WASHINGTON — State rainy-day funds plunged by 70% or $21.3 billion from fiscal 2006 to fiscal 2010, underscoring how depleted state funding cushions have gotten as they prepare fiscal 2012 budgets without federal stimulus aid, according to a report released Thursday.
The funds totaled only $8.9 billion at the end of fiscal 2010 in July, way down from $30.3 billion in fiscal 2006, according to the report issued by the Center on Budget and Policy Priorities.
Rainy-day funds exist "to smooth out" the business cycle so that states can weather economic downturns, said Elizabeth McNichol, co-author of the report. Most states are constitutionally required to balance their budgets, so these reserve funds help them prevent immediate spending cuts or tax increases, she said.
But the center found that the economic downturn uncovered "serious flaws" in the structure of many rainy-day funds. Some states restrain access to their reserve accounts with methods such as requiring a supermajority of legislators to release funds, for example. Others cap the size of their funds, limiting how much they can save.
With many states still grappling with revenue shortfalls, now "is not yet the time for many states to make deposits" to their rainy-day funds, the report warned. However, states should take action now to reform the structures of their rainy-day funds — by allowing reserve accounts to refill when times are good and by offering state officials easier access to the money when times are tough, it said.
Nine states reported that they have fully exhausted their reserve funds since fiscal 2006, according to the report. They are Arizona, California, Indiana, Kentucky, Maine, Minnesota, Nevada, New Jersey, and Ohio. The rainy-day funds of three states — California, Minnesota, and Ohio — dropped from more than $1 billion in fiscal 2006 to zero in fiscal 2010.
With states' savings levels already low, budget writers are preparing for fiscal 2012 without funds from the American Recovery and Reinvestment Act of 2009. States face a $37.9 billion loss in ARRA funds in fiscal 2012 compared with fiscal 2011, according to the National Conference of State Legislatures. What little money remaining in states' reserve accounts will likely be called upon in fiscal 2012, McNichol said.
When the drop in state' general fund surpluses is combined with the decreases in their rainy-day funds, states' total savings cushions looks even worse. From fiscal 2006 to fiscal 2010, states' overall savings fell by three-quarters, to $13.7 billion from $60.2 billion.
Five states do not have reserve funds, according to the CBPP report — Arkansas, Colorado, Illinois, Kansas, and Montana. The data excludes two states' funds, Alaska and Texas, because their bountiful energy resources have helped them amass rainy-day funds totaling $18.2 billion in fiscal 2010.
McNichol highlighted the structure of the Massachusetts r fund as a model for other states to copy. The fund draws on revenue from three separate sources to sustain itself. It also offers state officials relatively easy access to the reserve money, she said.
Alternatively, Missouri's rainy-day fund requires a super-majority of votes by legislators to access funds. As a result, the state has not tapped its reserve account, according to the report.
McNichol said the flexibility offered by Massachusetts is more accommodating to state officials. Missouri's restrictions discourage its officials from even considering drawing its rainy-day fund in times of need, she said. Often, in states requiring a super-majority of votes, lawmakers won't even introduce legislation to tap to the fund because of the difficulty of rounding up enough votes, the report said.
Five states — Hawaii, North Dakota, Oklahoma, South Carolina, and Virginia — passed laws last year to either increase the cap imposed on rainy-day funds or enhanced the state's ability to make deposits into the fund.