Fund, but the fund cannot be used to help close the state's $1.6 billion budget shortfall for the fiscal year that begins July 1.

Instead, state lawmakers and Gov. Bobby Jindal are expected to make another round of deep cuts to public colleges and health care programs that care for the poor and uninsured.

"These are taxpayer dollars that are sitting in this fund. They are not serving any purpose right now while we are cutting taxpayers' services," said Louisiana Sen. Mike Michot, a Republican who is chairman of the state Senate Finance Committee. "If we can't use it for this purpose, then we ought to just abolish the fund."

In New York, it took several years of multibillion-dollar budget deficits before the state hit the rigorous criteria to use its rainy day fund last year. In Virginia, the money can be applied to a deficit within an existing budget year but cannot be used to help offset cuts when lawmakers are crafting the following year's spending plans.

Little incentive exists to use Missouri's Budget Reserve Fund because the dollars must be repaid quickly when the fund is tapped.

Missouri's budget director, Linda Luebbering, said the state regularly uses the reserves to help with cash-flow issues and repays it with interest in the same fiscal year, as required. But she said the fund is rarely used for true "rainy day" purposes -- like during the latest recession and with a $700 million shortfall in the coming 2011-12 fiscal year -- because "it really isn't usable in this type of economic situation."

The money would have to be repaid to the reserve fund within three fiscal years if lawmakers agreed to use it. The fund hasn't been used in that fashion since a flood in 1993.

"The only time we have used it is during national disasters, floods in particular," Luebbering said. "Once the flood was gone, our economy was fine, and we had plenty of revenue and we could pay it back."

Some say the one-time money won't solve multiple years of budget woes and that lawmakers and governors need to shrink government services to deal with a new, post-recession fiscal reality.

In Texas, tea party activists and other conservative groups have called on lawmakers to leave the state's multibillion-dollar rainy day fund alone and have threatened to run candidates against those lawmakers who vote to tap the reserve account. But the Texas comptroller, Susan Combs, said she can't imagine solving the state's $4.3 billion budget shortfall with cuts alone.

In California, voters in 2012 will decide whether to amend the state constitution to strengthen the rules governing its rainy day fund, making withdrawals more difficult. When it was approved for the ballot, then-Gov. Arnold Schwarzenegger argued the fund was so susceptible to raids that it didn't build up in good financial times, leaving the state with few reserves during the recession.

An informal rule of thumb is that a state should strive to have an amount equal to 5 percent of its general fund in a reserve account, according to the National Association of State Budget Officers.

Maryland lawmakers have avoided using that state's rainy day fund -- and Massachusetts has limited withdrawals from its fund -- because of concerns that bond-rating agencies would be downgraded, boosting interest costs on state borrowing.

The chairman of the Maryland Senate's Budget and Taxation Committee said the fund is maintained more to address a potential fiscal emergency, despite the recession.

"I think there's a sort of a sense that this should be some emergency, some event, that normally doesn't occur in a normal budgetary process -- that we shouldn't use it for just filling a hole in a budget," said Sen. Edward Kasemeyer, a Democrat.