Rainy Day Funds and TABOR Iris J. Lav, Deputy Director Center on Budget and Policy Priorities Taxing and Spending Limits in Wisconsin Robert M. La Follette School of Public Affairs January 19, 2005

State Tax Revenues Decline During and After Recessions Adjusted for inflation and legislated tax changes. Source: Rockefeller Institute of Government.

1990s Fiscal Crisis Lasted Three Years Recession Ends Source: National Association of State Budget Officers

This One was Deeper and is Moving Into its Fifth Year Note: In most states fiscal years run from July 1 to June 30. Recession Ends

Rainy Day Funds Help Handle Multi-Year Deficits Between FY 2000 and FY 2003, states drew down about $20 billion from RDFs to close budget gaps States drew on other reserves for an additional $12 billion in funds to plug gaps Budget deficits through FY 2003 were about $115 billion. Thus use of RDFs and other reserves closed more than ¼ of the gaps in the first few years of the fiscal crisis

States Tapped their Rainy Day Funds, Other Reserves Source: National Association of State Budget Officers, adjusted by CBPP

States Were Better Prepared For This Fiscal Crisis At the end of 2000, states had total reserve balances of $48.8 billion, or 10.4% of spending Prior to the last recession of the early 90s, states had total reserve balances of only $12.5 billion or 4.8% of spending

But a 10.4% Reserve Proved Inadequate to Size of Deficits 2002 Deficit – $37 billion or 7.2% of spending 2003 Deficit - $79 billion or 15.1% of spending 2004 Deficit - $78 billion or 15.0% of spending

Wisconsin Wasn’t Prepared at All Wisconsin was one of only 10 states that did not have any money in its Budget Stabilization Fund (RDF) at the beginning of the downturn WI did have some surplus budget funds at the end of FY 2000, but they were largely exhausted by the end of FY 2001

Wisconsin Faced Large Deficits A $1.1 billion gap opened during the biennium A $3.2 billion hole heading into the biennium – a shortfall of about 14 percent of revenue for the two years

In absence of RDF, Wisconsin Got By With a One-time Fix Wisconsin — in essence — used its Tobacco Settlement funds as a RDF WI was scheduled to receive about $5.9 billion over next 25 years. Instead, it “securitized” for a one-time payment of about $1.6 billion This strategy will not be available in a future downturn

Shortfall Could Have Been Foreseen — and Prepared For Business cycles can be analyzed, along with the patterns of how state revenues respond to them A report CBPP wrote in 1999 simulated a FY recession and projected that WI would have a $2.7 billion budget gap — in the neighborhood of what actually happened

Wisconsin Could Choose to Have an Adequate Rainy Day Fund The majority of states — 30 — deposit a portion of their year-end surpluses in their RDF. This does not seem to work for WI. Seems to be sense that WI will not save unless forced to do so Some states have formulas that require deposits under specified circumstances: AZ, FL, ID, IN, MD, MI, MO, NM, OR, RI, TN, VA

Wisconsin Could Choose to Have an Adequate Rainy Day Fund Best way to assure RDF is filled may be to appropriate deposits — and set a formula for the amount to be appropriated For example, some states allow only 98 percent of forecasted revenue to be appropriated for programs and services. The other 2 percent can be appropriated to a RDF at the time the budget is enacted

Wisconsin Could Choose to Have an Adequate Rainy Day Fund Appropriations to the RDF would not preclude adding budget surpluses to the fund at the end of the year

How Much Should States Save? Common benchmark of 5% is inadequate CBPP study – states on average would need 18 percent of a single year’s spending to weather a three-year downturn — WI needed 27 percent in the study Government Finance Officer’s Association recommends 5 to 15 percent Standard and Poor’s gives a “strong” rating to jurisdictions with reserves of 15 percent or more

Cap Should be Removed From BSF WI caps deposits into the BSF at 5% of expenditures Caps impede adequate savings: from 1993 to 2000  States with cap ≤ 5% grew from 1.0% to 3.7%  States with cap ≥ 10% grew from 2.3% to 9.0%

Would a TABOR Address the Cyclical Problem? TABOR lowers the revenue and expenditures of a state, but it does not repeal the business cycle. Nor does it prevent multi-year deficits in a downturn The states that had the lowest spending as a percent of GSP also had substantial deficits in the fiscal crisis; no particular relationship between spending level and deficits

Lowest Spending States (Spending as percent of GSP, 2001) FY 2004 deficit as % of budget Texas25% Nevada19% Colorado14% Georgia6% New Hampshire9% Illinois15% Virginia9% 2004 deficit is initial deficit going into the fiscal year.

Population-Plus-Inflation Growth Formula Would Shrink State Governments What if a strict TEL had been in place for all states since 1990? Source: CBPP calculation of NASBO data. Note: “Own-Source” spending is the sum of general fund and other state spending. $162.7 Billion Or 21%

What Would $162.7 Billion Less Mean? States could cut: 78% of all state K-12 spending, or All Medicaid and transportation spending, or 1.6 times higher education spending, or 13 times all public assistance, or 4 times all corrections spending, or 60% of all other state spending

You Don’t Need TABOR to Reform Wisconsin’s BSF Use targets rather than caps. Target level should be at least 15 percent of spending Deposits should be an appropriation item in the budget, to assure they occur Provide flexibility to use funds in a downturn Avoid specific replenishment requirement