* Illinois News Network…
A lesser-mentioned consequence of the budget battle between Democrats in the General Assembly and then-Gov. Bruce Rauner was the depletion of Illinois’ rainy day fund, which still sits nearly empty.
A state’s rainy day fund is used to avoid having to make cuts or tax hikes in the event of a sudden drop in revenue like what many states saw during the recession. In 2017, Illinois lawmakers voted to drain the state’s Budget Stabilization Fund and include the hundreds of millions of dollars that were in it to keep services going during the budget battle. Today, there’s less than a percentage of Illinois’ annual budget in that fund.
Justin Theal, an officer with Pew Charitable Trusts, said that goes against the national trend. Most other states have been bolstering their funds during times of higher revenue.
“The state had about $10 million in its rainy day fund, or the equivalent of just one-tenth of one day’s worth of operating cost,” he said. “Fiscal Year 2018 saw thirty-two states add nearly $10 billion to their rainy day funds. That’s largely the result of a healthy economy, robust stock market returns, specific state policy actions, and at least a portion of that was due to tax revenue growth from the recent federal tax reform package.”
Illinois also relies on its end-of-year balance, which Pew reports would cover 1.3 days, hence the headline.
Daily operating costs are based on a 365-day year.
* From Pew…
States use reserves and balances to manage budgetary uncertainty, including revenue forecasting errors, budget shortfalls during economic downturns, and other unforeseen emergencies, such as natural disasters. This financial cushion can soften the need for severe spending cuts or tax increases when states need to balance their budgets.
Because reserves and balances are vital to managing unexpected changes and maintaining fiscal health, their levels are tracked closely by bond rating agencies. For example, S&P Global Ratings downgraded Massachusetts’ debt rating in June 2017, citing its “failure to follow through on rebuilding its reserves.” A year later, Massachusetts deposited more than $492 million into its reserve fund. If left unaddressed, credit downgrades can lead to increased state borrowing costs for years to come.
Building up reserves is a sign of fiscal recovery, but there is no one-size-fits-all rule on when, how, and how much to save. States with a history of significant economic or revenue volatility may desire larger cushions. According to a report by The Pew Charitable Trusts, the optimal savings target of state rainy day funds depends on three factors: the defined purpose of funds, the volatility of a state’s tax revenue, and the level of coverage—similar to an insurance policy—that the state seeks to provide for its budget.