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Friday, September 27, 2019

NOTES FROM THE SENATE, SEPTEMBER 27, 2019
NOTES FROM THE SENATE, SEPTEMBER 27, 2019

"RAINY DAY" FUNDS VARY IN STATES

We wrote in last week's column about the state Revenue Report and touched on the calculation of the RSR or rainy day fund. Turns out that Georgia is doing very well in saving up over 11% of previous year's revenues for the latest RSR, $2.9 Billion.

Nationally, according to the National Association of State Budget Officers (NASBO), rainy day funds are growing as a percentage of state budgets due in part to the longest economic recovery period in history following the recession 11 years ago.

Although some states have recovered better than others according to research by the Pew Charitable Trusts. NASBO says that the biggest change in states' financial position has been the increase in rainy day funds which has risen to 7.5% of general funds, up 2.7% from before the recession.

RAINY DAY FUNDS VARY IN SIZE

There's a wide difference in the level of rainy day funds around the country. California has put aside $17.8 billion while 3 states, Illinois, Kansas and New Jersey have no reserves at all. You may remember Georgia's RSR stands at $2.9 Billion before the midyear adjustment for Education.

Some states have a process to automatically set aside revenues for their rainy day funds. Two years ago, North Carolina set up a process of setting aside part of their forecasted revenues to build up their rainy day fund.

Some states with oil and gas deposits set aside part of those severance tax revenues for reserves. Georgia has no set process beyond the requirement that lapsed agency funds go into the RSR at the end of the Fiscal year.

SOME STATES IN BETTER SHAPE THAN OTHERS

We reported a while back about Moody Analytics study that found 23 states had reserves sufficient to survive a moderate recession and 10 more were close to that total. Georgia was one of those states with a satisfactory reserve to get through a moderate recession.
A follow up report later this year will bring those figures up to date.

States' tax profiles can be a factor in their ability to withstand a recession. California's dependence on high income taxpayers would take a hit during a recession as they did during the Great Recession.

Florida's dependence solely on sales taxes makes it very dependent on tourism and subject to the whims of the economy and peoples' travel plans.

STATES ARE VULNERABLE IN A RECESSION

State services like Medicaid go up during a recession along with education costs as many return to school when jobs are lost. State constitutions like Georgia's require a balanced budget so there is pain involved when states have to cut budgets due to falling revenues.

August of 2019 brought the highest level of concern for a recession sparked by fears of the US/China trade war, global business slowdown and the inverted short term and long term interest rates. A Fed rate cut and that inverted yield curve that returned to normal has eased fears somewhat.

The former head of the Congressional Budget Office recently said "The household sector remains nearly of the U.S. Economy and displays a healthy mix of low unemployment and rising wages. As long as that continues, we will avoid a recession."

Another factor forestalling a recession is the fact that technology has a positive effect on the recession model.

BUT BACK TO RAINY DAY FUNDS

As a percentage of total state expenditures, Wyoming has the largest FY 2019 Rainy Day Fund balance at 109% according to the Spring 2019 Survey of the National Association of State Budget Officers Fiscal Survey of States.

California, while having the largest total rainy day fund at $17.8 billion only shows this as 12.4% of the states total expenditures for the year. Georgia's RSR is 11.6% of state general fund receipts but is 9.3% of the state's budget.

REPAYMENT OF EXHAUSTED RAINY DAY FUNDS

States vary in how rainy day funds are replenished after being appropriated. Alabama, for example must pay back its General Fund rainy day fund within 10 years of withdrawal.

North Carolina has a more involved process where the Fiscal Research Division and the Office of State Budget & Management jointly develop an annual evaluation of the adequacy of the fund and then estimate the target for the Savings Reserve Balance sufficient to cover two years of 9 of 10 scenarios involving a decline in general fund operating budget appropriations excluding dept. receipts.

In South Carolina, the General Reserve Fund must be restored within three fiscal years based on a rate of not less than 1% of general fund revenue until the fund reaches 5%. The Capital Reserve Fund is raised 0.5% until it reaches 5% of general fund appropriations for the prior fiscal year. At the end of the fiscal year, lapsed funds in the Capital Reserve Fund are credited to the general fund.

In Georgia, the lapsed funds at the end of the fiscal year are automatically sent to the RSR. So, the Revenue Estimate is vitally important in that it remain a fiscally conservative estimate when used to base a proposed budget. Setting a moderate, conservative revenue estimate keeps the state from spending at a dangerous level if revenues were to drop during the year and this conservative spending allows more accumulation of revenues by the end of the year to lapse into the RSR.

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