Rainy day fund taking hits

THE STATE’S RAINY DAY FUND is set aside for years when the economy is tanking, tax revenues are falling, and officials are scrambling to fill budget gaps. That’s what happened in the early 2000s and in 2008 when the state was gripped by recession; the state tapped the rainy day fund to weather the economic storm.

But over the last four years state leaders have been dipping into the rainy day fund or diverting money headed for the fund even though the economy is improving and tax revenues are growing. Former governor Deval Patrick hijacked $100 million headed for the rainy day fund in fiscal 2013 and grabbed another $350 million in fiscal 2014. Gov. Charlie Baker snatched $130 million that had been headed for the rainy day fund in fiscal 2015 and his 2016 budget relies on another $300 million diversion.

Patrick and Baker have both made the case that the diversions are short-term solutions to pressing budget problems, but the money grabs are troubling signs. The Massachusetts economy is not in the midst of a rainstorm, yet the state’s elected leaders are acting as if it is. Spending money that is supposed to be used to replenish the rainy day fund will mean there is less money available when the deluge actually arrives.

Andrew Bagley, director of research and public affairs at the Massachusetts Taxpayers Foundation, a business-backed fiscal watchdog group, says state leaders aren’t adhering to the policies they set up to ensure a healthy rainy day fund. “We lost some of our fiscal discipline,” he says.

The rainy day fund is the equivalent of the state’s savings account.  In theory, the state socks away money in the good times and then makes withdrawals when the economy is on the skids. The goal is to even out the state’s revenues so, in the bad times, there is still money available for vital programs. The rainy day fund worked as designed in 2000 and 2008, as money was withdrawn from the fund to offset a downturn in state tax revenues. Those withdrawals depleted the fund; over the period from 2008-2009, the size of the rainy day fund dropped from $2.1 billion to $841 million. When the economy began to recover, the state began pumping more money into the fund and it began to grow again, hitting $1.1 billion during the current fiscal year.

The Bay State’s rainy day fund is the sixth largest in terms of dollar value in the country, but in relative terms it is shrinking. The latest Fiscal 50 study put out by the Pew Charitable Trusts ranked the Massachusetts rainy day fund 37th in the country, and Pew’s forecast estimates the fund’s ranking will slip another notch in the current fiscal year. As recently as fiscal 2012, the Massachusetts rainy day fund ranked 26th nationally.

The Pew rankings are based on how long a state could continue to operate using money in its rainy day fund. For fiscal 2014, the Massachusetts rainy day fund would have funded government operations for 14.2 days. The national average was 24 days. The recent slippage in the Massachusetts ranking reflects the moves by Patrick and Baker to divert money that by law was supposed to be used to replenish the rainy day fund.

Until fairly recently, the Massachusetts rainy day fund relied on deposits of any surplus money left over at the end of a fiscal year. The danger of that approach became evident toward the end of the last decade. In fiscal 2007, the state collected $2.2 billion in capital gains tax revenues. The following year, with the state mired in a harsh recession, capital gains tax revenues plummeted to $832 million. The volatility of the capital gains tax convinced lawmakers in 2010 to shift any capital gains tax revenue in excess of $1 billion into the rainy day fund. The following year lawmakers added another source of rainy day funding, directing that any corporate tax settlement money in excess of $10 million should be put aside for tough economic times.

Over the last three fiscal years, Massachusetts tax revenues grew by more than $2 billion, yet state leaders nevertheless spent money that was supposed to go into the rainy day fund. Patrick tapped $450 million in corporate tax settlement funds that were supposed to be deposited in the rainy day fund. Baker, trying to close a $768 million budget gap this fiscal year, took $130 million in capital gains tax revenue that was headed for the rainy day fund. His budget for the coming fiscal year relies on $300 million more of capital gains tax revenue that was supposed to go to the rainy day fund.

All of these diversions reflect the inability of state officials to match spending and revenue. Noah Berger, president of the Massachusetts Budget and Policy Center, a nonprofit that examines how budget and tax policies affect low and moderate income people, says state officials need to either boost the state’s revenues or cut spending. State leaders so far have chosen a third option, bridging the gap between revenues and spending by tapping money headed for the rainy day fund.

Lisa Heller, vice president of Moody’s Investors Service, says Massachusetts currently has the second-highest bond rating, Aa1. She says the size of a state’s rainy day fund is an important factor in setting a bond rating, as are the practices of state leaders in managing the fund. She says Massachusetts overall has a “pretty good track record of best practices,” but she is watching recent actions to raid money headed for the rainy day fund closely. “Is a state continuing their strong best practices?” she asks. “Is there so much budgetary strain that they can’t commit to funds?”

When he unveiled his budget for the coming fiscal year, Baker said he had no intention of taking money out of the rainy day fund. “I think the only thing that would make us tap the rainy day fund would be for snow and ice,” he said. “Because one of the things I’ve said about the rainy day fund historically is that you’re not supposed to spend it unless it’s raining. I’ll make an amendment to that to say it’s OK to spend it if it’s snowing.”

Asked whether there was really a distinction between tapping the rainy day fund and intercepting money headed for the rainy day fund, Baker said he believed there was. “The big difference there is if you take money out of the rainy day fund you absolutely reduce the amount of money that’s available there to support the Commonwealth,” he said. “In a perfect world, I would rather see us investing in the rainy day fund. But when you inherit two deficits, one that’s worth $768 million with half the fiscal year left and the other worth $1.5 to $1.8 billion in the next fiscal year, you make adjustments.”

Eric Tenczar was a development associate at MassINC when he wrote this article. He currently works at City Year.