A new study out today from the Pew Charitable Trusts identifies both Idaho and Washington as among just 12 states that do things right when it comes to saving for a rainy day – accounting for the volatility of their revenue streams in how they decide when and how much to save. “The practices followed by the 12 states that tie deposits to volatility stand out as examples of how revenue and economic fluctuations can be harnessed to smooth over changes in the business cycle,” the report found. But the other 38 states face just as much volatility in their revenues, it noted, and have suffered when downturns hit and they weren’t adequately prepared.
Idaho’s Budget Stabilization Fund law triggers a transfer from the general fund to the savings account whenever state general fund revenue grow by more than 4 percent from the previous year, with transfers up to a maximum of 1 percent of revenue. Washington made almost no contributions to its budget stabilization account through the 2000s, but voters passed a constitutional amendment in 2007 and another in 2011 requiring deposit to the rainy-day fund during windfalls years. “It’s there to capture whatever the next bubble is,” Jason Mercier of the Washington Policy Center said in the report.
“The choice to save is not always an easy one,” the report noted. “Setting aside revenue often means forgoing tax cuts or additional spending on programs. Over the long run, however, the tough choices states make in good times can prevent them from having to make even tougher ones during bad times, when residents may be least able to absorb the impact of tax increases or cutbacks in spending. Linking savings to actual fluctuations can harness growth without requiring contributions during lean years.”
The report did find some fault with Idaho’s process – the deposits to the Budget Stabilization Fund are “all or nothing” depending on the revenue growth level; even in boom years, no more than 1 percent is set aside, and when growth is below 4 percent, nothing is required to be added to the fund.
“No state is doing everything it should,” the report concluded. “With continued growth forecast for most states, the next several years offer a critical opportunity to make strategic adjustments to budget stabilization funds that will prepare states for the effects of volatility for years to come.” The full report is online here.