States face decision: Tap rainy day funds?

associated press

Lawmakers around the country are engaging in a tricky bit of economic forecasting these days, trying to figure out whether — or when — to tap into their states’ rainy day funds.

The calculation involves deciding if it is better to raid the fund for fiscal emergencies now or to wait, in case the economic slowdown worsens and the need for revenue becomes more desperate.

In Ohio, Democratic Gov. Ted Strickland ordered spending cuts of more than $700 million to fill a budget hole rather than use the rainy day fund, which was drained in the previous recession under a Republican administration.

Arizona lawmakers dealt with a $1.2 billion shortfall for this fiscal year, which ends in most states on June 30, by spending more than two-thirds of the state’s rainy day reserve.

In Virginia, House Republicans opposed Democratic Gov. Tim Kaine’s proposal to use $423 million of the state’s rainy day fund to close a projected revenue gap in the current fiscal year. They relented and agreed to a compromise of about $352 million.

In Tennessee, Gov. Phil Bredesen is resisting similar calls to tap that state’s reserves to fix its deficit.

“Early on in any recession, which is where we are now, is not the time to start diving into the savings account,” Bredesen said.

States generally try to maintain reserves of at least 5 percent of their budgets to protect their credit rating. The decisions that trigger the use of rainy day funds vary from state to state and, of course, involve politics as well as economics.

Governors and lawmakers tend to be reluctant to dip into the funds out of fear that, without the cushion, unpopular tax increases aren’t far behind.

But officials also see draining rainy day funds as more politically popular than cutting health care programs or school funding, or raising the dreaded “t” word.

A National Conference of State Legislatures survey conducted last month found several states — including Alabama, Massachusetts and Minnesota — plan to tap their rainy day funds to close budget gaps in the year beginning July 1.

The decisions are being made amid an anemic economy that is hitting states hard. Earlier this month, the Rockefeller Institute of Government reported that state sales tax revenue delivered the weakest performance in six years during the first quarter of 2008.

In April, the NCSL said the finances of many states have deteriorated so badly that they appear to be in a recession, regardless of whether that is true for the nation as a whole.