States' 'rainy day' funds often have strings attached

BATON ROUGE, La. - While budget deficits threaten to cripple government services across the country, a handful of states with billions of dollars socked away in "rainy day" funds are discovering they can't use that money to offset their cuts.

Amid the worst financial crisis in decades, stringent rules governing the use of reserve funds have tied the hands of lawmakers in nearly a dozen states even as they consider raising taxes, slashing health and social services, and shuttering education programs.

About three-fourths of states have used rainy-day funds in the last three years to alleviate budget cuts, but some have had difficulty getting the money or have shied away from doing so. They would have to repay it quickly or were worried it would hurt their bond ratings.

In some states, the rules governing the funds are so strict that the savings accounts are off the table for crafting next year's budgets.

This has some questioning the point of having a rainy-day fund.

Others contend that states can't use rainy-day funds constantly to close recurring budget shortfalls or as an excuse to avoid making difficult tax and spending choices.

The bulk of the reserve funds were set up within the last three decades to help soften the blow of economic downturns or cope with natural disasters. The rules vary widely on how money gets deposited and how it can be withdrawn.

The National Conference of State Legislatures estimates that states will have closed multiyear budget gaps totaling $530 billion by the time the recession's effect has ended.

Thirty-seven states have tapped into rainy-day reserves over the last three years to help alleviate budget cuts, according to a review by the National Association of State Budget Officers, or NASBO. Alabama, Connecticut, Idaho, and some other states have drained their funds entirely to plug budget gaps.

Others have such onerous rules, they have used their reserve dollars only in a limited fashion, or not at all.

In a recent report, the Center on Budget and Policy Priorities says 12 states require that such reserve funds be replenished quickly when used, making them almost useless in a steep downturn with plunging tax revenue. Ten states require a two-thirds vote of lawmakers to use the funds, discouraging some legislatures from even attempting to get to the dollars.

Five states don't have rainy-day funds at all.

In New York, it took several years of multibillion-dollar budget deficits before the state hit the rigorous criteria to use its rainy-day fund last year. In Virginia, the money can be applied to a deficit within a current budget year but cannot be used to help offset cuts when lawmakers are crafting the following year's spending plans.

Maryland lawmakers have avoided using that state's rainy-day fund - and Massachusetts has limited withdrawals from its fund - because of concerns about downgrades from bond-rating agencies, boosting borrowing costs.

Brian Sigritz, director of state fiscal studies for NASBO, said a rule of thumb was that a state should strive to have an amount equal to 5 percent of its general fund in a reserve account. But he doesn't think bond-rating agencies will penalize states for using those rainy-day funds, given the current economic climate.