Editor’s Note: The Bluegrass Beacon is a weekly column published on the Bluegrass Institute website after being published by newspapers across the state.
During the first days of this year’s General Assembly session, lawmakers earmarked $200 million in relief funds for areas devastated by violent tornadoes that ripped through Bowling Green and surrounding areas in early December.
Thanks to the healthiest “rainy day” fund in its history, at nearly $2 billion, Kentucky was in a much better position to provide this kind of important and immediate assistance than just a few years ago, when such a big change would have eaten a big hole in the state’s savings.
More storms of all kinds are certain to blow over the Commonwealth in the future, so it behooves lawmakers to ensure that their commitment to building up a large – and growing – provident fund continues even if they are criticized by some constituencies for saving too much and spending too little.
In a recently published Lexington Herald-Leader editorialAngela Oh, senior manager of the Pew Charitable Trusts State Fiscal Health Initiative, and Andrew McNeill, visiting scholar at the Bluegrass Institute, offer best practices learned from other states on how to set up and manage successfully these funds to “mitigate the impact of the economic crisis”. slowdowns”.
First, establishing “deposit rules that encourage steady accumulation of reserves” in the future by linking such deposits “to above-normal income growth or one-time increases in income” will help maintain sufficient liquidity. during future economic storms.
It would be easier for Kentucky to establish that policy now when the state is teeming with excess funds, thanks to large budget surpluses and federal Covid relief dollars that will arrive soon.
McNeill and Oh include Tennessee’s example of setting aside 10% of incremental revenue year over year, allowing lawmakers to save “more than is needed or expected while ensuring that the state has enough money to keep the services going.”
North Carolina also makes contingency saving a priority by allocating 15% of projected revenue growth to its savings reserve account at the beginning of each fiscal year.
Second, lawmakers help each other a lot by taking a proactive approach and setting rules for withdrawing from the state savings account before funding demands spike.
Without “explicit and objective conditions for drawdowns,” as Pew explains, North Carolina’s approach, the daily forecast will offer a 100% chance of rain with flooding likely in Frankfurt caused by those who think dollars invested in savings could be put to better use with new government spending. .
Finally, Oh and McNeill suggest that lawmakers “tailor reserve caps and targets to their state’s fiscal situation.”
They advise states with “greater economic and revenue volatility…to aim for larger reserves” than their counterparts with more stable tax bases.
In 2017, Pew helped North Carolina set up a savings reserve account based on an analysis of its historical earnings volatility. When Covid hit a few years later, the state needed – and had – strong reserves to deal with the emergency.
Determining the size of an adequate rainy day fund can be informed by studies offering “insight into the frequency and magnitude of a state’s revenue shortfalls”, as well as performing fiscal resilience to gauge how existing state reserves “would fare in the face of economic shocks.” Oh and McNeill write.
Once North Carolina understood the historic changes in its revenue, it was able to set an informed cap rather than continuing its historic habit of installing arbitrarily placed caps on its reserve funds.
“More states should adopt this practice,” Pew recommends in its analysis of the North Carolina experience.
What could be a better policy than a balanced and objective approach ensuring that the Bluegrass State also has sufficient cushion in the event of downturns in weather storms – of the literal and economic variety – without crowding out resources needed for other priorities?
Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free market think tank. Reach him at [email protected] and @bipps on Twitter.
