When Is It Rainy Enough to Tap the Rainy Day Fund?

Many states have rainy day fund policies, but many don't have the right kind of policies. Wyoming is looking to change that.
by | September 24, 2015

There are essentially two types of people when it comes to state rainy day funds: Those who think the savings account is inadequate to buffer a future revenue downturn and therefore should not be touched. And those who think the fund is too large and want to use some of that money to supplement needy programs and services.

Regardless of what type of person you are, there's a more pertinent problem: When it comes time to actually decide whether or not to withdraw money from the state's rainy day fund, the rules are poorly defined in many states. In Wyoming this year, legislators are trying to remedy that. The state's revenues have declined as the slowdown in the oil and natural gas industry has taken its toll. As a result, lawmakers approved a more than 6 percent spending cut in the current two-year budget. Now the governor is asking state agencies to identify entire programs that could potentially be eliminated should the 2016-2017 budget need cuts, too.

While some legislators are tempted to simply plug any holes with money from the state's $1.8 billion rainy day fund, others want to use this opportunity to strengthen the state's rainy day fund policy. Namely, they want to put in writing what the policy goals for the fund are and when it is appropriate to withdraw money.

"We'd like to be able to say ahead of time, what are the ground rules that would trigger using the rainy day fund," said Wyoming state Rep. Mike Madden, who co-chairs the Revenue Committee. In consultation with the Pew Charitable Trusts, the committee is developing policy to be voted on in next year's session. As it currently stands, said Madden, "we do these rules by the seat of our pants -- meaning it depends on how bad things are."

Many states have some rules when it comes to their rainy day fund policy, such as when to make deposits, when to make withdrawals or caps on the fund's total. But many don't have the right kind of rules, according to a 2011 analysis by the Center on Budget and Policy Priorities. For example, onerous replenishment rules can make it difficult for states to use their reserves as intended. Twelve states and the District of Columbia require rainy day funds to be replenished quickly after they are used, even if economic conditions have not improved. "Such rules have proven to create a disincentive to use the fund and place the rainy day fund in competition with other programs for scarce resources during an economic downturn," the analysis said.

 

Requiring a supermajority vote to withdraw funds, as is the case in 10 states, also limits the fund's effectiveness, according to the report. On the reverse side, some states have fairly nonrestrictive withdrawal rules, allowing "states to make shortsighted use of fund balances, leaving themselves with less flexibility to respond to emergencies," said a Pew report issued last year. In New Jersey, for instance, lawmakers can withdraw from the rainy day fund any time revenues come in below projections. "That's a pretty low bar," David Rosen, the state's legislative budget and finance officer, told Pew.

In Wyoming, committee members are discussing things like how to define a downturn in the state's revenues, whether or not withdraw from other state investment funds before turning to the rainy day fund and creating a deposit rule, said state Rep. Madden. Lawmakers also need to decide how much financial coverage they'd like from their savings accounts during a downturn. A one-year buffer? More? States with more volatile revenues from year-to-year, like Wyoming, will need to set aside more money per year of coverage. "It's like an insurance policy," said Pew's Brenna Erford, who reported to Wyoming's revenue committee on the topic earlier this month. "For a higher savings target [down the road], you need to pay a higher premium."