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Rainy day fund a key to states prosperity
Hill Jack
Sen. Jack Hill

Having a healthy reserve is seen as a cushion against dips in the economy and provides reassurance to bond underwriters that Georgia will address any contingencies that arise.

One of the three bond underwriters, Fitch, said this about Georgia and its bonds in the rating document published this past June:  “The longstanding AAA rating and stable outlook on Georgia’s GO (general obligation) bonds reflect its conservative debt management, a proven willingness and ability to support fiscal balance and a diversified economy. The state took repeated action during the recession to maintain fiscal balance through steep spending cuts, use of federal stimulus, and draws from its rainy day fund (RSR).  Since then it has maintained a conservative approach to fiscal management, curbing spending growth and making progress in rebuilding the RSR balance. The state’s debt profile is conservative and its debt burden is moderate as a percentage of personal income.”

So RSR levels are constantly under review by underwriters.

A view of Georgia and other states
States also vary in what percentage of their net revenue they decide to place in  their reserve fund, but the common theme is to try and be somewhere in the neighborhood of 5 percent (as of FY 2014 Georgia is at 5.15 percent).

States across the country have added to their reserves as the economy improves and the state median is now to have enough of a reserve to operate the state for 23.2 days (Georgia was at 15 days as of FY14).

Georgia is not alone in raising its RSR, but it is also not alone in the fact that its fund still hasn’t reached pre-recession levels. According to PEW, only 12 states have reported that their rainy day fund has been restored to 2007 levels.

However, it should be noted that Georgia was able to increase its amount of days the state could run on its reserve from FY13 to FY14, a time when the national average actually decreased.

California as an example of RSR’s importance
On election night California voters approved Proposition 2, a ballot measure aimed at improving the state’s Budget Stabilization Account (BSA). California, which has struggled to increase its credit rating, was immediately upgraded to A+ upon the measure’s passage. Standard and Poor’s cited the increase in the maximum size of California’s BSA as a reason for the upgrade.

Proposition 2 rose the max amount of the BSA to 10 percent of general fund revenues, as well as requiring the state to set aside 1.5 percent of general fund revenues, and creating a separate rainy day fund for K-12 education.

The day after the election, Nov. 5, Standard and Poor’s released a statement announcing the upgrade from A to A+. Standard and Poor’s specifically cited Proposition 2’s impact to help the state in times of revenue volatility as a reason for its upgrade. This example shows the importance good management of a state’s rainy day fund has on its credit rating.

While it may be tempting for states to utilize surpluses, the bond underwriters clearly believe a robust rainy day fund is a sign of a state’s financial health.

Georgia’s current RSR balance, around $979 million, would operate the state about 15 days in case of an emergency. It is important the state continues building the RSR toward that upper limit of 15 percent of previous year’s net revenues. Certainly around $2 billion is a good target allowing the operation of the state a little over 30 days if catastrophe hits.

Keeping in mind the key role that the RSR plays in the AAA bond rating earned by the state, we should remember there is a good reason why only a handful of states, 10 or so, about 20 percent, currently enjoy this rating which earns the state the very lowest bond interest rates.

It is always a choice between spending on state needs and saving through the RSR. Finding that right balance is always the challenge for Georgia’s leaders.

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