What Others Are Saying: Time to Tap Rainy Day Fund?
Fearing steep budget cuts that could lead to more furloughs, layoffs and cuts to state services, members of the American Federation of State, County and Municipal Employees are urging the state to dip into its $640 million rainy day fund. Normally, such an idea is heresy – bond rating agencies demand that the state keep at least 5 percent of its general fund in reserve to maintain our AAA bond rating (which was recently re-affirmed), and no matter how bad things get, Maryland never goes below that figure. The rainy day fund has become less what its name implies and more the price of getting the seal of approval from Wall Street.
Gov. Martin O’Malley has already rejected the proposal (he’s not so keen on the union’s other idea, more tax increases, either), but he should reconsider the rainy day fund. It would be a mistake to delve too deeply into the fund, but there’s a case to be made for using some of it in the fiscal year that starts in July.
For one thing, the lower our revenues go, paradoxically, the less we need in reserve. The $640 million is enough to support the $13 billion or so we’re now spending, but as more cuts are made, we’ll need less. Effectively, cutting $1 billion from the budget gets us $50 million to play with from the rainy day fund.
Furthermore, Maryland could make the case to the bond rating agencies that a small, temporary dive into the fund is warranted given that slots are, finally, coming on line. The first parlor, at Ocean Downs, is expected to be up and running by Memorial Day, and approval for a Cecil County site isn’t far off. The two are likely to be producing revenues sooner than state budget analysts expected. We’re nowhere close to the $600 million in annual slots revenue that officials hope we might one day get, but we could probably justify at least some use of the rainy day fund in the meantime, especially if we see movement soon from the Anne Arundel County Council on zoning for the Arundel Mills casino, or if the Baltimore slots proposal moves forward.
More extensive use of the fund would require broader solutions. A ticking time bomb in the budget is teacher retirement fund payments. The federal government is now picking up a chunk of the tab through the stimulus bill, but that runs out in fiscal 2011. If the General Assembly decided this spring to start shifting some of those costs to the counties – a move that makes sense from a budgetary perspective anyway – Maryland could probably justify dipping farther below 5 percent for a year.
What difference does $50 million or $100 million make when Maryland is facing a budget shortfall of as much as $2 billion? It means that many fewer painful choices have to be made. To put it in context, the mental hospital the state is closing on the Eastern Shore would cost perhaps $9 million to keep open. An extra $100 million could save hundreds or thousands of state workers’ jobs. It wouldn’t solve Maryland’s problems or even prevent a lot of heartache in the coming months, but every little bit helps.
Maryland wasn’t always so parsimonious with its rainy day fund. During the severe budget crisis of the early 1990s, draining the fund was among the first things then-Gov. William Donald Schaefer did. It makes sense; what is the money for, if not, in dire circumstances, to be used? Since then, rainy day funds have become standard – virtually all states have them now – and it takes more to impress the credit analysts. But that doesn’t mean using some of the money would bring instant disaster. According to the National Conference of State Legislatures, eight states are considering or already have tapped their rainy day funds in the current fiscal year, and another eight are using other kinds of reserve funds. Connecticut depleted its $1.4 billion rainy day fund entirely, Massachusetts is using $214 million, and Pennsylvania ended the longest budget impasse in the nation last week, in part by using all $755 million it had socked away.
Of course, those states are not in Maryland’s league when it comes to bond ratings. Maryland is one of just six states with AAA ratings from all three agencies: Moody’s, Standard & Poor’s and Fitch. But one of our peers, Virginia, did tap its rainy day fund this year, to the tune of $490 million. By the end of fiscal 2010, the fund is expected to total a scant 2.1 percent of revenues, less than half of Maryland’s 5 percent threshold. How did Wall Street react? Virginia is still AAA. Fitch recently noted its "conservative approach to financial operations."
Maryland shouldn’t get carried away. But if it can’t tap the raindy day fund now, what good is it?
Reprinted courtesy Baltimore Sun