Budget Talk: Why saving for a rainy day matters

*First appeared in the July 23 edition of the Laurel Chronicle newspaper

When I play word association with the month of July, some things come to mind: Independence Day. Bastille Day. Neshoba County Fair. Start of a new fiscal year.

We’ve already celebrated the red, white, and blue (and le rouge, blanc, et bleu) with fireworks, picnics, and luckily, no guillotines. The Neshoba County Fair, with its red dirt and horse races and political overtones, comes but once a year, but the new state fiscal year lasts twelve months. Let’s talk about it, shall we?

Mississippi’s fiscal year runs July 1 through June 30. Last legislative session, the Legislature adopted a balanced budget for FY 2015 that increased funding for priorities such as public safety and education, reduced reliance on one-time money, and filled the rainy day fund to its statutory limit.

This budget decision was a joint effort by the state’s top Republicans: Governor Phil Bryant, Lt. Gov. Tate Reeves, and Speaker of the House Philip Gunn. These conservative leaders recognize that a full rainy day fund can stave off future budget cuts and stabilize the budgeting process.

Like so many long-term approaches to public policy, it wasn’t an easy decision to make. Setting aside funds for tomorrow’s uncertainties meant less funds for today’s projects.

A quick trip down memory lane reminds us of the value in having a budgetary umbrella for stormy weather – even if our umbrella isn’t as wide as it needs to be.

The Great Recession wreaked havoc on state finances, not only in Mississippi but across the nation. Collectively, states had about $60 billion in reserves to offset revenue losses, but they faced a combined shortfall nearly twice that amount ($117 billion), according to the Pew Charitable Trust’s “Building State Rainy Day Funds.”

While reserve accounts helped states weather this fiscal storm, the recession highlighted gaps in the saving practices employed by states which “could have set aside more in recent periods of growth if not for statutory limits on the total size of reserves and rules…that make saving a low budget priority.”

In Mississippi, our rainy day fund is officially known as the “Working Cash Stabilization Reserve Fund” and was created by the 1992 Budget Stabilization Act. The law defines a “full” rainy day fund as 7.5 percent of the state’s general fund budget to cover deficits that may occur as a result of revenue shortfalls.

When the recession hit Mississippi, it walloped state revenues. Over two fiscal years (2009 and 2010), Gov. Barbour was forced to cut budgets by more than $650 million. Fortunately, before state revenues tanked, lawmakers had filled the rainy day fund at about $380 million.

Most of these funds were used to stabilize the budgeting process during the recession and its aftermath, which lingered long after the recession’s official end.

The rainy day fund alone wasn’t enough to offset cuts, but it did provide a cushion that reduced the amount of cuts necessary to balance the budget without huge tax increases on Mississippians.

Those who criticize putting money aside for the future do so at the peril of risking funding for priority programs – whether it’s education, transportation, public safety, or other government services.

Mississippi’s experience is like that of other states: Our savings umbrella could have (and maybe should have) been larger, which would have more significantly reduced and/or eliminated the need for cuts in priority programs.

Because we statutorily cap our rainy day fund at 7.5 percent of spending, though, we didn’t have enough money to completely offset revenue shortfalls.

In fact, the idea of saving more – not less – is already underway. Standard & Poor’s and Moody’s gives top scores to states with savings equal to or greater than 8 to 10 percent of annual revenue or spending. The Government Finance Officers Association suggests balances of up to two months’ worth of operating revenue, and the National Conference on State Legislatures recently opined that the five-percent rule (setting aside five percent of revenue) is no longer a universally applicable safeguard measure.

While revenues appear to be on the rise, those who control the purse strings must consider lessons learned from leaner times. I applaud the Republican leadership for their political courage in this regard.

When certain Democrats decry saving, saying we ought to “spend, spend, spend,” Republicans need only to remind them of yesteryear when we were able to avoid larger cuts to programs by using reserve funds.

The Pew Charitable Trust has it right: “In a recession, adequate reserves can improve states’ ability to keep promises already made, whether those are in the form of spending commitments, tax policies, or both.”