Weekly Wrap: Govs Seek to Prop Up Budget Reserve Funds

By: - January 29, 2010 12:00 am

Governors are moving this year to create emergency reserve funds or shore up existing ones to help plug persistent budget gaps.

Since legislatures began meeting this month, the governors of  Hawaii, Kansas, Mississippi and Oklahoma said they would focus on rainy day funds as another way to wrestle with shortfalls.

The idea behind setting aside reserves, also known by other names including budget stabilization funds, is that they provide a cushion against a decline in tax collections. States generally set a goal of keeping at least five percent of total expenditures a year, but that percentage has fallen under five percent on average since fiscal 2009 in the states with reserve funds, according to the National Governors Association and National Association of State Budget Officers.

In Kansas, which along with Arkansas and Montana does not have reserve funds, Gov. Mark Parkinson (D) asked the Legislature to embrace a bipartisan proposal by two state senators to ask voters to approve amending the state constitution to create an emergency fund.

“It is time that we take steps to make sure that the state never again finds itself facing this kind of fiscal challenge,” said Parkinson, whose state will have to slash another $400 million in spending this year on top of $1 billion that has already been cut. “There are many reasons for the budget problems that we have.  One is that we came into last year without an emergency fund.  This is unacceptable. Downturns are inevitable.  Every business and family knows this, and those that are able develop reserve funds to prepare for those downturns.  It is time for the state to do the same.”

Hawaii Gov. Linda Lingle (R) recommended that lawmakers approve placing a constitutional amendment on the ballot that if approved would set up a budget stabilization fund that sets aside  5 percent of the general fund. “This fund will shield us in future years from the need to raise taxes during periods when the economy is contracting and citizens can least afford to pay more,” the governor said in her state of the state speech Monday (Jan. 25).

In Oklahoma, which has a $729 million budget gap this year and has drawn down on its reserves for two years, Gov. Brad Henry (D) wants lawmakers and voters to approve raising the reserve account’s limit from 10 percent of the general fund to 15 percent. Lawmakers rejected his recommendation in 2006, but that was before the state’s worst economic crisis in modern times. “It would not solve all of our problems, but it would give us more room to maneuver as we balance the budget and attempt to protect core services,” Henry said, according to the Tulsa World .

Mississippi Gov. Haley Barbour (R) urged lawmakers to make the state’s $234 million rainy day fund last three more years by spending only a third of it and suggested draining the tobacco trust fund instead. “I consider one of the worst mistakes that can be made at a time like this would be the excessive use of one-time money,” he said .  

Toyota’s decision to halt sales of eight models of cars and trucks could add to slumping tax revenue in the states depending on how long the suspension lasts.

Auto purchases spur sales and personal property tax revenues and income from registration fees. The more cars sold, the more income tax the state collects from salespeople. Production plants are affected too. Toyota is indefinitely postponing manufacturing of its vehicles at its Indiana, Kentucky and Texas plants. Indiana and Kentucky already have a serious drop in tax revenue.

“They need to go and get a solution to this fast,” auto analyst Aaron Bragman told the Indianapolis Star.

Speaking of state economies, Ohio recently was dealt a blow when NCR Corp. announced that it was moving its corporate headquarters from Dayton to the Atlanta area. National Cash Register and Dayton have been intertwined since 1884. The New York Times recounted   the company’s tie to Dayton and Ohio and the sadness when a major employer leaves town.

Ohio also is fighting to keep another longtime, highly visible employer. Cardmaker American Greetings Corp. executives recently said they are weighing a move from the Cleveland area to another city with lower taxes, possibly in another state.  Gov. Ted Strickland (D) is working with company officials to persuade them to stay.

Two recession-related studies out this week are worth taking a look at:

* A Washington, D.C.-based research group released an analysis on Wednesday (Jan. 27) providing  evidence that the current economic  downturn is in fact the worst since World War II.

The Economic Policy Institute, a nonpartisan, nonprofit organization, used gross domestic product data to buttress the case that the recession that began in December 2007 is “far worse” than any of the nine downturns in the post-war period. The gross domestic product is the value of goods and services.

* North Dakota has replaced Illinois as the state with the worst stimulus Web site, according to an analysis by a nonprofit watchdog group called Good Jobs First in Washington, D.C.  Maryland has the most transparent site, said the group, which released its first critique of state Web sites last July.

Good Jobs First says it looks at the quality and amount of disclosure by official state Web sites on how the $787 billion federal economic stimulus program is flowing through states to local governments, organizations, businesses and individuals. Each state is graded according to seven criteria such as the geographic distribution of spending.

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.