A new report says the General Assembly isn’t saving enough for a rainy day.
The Center on Budget and Policy Priorities, a liberal Washington think tank, argues Rhode Island and other states would have weathered the recession better if they’d had more money in reserve to cover budget shortfalls. “In many states, it was not just a lack of foresight but poor rainy-day fund design that led to this inadequate funding,” Elizabeth McNichol, a senior fellow at the center, writes in the report.
Rhode Island caps its rainy day fund at 5% of spending, an amount McNichol criticizes as “far too low.” She suggests Rhode Island should triple its rainy-day cap to 15% of spending, the level used in Massachusetts. Connecticut’s cap is 10%. ”Rainy day funds would have been even more effective in the most recent downturn if they had been larger,” she writes.
In addition, McNichol argues Rhode Island should ease its rules on how quickly the state must replenish the rainy-day fund, which doesn’t take into account the economic situation at the time. “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,” she writes.
On the subject of rainy-day funds, the Center on Budget is actually in rare agreement with the Tax Foundation, its frequent nemesis among think-tanks.
A report last year by the Tax Foundation’s Joseph Henchman found that the size of most states’ budget reserves were inadequate during the recession, and cited research arguing that states should save 13% to 18% of revenue to cope with future downturns. “To achieve this during a typical period of economic expansion, states would need to save between 2.4% and 2.8% of each year’s revenues during good economic times,” Henchman wrote.
“Having a well-funded rainy day fund may not obviate the need for making difficult programmatic cuts during an economic downturn but it can cushion the fiscal system in the short-term,” he concluded. “Well-designed rainy day funds should have set rules for filling and withdrawing the funds, a targeted amount to save that takes into account the state’s historical revenue volatility, and good transparency to ensure that citizens are informed about how the fund operates and is used.”
• Related: How Keynes would manage Rhode Island’s budget (April 29, 2011)