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States dither over rainy-day funds

Some are raiding their reserves. Others say the need is not yet an emergency.

Lawmakers around the country are engaging in a tricky bit of economic forecasting these days, trying to figure out whether - or when - to tap into their states' rainy-day funds.

The calculation involves deciding if it is better to raid the fund for fiscal emergencies now or to wait, in case the economic slowdown worsens and the need for revenue becomes more desperate.

Already, Arizona lawmakers dealt with a $1.2 billion shortfall for this fiscal year, which ends in most states on June 30, by spending more than two-thirds of the state's rainy-day reserve.

In Virginia, House Republicans opposed Democratic Gov. Tim Kaine's proposal to use $423 million of the state's rainy-day fund to close a projected revenue gap in the current fiscal year. They relented and agreed to a compromise of about $352 million.

In Tennessee, Gov. Phil Bredesen is resisting similar calls to tap that state's reserves to fix its deficit.

"Early on in any recession, which is where we are now, is not the time to start diving into the savings account," Bredesen said.

States generally try to maintain reserves of at least 5 percent of their budgets to protect their credit rating. The decisions that trigger the use of rainy-day funds vary from state to state and, of course, involve politics as well as economics.

Governors and lawmakers tend to be reluctant to dip into the funds out of fear that, without the cushion, unpopular tax increases are not far behind.

But officials also see draining rainy-day funds as more politically popular than cutting health-care programs or school funding, or raising the dreaded "t" word.

A National Conference of State Legislatures survey conducted last month found that several states - including Alabama, Massachusetts and Minnesota - plan to tap their rainy-day funds to close budget gaps in the year beginning July 1.

The decisions are being made amid an anemic economy that is hitting states hard. Earlier this month, the Rockefeller Institute of Government reported that state sales tax revenue delivered the weakest performance in six years during the first quarter of 2008.

In April, the NCSL said the finances of many states had deteriorated so badly that they appeared to be in a recession, regardless of whether that was true for the nation as a whole.

Such dire news is one reason some states are holding off raiding their reserves.

"They're worried that, as bad as it might be, it might get worse," said Scott Pattison, executive director of the National Association of State Budget Officers.

Complicating matters, states tend to lag behind the nation when it comes to recovering from a downturn.

"You start picking up on your income and even your sales tax, but then you get hit with the Medicaid caseload growth," said Ray Scheppach, executive director of the National Governors' Association.

Rainy-day funds were relatively healthy at the end of 2001, even after a recession and the shock of the 9/11 attacks. Over the following two years, however, the funds plummeted as cash-starved states looked for help.

State coffers have since been refilled, hitting a historic high in 2006, when states reported $69 billion in their reserves, including rainy-day funds, or 12 percent of total revenue. That figure will drop to about $46 billion, or 7 percent, by June 30, the end of the business year for most states, according to the NASBO.

States worry about the effect on their credit ratings if the funds dip too low. But one fiscal group says states should not hesitate if they are needy.

"Having a rainy-day fund and not using it is the same as not having a rainy-day fund at all," said Liz McNichol of the Washington-based Center on Budget and Policy Priorities.