Virginia Division of Legislative Services
Number 3 -- November 2001
Virginia's Rainy Day Fund Revisited
Joan E. Putney
Joan E. Putney is a senior attorney in the Finance and Government section of the Division of Legislative Services.
In July of 1999, the Division of Legislative Services prepared and sent out to all members of the General Assembly a report on Virginia's Revenue Stabilization Fund (also known as "the rainy day fund"). A copy of that report is enclosed.
At that time, the Commonwealth was flush with revenues and had been for a number of years. Unfortunately, that is no longer the case, not only in Virginia but throughout much of the United States. Several states have had to take extraordinary measures, including tapping their rainy day funds and other reserves, in order to balance their budgets. Thus far, Virginia has been able to avoid using any rainy day dollars.
Virginia's Revenue Stabilization Fund
On June 30, 2000, the amount in Virginia's Rainy Day Fund was $574.6 million, and as of June 30, 2001, the total was $715.6 million, including deposits and interest (see Table 1). According to Secretary of Finance John W. Forbes, in his presentation to the House Finance, House Appropriations and Senate Finance Committees on August 20, 2001, the projected deposit to be made June 30, 2002, is $187.1 million. This would bring the fund's total to almost $950 million. To date, no withdrawals have been made from the fund.
Other States Deal with Budget Shortfalls
While the Commonwealth has not been forced to dip into its rainy day fund, others have not been so fortunate. In recent years the strong economy created extra revenues that were used to fund additional or unexpected spending and to increase rainy day fund balances. These extra revenues are beginning to dwindle, thereby becoming a smaller share of state reserves.1
Table 2 shows that as the economy has slowed down throughout the United States, the unspent revenues for all the states at year end and the amounts deposited into rainy day funds throughout the United States continue to diminish. Concurrently, rainy day fund balances become a greater percentage of total balances.
Another indication that revenues are not filling the state coffers as much as they did in much of the 1990s is to compare the rainy day fund deposits to states' expenditures across the country. The total balances in rainy day funds equaled 10.1 percent of state expenditures nationwide in 1995. Because states are beginning to dip into those funds, the amount of money in such funds is projected to drop to 5.9 percent of state spending in 2002.
Revenues have dropped the most in industrial states such as Michigan, Ohio and North Carolina, where manufacturers have been hit hard by the slump in the economy. Also in states such as Tennessee, where the main revenue producer is the sales tax, worried and unemployed consumers are not shopping, thereby reducing those revenues. While the individual income tax produces the largest amount of general fund revenues for the Commonwealth (64 percent in FY 2000), the sales and use tax is the next highest (21 percent of general fund revenues in FY 2000).
FY 2001 Mid-year Shortfall Actions
Seventeen states had to address mid-year budget shortfalls in fiscal year 2001, and they did so through a variety of actions. These included tapping tobacco settlement funds, cancelling or delaying capital projects, increasing debt obligations, implementing budget cuts and tapping rainy day or other reserve funds.
Four states tapped their rainy day funds as a step toward shoring up their mid-year budget shortfalls. The state of Mississippi had the largest withdrawal of $85 million, followed by Michigan at $77 million. Indiana withdrew $46.3 million and Kentucky $38.8 million. Three of these states tapped other reserve funds in addition to their rainy day funds (Mississippi, Indiana and Kentucky) while Colorado ($243.9 million) and South Carolina ($98.6 million) only tapped other reserve funds.
While the Commonwealth's Revenue Stabilization Fund was not touched, the Governor did issue an executive order in March to balance the state's budget after the General Assembly could not reach an agreement during its 2001 Session. Among the actions taken were delays of capital outlay projects throughout the state; cuts in state agencies' spending (e.g., reversion of unspent balances, deferred hiring for vacant positions, reduced printing costs through use of web-based publishing, reduced travel); and deferral of state grants to localities. Also as a result of the budget impasse, there were no salary increases for state employees and local sheriffs.
FY 2002 Balanced Budget Actions
Enacting balanced budgets for fiscal year 2002 proved to be a challenge in 20 states, which had to take extraordinary actions. Rainy day funds or other reserves were raided in 10 states. Once again, Indiana ($26.3 million), Kentucky ($120 million), and Michigan ($155 million) are planning to use portions of their rainy day funds in fiscal year 2002, just as they did in 2001. Nebraska also plans to withdraw $24.8 million of its rainy day fund while Maine will transfer $17.3 million to its general fund. The states of Mississippi, Ohio, Rhode Island, South Carolina, and Washington will rely on other types of reserve funds to meet their fiscal needs in 2002.
It is important to note that just as in fiscal year 2001, a number of alternatives will be implemented in addition to tapping rainy day and other reserve funds in order for states to enact balanced budgets in 2002. Such additional alternatives include delaying expenditures, reducing spending, tapping tobacco settlement funds and increasing taxes, fees and fines.2
The Commonwealth's Revenue Stabilization Fund was enacted into law after the recession in the early 1990s and the passage of a constitutional amendment. It took the place of an appropriated general fund revenue reserve. The purpose of the fund is to serve as an additional budget tool, offering a financial cushion if an unexpected downturn in the economy occurs. There is a formula by which the amount to be deposited annually is calculated, based on how the economy is doing. Because of the strong economy from the mid-1990s to early in 2000, a deposit has been made to the fund each year of its existence (except 1996).
Initial signs of reduced revenue growth began appearing throughout the country in the fall of 2000. While Virginia has not suffered as much as some states, its revenues have not continued to grow as they have in recent years. Many states have made withdrawals from their rainy day funds in order to balance their budgets. However, the majority of states' rainy day funds are governed by statutes rather than constitutional provisions, making such statutory funds easier to access than is the case in Virginia. Other state actions taken have included reducing spending, incurring more debt, tapping into other reserve funds and increasing taxes, fees and fines.
Subject to withdrawal only if the general fund revenue projection is overstated by more than two percent of the prior year's income and sales tax collections, the Commonwealth's Rainy Day Fund has remained untouched to date.
1 Much of the information in this report concerning other state's budget activities came from an annual report produced by the National Conference of State Legislatures titled State Budget and Tax Actions 2001.
2 North Carolina has experienced some difficult years recently and depleted its rainy day fund to $157 million prior to its most recent budget session that ended this fall. Because of this and other economic factors, its AAA bond rating was threatened, thereby forcing North Carolina's governor and legislators to take a number of steps in adopting the budget in September to improve the state's fiscal stability. Such steps include making a deposit of $181 million to its rainy day fund, bringing its total to $338 million. The goal is to raise that amount to the $700 million to $800 million range in the next few years. In addition, other steps include, but are not limited to, increasing the state sales and use tax by 0.5 percent and adding a new individual income tax bracket of 8.25 percent for taxable incomes exceeding $200,000 for couples and $120,000 for individuals.