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Study faults Maine for poor ‘rainy day’ planning, but lots of other states fare worse

Posted July 16, 2014, at 4:55 p.m.
Richard Rosen
Courtesy Photo
Richard Rosen

AUGUSTA, Maine — The balance in Maine’s rainy day fund has been the source of considerable State House drama in recent months, but a new study by a respected national group highlights that piling up cash reserves is not just political theater.

The state’s rainy day fund is essentially state government’s savings account. How it should be managed and how low its balance should be allowed to dip have been sources of considerable conflict during the past several months between Democrats in the Legislature and Republican Gov. Paul LePage. After the Legislature used $21 million from the rainy day fund to restore cuts in municipal revenue sharing that LePage had proposed, the governor withheld voter-approved bonds until the fund was built back up to its previous balance of about $60 million.

The Pew Charitable Trusts released a report on Tuesday that, in general, concludes states fall far short of setting aside enough money for unexpected expenses and economic downturns that without an avoidance plan could be disastrous. Case in point: the sudden economic meltdown that in late 2008 plunged ledgers in Maine and most other states deep into the red. According to Pew, states held a combined $60 billion in reserve in 2008 and all together faced budget gaps nearly twice that in 2009.

In Maine, the rainy day fund — officially known as the Budget Stabilization Fund — went from a balance of nearly $129 million before the start of the Great Recession to less than $200,000 in 2009, and it never has recovered. In July of 2013, there was about $60 million in the fund.

Part of the problem, according to the Pew study, is that many states don’t have regulations that force deposits into rainy day funds in boom years to prepare for busts.

“In many cases, states lack rainy day policies that prioritize savings during times of growth,” said Brenna Erford, a Pew expert on state fiscal health and economic growth. “We recognize that the choice to save for states is not easy and that making that choice often comes at the expense of other programs.”

The study found that, among other things, not enough states take full advantage of economically strong years and that some states have fixed rainy day fund caps that are too low to be of substantial use when revenues sour. The report finds Maine guilty of the former and not so much of the latter, although the end result is the same: not enough money set aside.

Mike Allen, the state’s acting deputy commissioner of finance, said Maine’s deposits to the rainy day fund come from end-of-year unappropriated surpluses, which are budgeted resources in excess of the state’s appropriations limitation.

That limit increases each fiscal year through a formula that involves long-term population and personal income growth, adjusted for inflation. Since the creation of the appropriations limit in 2005, budgeted resources never have exceeded the limitation, so as a result, deposits to the fund have come solely from year-end surpluses.

“We’ve recognized for years that we have a fairly volatile sales tax base and a very volatile income tax base,” said Allen. “Capital gains are also becoming a big part of the revenue picture and we’ve certainly tried to come to grips with that.”

The Pew study finds that nationally, Maine ranks 32nd — meaning better than most states — in terms of its revenue volatility.

One of the core recommendations in the Pew study is that states conduct regular “volatility studies” in an effort to predict future revenues and prepare for lean times. Maine is one of the states not credited for doing that, according to the study, though Interim Finance Commissioner Richard Rosen and Allen said that in a way, Maine does that through its semi-annual revenue and economic forecasting processes.

“We need considerably more than we’ve historically been able to hold in that fund,” said Rosen. “The fact is that the balance in the fund has not been sufficient to smooth out those kinds of dramatic impacts.”

Maine’s rainy day fund is capped at 12 percent of revenues in the preceding year. That means that in 2013, the cap on the fund was more than $370 million, more than six times what was actually in the account. State financial data show that the balance in the fund was at or near the cap for a few years in the late 1990s and early 2000s but since 2002 has not come close.

Rosen said his department is making year-end calculations on the fiscal year that ended June 30 — details of which will be released next week. Those calculations could make more money available for the rainy day fund.

However, budget language enacted by the Legislature this year will funnel up to $20 million into a special account to deal with any shortfalls that crop up in 2015.

“This is not an idea that came from the governor or the administration,” said Rosen, who added that he sees the Pew study as a valuable reminder of the importance of planning for unforeseen fiscal catastrophes.

There’s a jar on top of a bookshelf in Rosen’s office that says “Rainy Day Fund” on it, which is a holdover from the legislative debate earlier this year. While it doesn’t actually contain any of the state’s money, Rosen said it’s symbolic.

“It was cracked and had to be glued back together,” he quipped.

 

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