March 7, 2006
Rainy day budgeting
A group of legislators in Olympia is tackling the state treasury’s perennial “rainy day fund” problem. Worrying about wobbly revenue is the kind of wonkish work that doesn’t excite passions or win many votes. It’s also the kind of work that symbolizes good government. And it’s especially impressive that this is a bipartisan effort, with Republican and Democratic legislators in harness with each other.
In good years, Washington state tax revenue rises as we all buy more and pay more sales tax. What’s more, individuals’ need for government support is a little less pressing when the economy is doing well and more of us have jobs. During downturns, the supply of tax funds diminishes and the demand for services rises.
Without a working rainy day fund, legislators feel free to raise spending in “surplus” years and feel forced to cut badly needed programs in lean years. If anything, needs are less in good times and greater in bad ones. The current system sends cyclical spending in exactly the wrong direction.
Common sense dictates that we set aside a portion of the revenue during good times and use it to make up the revenue shortfall during downturns. A bipartisan group of senators, led by Sen. Joseph Zarelli, R-Ridgefield, is proposing an amendment to the state constitution to do just that. Sen., Rosa Franklin, D-Tacoma, has a closely related and similarly meritorious bill, but the Zarelli amendment has more cosponsors.
Washington already has a rainy day fund established by voter initiative. But, because the current fund isn’t written into the constitution, the legislature has been known to raid it far too freely.
The new plan enshrines the fund in the constitution. Each year, 1 percent of general state revenue is put into the rainy day fund. In a bad year—defined as a year with employment growth below 1 percent—money can be taken out of the rainy day fund by a majority vote of both houses of the legislature. Even without the below-1-percent-growth trigger, money can be withdrawn by a 60 percent vote in both houses.
If times are good enough for long enough that the level of the rainy day fund rises above 10 percent of state spending, then a majority vote in both houses can use the excess amount for current spending.
The 60 percent override provision in the new plan offers a sensible compromise between providing legislative discretion and making it hard to raid the rainy day fund when it’s not warranted.
What about the semi-automatic trigger allowing spending by simple majority vote when employment growth falls below 1 percent? Does this rule do a good enough job of identifying downturns? As it turns out, the 1 percent trigger is a surprisingly good, if simple, rule.
While not burning hot, Washington’s economy has been doing well for at least a year, and okay for two years. The last time employment growth fell below 1 percent was early 2002. Employment growth at that point had been below the magic 1 percent trigger since late 1999. If we’d had the current system in 1999 we could have gotten through the biennial budget cycle with much less panic.
Earlier drops below 1 percent growth happened in 1991 and in 1980-82. Since these bad times hit about once every 10 years, letting the fund build up at 1 percent a year until it hits ten percent of revenue makes sense.
Good as the bill is, it would be even better if drawdowns were spread over several years. Since downturns typically last more than a year, we shouldn’t spend the entire rainy day fund the instant employment growth falls below the 1 percent mark. A provision limiting a single year’s withdrawal to three times the amount of the most recent deposit would give a three to four year cushion.
The rainy day fund is diligent legislative work on an important topic. If our representatives in Olympia carry through as they should, then we voters will have to do our part next November and pass the proposed constitutional amendment. The next downturn will be less of a crisis, and we’ll have our legislators and ourselves to thank.
