State House ponders tapping rainy day fund
Some favor spending reserves over more program cuts
ANNAPOLIS Deep within Maryland's budgetary catacombs sits a giant pot of money to be used only in a fiscal emergency.
But as Gov. Martin O'Malley prepares to bring a third round of proposed budget cuts to the Board of Public Works next month with a $2 billion shortfall looming for fiscal 2011, a number of legislators and state officials say it's time for the General Assembly to consider drawing down the "rainy day fund" a reserve amounting to at least 5 percent of general fund revenues.
The worst recession since the Great Depression has states nationwide searching for ways to balance their budgets without increasing taxes or cutting already pared programs.
Twenty-three states tapped into their reserves to reduce or eliminate budget gaps in fiscal 2009, said the National Association of State Budget Officers. At least 15 states planned to use their rainy day funds in fiscal 2010, according to the June 2009 NASBO report.
Citing the desire to protect Maryland's prized AAA bond rating from the three major Wall Street agencies a mark shared by only six other states that enables Maryland to benefit from low interest rates when it floats debt for large-scale capital projects O'Malley (D) said he would like to avoid using reserve funds for operating expenses.
But he acknowledged the increasing difficulty of slashing aid to programs, as revenue collections continue to lag.
"The longer we go through this recession, the more we are forced to cut from bone and muscle," he said during Wednesday's Board of Public Works meeting.
That's prompted some lawmakers to consider taking a fresh look at a more appropriate level for the $651.1 million rainy day fund.
"It's there for a reason," said Del. Murray D. Levy (D-Dist. 28) of La Plata. "If you never use it, why do you have it?"
The topic was raised Wednesday during a meeting of the Joint Committee on the Management of Public Funds as Treasurer Nancy K. Kopp was delivering a briefing on the state's fiscal posture.
Kopp (D), who is protective of the AAA bond rating, agreed that the fund should not be totally sacrosanct, but must be handled with care. If legislators decide to use reserves to close short-term gaps, there must be a plan in place to show the rating agencies that the state is being fiscally responsible in the long term, she said.
"I think the bond rating agencies would understand if it was part of a total package and the package was based on some credible numbers," she said.
For instance, Kopp said if the economy shows signs of rebounding and lawmakers decided to use the rainy day fund as a bridge until revenues pick back up, that would probably not jeopardize the bond rating.
"You don't want a bridge to nowhere, because then you've lost your last fallback," she said.
The possibility that economic conditions could worsen or something unexpected could happen causes many states to use their reserves only as a last resort, said Stacey Mazer, a senior staff associate for NASBO.
"States in general have built up their balances to pretty good levels prior to the downturn, but it goes away quickly," she said.
Maine used all $51 million in its rainy day fund to plug a budget hole. Alabama also emptied its $216 million reserves to fill a gap in the current fiscal year that went toward education. Connecticut lawmakers drained the state's $1.4 billion rainy day fund to resolve its budget morass. Ohio did the same with its $1.01 billion fund to balance the fiscal 2009 budget; it has a whopping 89 cents left in reserves. Large sums were also taken from the respective rainy day funds in Minnesota and North Carolina, according to a Stateline.org news analysis.
Warren G. Deschenaux, the Maryland legislature's chief budget analyst, prefers a cautious approach when considering the rainy day fund.
The state has always believed it could use the rainy day fund, with little risk to its bond rating, so long as it had a plan to replenish it.
"Just sucking it down however to further defer decisions probably wouldn't be viewed so positively," he said.
The rainy day fund will almost certainly be on the table once legislators start working on the fiscal 2011 budget next year, House Speaker Michael E. Busch said.
With health care having already shouldered substantial cuts and state employees being forced to take up to 10 furlough days, it's difficult to consider big pots like K-12 education and the rainy day fund off limits, said Busch (D-Dist. 30) of Annapolis.
States have little ability to cut education budgets that have been supplemented with federal recovery aid because the guidelines stipulate that education must be funded at the fiscal 2008 or fiscal 2009 level whichever is higher or states would forfeit the stimulus dollars.
The state's high water mark for education funding was in fiscal 2008, following the six-year phase-in of the $1.3 billion Thornton school funding formula.
"It leaves us keeping our commitment to education, but it limits our budget actions," said Sen. Richard S. Madaleno (D-Dist. 18) of Kensington.
Education represents about 38 percent of the general fund, making it more difficult to find the necessary reductions in the rest of the budget.
"The cuts have to come out of other places," Madaleno said.
Politics is another factor. O'Malley, who often trumpets Maryland's top-ranked school system as rated by Education Week, would be loath to cut aid to schools in an election year.
"It's been a tremendous investment. It's also yielding tremendous returns," he said recently, pointing to recent improvement in Baltimore city schools' test scores.
Federal recovery dollars helped states keep their budgets in balance, but it hasn't been a panacea. States have run the gamut in finding ways to boost their coffers.
More than 15 states slashed aid to local governments. Delaware and Florida passed expanded gambling. Georgia passed a so-called "super-speeder" law that assesses an extra $200 fine on motorists caught driving over 85 mph on the state's highways. Rhode Island focused on pension reform, deferring actuarial funding of retiree health benefits, restricting the minimum age of retirement to 59 and eliminating pension cost of living adjustments for retirees. Michigan is locked in a battle over education spending.
Essentially, almost nothing is sacred.
"Things that were off the table may end up being on the table because there are no other alternatives or because they've already done the other things," Mazer said. "Nothing's really been untouched."
Staff Writer Sean R. Sedam
contributed to this report.