Rebalancing Act

States are replenishing their reserves. Revenues are coming in over projections in most states and that has allowed them to put more than $20 billion into their rainy day funds. But little of the money will stay there for long. There is too much pressure from other parts of the budget--whether it's funding programs that have been shrunk in recent years or keeping up with the growth of Medicaid and K-12 education costs--to build up a big pile of reserves.

The increase in savings, in most states, means money is just being parked, awaiting legislative decisions about where it should be spent. "I don't see a significant increase in the number of states making new deposits into these funds," says Corina Eckl, head of the fiscal affairs program at the National Conference of State Legislatures.

Reserve accounts were a great help to states during the economic downturn a few years ago. According to the Center on Budget and Policy Priorities, states have drawn down about $30 billion from reserve funds since 2001, accounting for about one-fourth of the money they used to close deficits. Based on that experience, the center is now recommending that states save much more--perhaps three times as much as the 5 percent of general fund revenues that states usually are advised to sock away.

That's unlikely to happen. "Politically, 5 percent is probably about as high as you can go before people complain that you're sitting on all this cash," says Scott Pattison of the National Association of State Budget Officers. Parents faced with fast-increasing tuition bills, for instance, would wonder why their state is not putting money into aid to higher education.

A few states are being aggressive about restoring depleted reserves. In 2003, Virginia put into statute its priorities for new revenues, with an eye toward making supplemental deposits into its reserve accounts, over and above the normal formula-driven deposits the state can make when times are flush.

Minnesota has put away about $1 billion. The governor and legislators, burned by a $5 billion deficit in 2003, made an explicit policy decision to direct any potential surplus into rainy day funds and cash flow accounts. "The decision was made before the revenue showed up," says state economist Thomas Stinson.

Minnesota is also using excess cash to move expenses, particularly in education, back into the fiscal year in which they belong. Like many states, Minnesota during the recent recession shifted some of its costs into the next fiscal year.

In South Carolina, Governor Mark Sanford has been trying to restore $500 million that had been borrowed from various trust and reserve funds during the downturn. But once that goal is accomplished, says his spokesman Joel Sawyer, the governor doesn't intend to build up rainy day reserves any higher than their pre-downturn days.