One of the feathers in the cap for Indiana state government has been its strong penchant for saving. Whether in good economic times or bad, Indiana has generally had a durable financial foothold.
How do leaders know the right amount to save – and how do they balance the need to save versus the desire to grow during healthy economic times? A recent article from Pew delves into the issue.
Here’s an excerpt, examining how a handful of states are handling the matter heading into the new year:
With the start of fiscal 2019, policymakers in many states are asking whether they are saving enough. They are trying to determine how best to balance preparing for the future with other, more immediate priorities. They know that each dollar saved is a dollar that cannot be used now on important programs, services, or revenue reductions. To make these decisions, more are turning to evidence-based approaches, rather than setting savings targets to an arbitrary percentage of state revenue or spending. For example:
Delaware: In 2017, the General Assembly passed HJR 8, which tasked the Delaware Economic and Financial Advisory Council with assessing the state’s budget smoothing practices. In a report released in June 2018, the council recommended setting the target size of a budget stabilization fund at 10 percent of general fund revenue, large enough to offset nine out of 10 potential revenue downturns considered in the analysis. Currently, the state Budget Reserve Account is capped at the equivalent of 5 percent of general fund revenue.
Minnesota: For several years, the state has required that the maximum size of its Budget Reserve Account be based on an analysis of the state’s revenue volatility. For the current two-year cycle, the management and budget office recommended a rainy day fund size equal to 4.9 percent of biennial general fund revenue. That represents 9.8 percent in terms of annual dollars, the equivalent of $2.187 billion. By law, that number automatically becomes the cap for the rainy day fund.
Montana: As a part of comprehensive reserve reform enacted last year in SB 261, the Legislative Fiscal Division and the Office of Budget & Planning were required to study and report on Montana’s tools for mitigating volatility. The agencies used stress testing to gauge reserve levels and recommended various savings targets that could be achieved, depending on the goals of policymakers.
North Carolina: For the first time, North Carolina this year used a statistical model to determine the target size for its rainy day fund, the Savings Reserve Account. A required joint analysis by the Office of State Budget and Management and the Legislative Research Division found the state should set aside 11.3 percent of general fund revenue to meet its savings goals.
Utah: In March, the state enacted HB 452, which requires the Office of the Legislative Fiscal Analyst to produce long-term forecasts and regularly conduct comprehensive budget stress tests. In 2008, Utah started regular analyses of revenue volatility, the only state then with a statutory requirement to produce these studies on a recurring basis. The new law builds on these practices, making the volatility studies part of a three-year cycle that examines long-term fiscal sustainability. In the first year, the office will publish its volatility report. In the second, it will calculate a long-term budget that includes programs appropriated from major funds. Then in year three, the office will conduct stress testing to compare estimated future expenditures to expected revenue under multiple economic scenarios.