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States dipping into savings accounts to weather economic storms

For many states, rainy day here

Posted: Tuesday, February 05, 2002

PHILADELPHIA -- Many state governments are coming to the conclusion that, fiscally speaking, it's raining.

During the boom years in the 1990s, states deposited billions of dollars in ''rainy day funds'' in case of recession or catastrophe. Now, from Michigan to Maine, Nevada to New York, states are dipping into those accounts or thinking about it.

Last week, Pennsylvania Gov. Mark Schweiker proposed tapping the state's rainy day fund for only the second time since its creation in 1985 to cover $550 million of an expected $622 million shortfall. The fund contains $1 billion.

''The great news for Pennsylvanians is that we will be able for the first time since World War II to weather a recession without having to raise taxes, and it's in large measure due to our buildup of the rainy day fund,'' Schweiker spokesman Steve Aaron said Thursday.

Experts say the good news is that states are much better equipped to handle an economic slowdown than they were during the last recession in the early 1990s, having increased their cash reserves from $7 billion in 1995 to $23 billion last year. Oregon, Arkansas and Montana are now the only states without a rainy day fund.

A report issued Thursday by the Center on Budget and Policy Priorities found that states held an average of 7.7 percent of annual expenditures in reserve at the end of fiscal 2001, compared with 4.9 percent before the last recession.

''During the economic boom, states squirreled a lot of money into these funds, and that's proving important now in the economic downturn,'' said Corina Eckl, who tracks state finances for the National Conference of State Legislatures.

Faced with declining revenue, Indiana, Kentucky, Michigan and Mississippi all raided their rainy day funds in fiscal 2001. The trend continued this year when six states enacted budgets that relied on surplus cash.

With tax receipts falling sharply in the first quarter of the current budget year, Eckl said at least half the states are now proposing to use their emergency accounts.

In New York, Gov. George Pataki wants to use $646 million of the state's $3 billion rainy day fund to close this year's budget shortfall, and an additional $1.7 billion to cover next year's projected deficit.

Michigan Gov. John Engler proposed using cash reserves of $284 million to close the deficit for the budget year that ends Sept. 30. He wants to tap the fund again next budget year.

Maine Gov. Angus King wants to deplete nearly all of that state's $102 million emergency savings account to balance the budget.

Reserve funds hold appeal because they can be used as an alternative to tax increases or spending cuts. Deficit spending is not an option, because all states except Vermont are required by law to pass balanced budgets.

''The rule is that you put off the pain as long as possible, especially considering that there is an election this year in a lot of states,'' said Nick Jenny, a policy analyst at the Nelson A. Rockefeller Institute of Government at the State University of New York in Albany.

Credit rating agencies do not typically penalize a state for using its rainy day fund in an emergency, unless the state has a pattern of deficit spending built into the budget or other serious problem, said Robin Prunty of Standard & Poor's. But states should ideally use their cash reserves in tandem with budget cuts and increased revenue, she added.

Some states are loath to dip into their surpluses, for fear they won't have enough left over if the country goes deeper into recession. Florida lawmakers, for example, slashed $1 billion in spending and postponed a tax cut rather than take money from the rainy day fund.

''There's some sense that you preserve your rainy day fund for a day when it's even raining harder,'' said Iris Lav, deputy director of the Center on Budget and Policy Priorities.



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