Rainy Day Funds 'Inadequate,' Economists Warn


But the size of rainy day funds isn't the only challenge states encounter. Other governments find it difficult to even access what money they do have in reserves due to stringent rules determining when they can be used.

Some states require a supermajority of votes in the legislature. Others use economic triggers, like a specific quota on revenue shortfalls, to determine when to tap into the funds.

Such rules have their defenders.

Strict rules and regulations that determine when funds can be accessed ensure the money is only used when it is truly needed, said Russell Sobel, economics professor at West Virginia University.

"It could be the best economic year in our nation's history, and states [without such rules] could be permitted to use rainy day funds," he said.

However, Sobel also says that the rules need to be reasonable so that "states can actually get to the funds when they need them." He said using economic triggers is permissible, but in most states, requiring a supermajority vote is "too harsh."

But others say the rules can be overprotective.

The Wisconsin legislature – which captured national headlines earlier this year in its battle over Gov. Scott Walker's attempt to weaken collective bargaining rights for the state's unions -- is currently considering an amendment to the state constitution that would create a "fiscal responsibility fund" to be used when a recession hits.

The state already has a rainy day fund, but according to said Jon Peacock of the Wisconsin Budget Project, it is an "insignificant account with almost no money in it." The Project is a nonprofit initiative that analyzes the effect of budget and tax issues on families of low and moderate income.

Peacock believes that the regulations surrounding the proposed fund are too strict.

The fund can only be accessed with a supermajority two-thirds vote in the state legislature. But if there's a projected drop in the national gross domestic product for two or more quarters of the fiscal year, only a majority vote is needed to withdraw funds.

According to Peacock, if this amendment had been in place during the 2010 economic year, Wisconsin would have needed a supermajority to access the funds.

"It's a little absurd," he said. 'We had the worst recession in 80 years and we wouldn't have been able to take out money [without a two-thirds vote]. That kind of rigidity makes it counterproductive."

The amendment calls for the state to deposit funds, at least one half of one percent of state revenue, into the savings account every year that it is not taking money out.

"That means we'd have to put money into the account during the latest recession," said Peacock. "This proposal would have completely failed us in the current economy. We're going through our rainiest days, and we couldn't have touched the rainy day fund."

Peacock and the Wisconsin Budget Project favor the creation of a bigger rainy day fund but would like to see it created without such "rigid" rules.

Using economic triggers, such as gross domestic, help the states differentiate between normal budgetary woes and true financial disasters, said Florida State's Holcombe.

"There's always the temptation to raid that fund when it's not an economic emergency," he said.

But Holcombe also said regulations need to be "reasonable" in order to make it easy for states to get the funds when they truly need them.

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