In the 1990s, many states set aside rainy day funds -- reserve accounts funded during that decades economic expansion -- to be the first line of defense against the pressures that declining revenues and rising need for public services in a recession might place on state budgets. Because of the existence of rainy day funds, many states were better able to handle the impact of the 2001-2002 recession than previous economic downturns. But in many cases states did not "hedge" enough and were still forced to raise revenues and cut spending more than they would have liked.
In the scramble for budget solutions, policymakers should carefully consider reforms that will help prevent this sort of crisis in the future, while making it easier to contain the fiscal damage that occurs when revenues fall quickly and sharply.
Inaccurate budget numbers have contributed enormously to state and local fiscal problems. In many states and localities, forecasts of government revenue and expenditure are inadequately analyzed, infrequently re-estimated, and insufficiently protected from political manipulation and sheer self-deception.
To help prevent and solve budget problems related to inaccurate numbers and undisciplined spending, policymakers in Virginia and Delaware have adopted reforms that help manage the complex stream of revenue and expenditures and contain overspending before it is a problem.
When former Gov. Mark Warner of Virginia took office in 2002, he quickly discovered that his state's budget shortfall was far worse than anyone had predicted, and far worse than his predecessor had admitted. To ensure that revenues are forecast more accurately and promptly, Warner ordered that within a month of the end of each fiscal year, the state comptroller give the governor a report of the actual collections of the state's main sources of revenues, compared with the official budget estimates for the year that just ended. If tax revenue is less (1 percent or more) than the official budget estimates, the governor must revise the revenue forecast by preparing a new, written, comprehensive re-estimate of general fund revenues for the current and next year. Newly-elected Gov. Tim Kaine continued this custom when he gave his mid-session update to the general fund revenue forecasts in February 2006.
Another Warner reform increased deposits into the state's "rainy day" emergency revenue fund in times of extraordinary revenue growth. When increases in revenues for a given year are 50 percent higher than the average increase experienced over the prior six years, the state must now increase the amount of money going into the rainy day fund by 50 percent. For example, in fiscal year 2004, Virginia found itself with $918.7 million in additional revenues above what they had budgeted for the previous year. This windfall allowed Gov. Warner to make a "super deposit" into the state's Rainy Day fund to prepare for future emergencies. When presenting his proposed amendments to the 2004-2006 Biennial Budget, Gov. Warner said, "The choices we make now -- when times are better -- will say as much about us as how we handle the though times."
Another reform ensures that legislative proposals are enacted only after policymakers fully consider future and hidden costs. By requiring an assessment of the long-term impact of certain proposed legislation, the reform minimizes the election-year tendency to enact proposals that sound good but have big future costs. In practice, the reform gives the chair of the House Appropriations and Senate Finance committees the responsibility of identifying bills with potential long-term budget ramifications and then tasks the Department of Planning and Budget with providing a six-year estimate.
While many program costs are readily predictable, some are harder to forecast due to changes in population, constituent demand, and even economic conditions. To modify spending decisions in light of unpredicted costs, this reform requires the Department of Planning and Budget to report on the actual costs of new programs by the end of each September.
Finally, Warner secured a reform that requires sunset dates in legislation establishing new boards and commissions. Until now, legislators created boards and commissions at a staggering pace, with no mechanism to phase out or reassess the value of current ones. Now each new board or commission must be phased out after three years unless the legislature takes an affirmative step to renew it.
One commission that continues to make a decidedly valuable contribution is Delaware's Economic and Financial Advisory Council (DEFAC). Created in the late 1970s by executive order of then-Gov. Pete Dupont, the commission continues to offer state and local policymakers a model for how to produce excellent budget forecasts. The DEFAC model works because it gives the governor and legislators their initial budget numbers and updated forecasts from an independent, nonpartisan group of public and private sector experts. Over time, DEFAC has earned trust and credibility with Chief Executives and legislators from both parties, who accept its forecasts without question. Deputy State Treasurer Anne Visalli says of DEFAC: "It's kept the state budget and revenue process out of political bargaining."
Chaired by a member of the private sector, DEFAC meets six times a year to evaluate and regularly report on the constantly changing economic factors affecting the state's revenues and expenditures. During the recent revenue freefall, Delaware policymakers had the forecasts they needed to respond to declining revenue and unexpected costs before they created a significant budget shortfall. Quick spending modifications helped protect Delaware residents from the dramatic service cuts that residents of other states are experiencing.
As we enter another economic downturn, many policymakers will still need to make painful cuts in the government services their constituents value. But they should recognize that better methods of financial management will not only help solve today's shortfall, but will also help prevent damage from "rainy days" in the future.
Katherine Barrett, et al., "The Government Performance Project: The Way We Tax: Delaware," Governing, February 2003
www.governing.com/gpp/2003/gp3de.htm
DEFAC's publications
http://www.state.de.us/finance/publications/DEFAC.shtml
"State Rainy Day Funds: What to Do When it Rains?"
Center on Budget and Policy Priorities
http://www.cbpp.org/1-31-02sfp2.htm
Honorable Jack Markell
State Treasurer
Thomas Collins Building Suite 4
540 South DuPont Highway
Dover, DE 1990
(302) 744-1000
Jody Wagner
Secretary of Finance
P.O. Box 1475
Richmond, VA 23218
(804) 786-1148
(804) 692-0676 (fax)
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