Some worry Massachusetts' 'rainy day' fund not hefty enough
BOSTON >> Saving your pennies for a rainy day isn't just good advice for children, it's sound financial policy for U.S. states that must balance their budgets in good times and bad, fiscal experts agree.
And Massachusetts isn't saving enough, some argue, even if its stabilization fund — far better known as the rainy day fund — remains among the nation's 10 largest with a current balance of about $1.25 billion. But viewed as a percentage of the state's operating expenses the picture is far less rosy, raising concerns that the state won't be fully prepared for the next economic downturn.
"We drew down reserves quite a bit during the (Great Recession) which is totally understandable," said Doug Howgate, director of policy and research for the nonpartisan Massachusetts Taxpayers Foundation. "The cycle we have to get into is to rebuild during good times, otherwise when the next recession comes, we simply won't have the resources."
Depending on how you view it, a $39.5 billion spending blueprint for the July 1 fiscal year recently unveiled by House leaders takes positive steps toward beefing up the reserve account — or continues an alarming trend of diverting money away from it.
State policy calls for using the first $1 billion in annual capital gains tax revenue for operations and socking away anything above that in the rainy day fund. The House budget would deposit $210 million in excess capital gains revenue into the rainy day fund, but would also divert $150 million for general budgetary needs. That matches recommendations in an earlier budget filed by Republican Gov. Charlie Baker.
Considering that in the last two fiscal years the state diverted all of the capital gains overage, the $210 million deposit is a step in the right direction, budget watchers say, but many would prefer to see the entire amount over $1 billion placed in reserve.
"We are putting money into the rainy day fund, and that's a good thing, but less than what our existing laws say we should be putting into our rainy day fund," said Noah Berger, president of the Massachusetts Budget and Policy Center. The group backs tax reforms to pay for budget priorities such as education and transportation.
The rainy day fund has seen far better times, climbing to $1.7 billion in fiscal 2001 and topping $2.3 billion during a period of economic expansion in the middle of the last decade.
Then it rained.
Legislators and then-Gov. Deval Patrick would withdraw nearly $1.5 billion from the fund during the economic downturn to offset steep losses in tax revenue. The reserve's strong pre-recession position appeared to help Massachusetts reasonably weather the storm.
"I think we utilized the stabilization fund prudently during the global meltdown ... we never really let it drop below $500 million and we've always had the goal of replenishing that," said Democratic Rep. Brian Dempsey, chairman of the House Ways and Means Committee.
Still, the fund's current balance represents only about 3 percent of total spending, compared to more than 8 percent in the middle of the last decade, according to an analysis by the taxpayers' foundation. The group recommends the fund be bulked up to $2.5 billion to $3 billion to ensure the state can withstand leaner times.
While Massachusetts retains historically high bond ratings, credit rating agencies like Standard and Poor's and Moody's suggest states should optimally have reserves exceeding 8 percent of spending, the foundation said.
"We recognize that is not achievable overnight," said Howgate. "We've got some ground to make up to get back to where we were a little while ago."
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