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PAR Opposes Diverting Rainy Day Funds

Some members of the joint budget committee seem eager to consider ways to divert revenue from the Rainy Day Fund into program spending. While not part of the administration’s budget plan, the idea of lowering the cap on the fund to free up mineral revenues for general fund use was raised several times in last week’s presentation of the state budget for next year.

Changing the Rainy Day Fund cap, however, would require a constitutional amendment. The constitution now sets the cap on the Rainy Day Fund at 4% of the “total state revenue receipts” for the previous year. Total state revenue receipts (including federal grants and self-generated funds) this year will run about $17.9 billion, making next year’s cap about $716 million.

The constitution requires that certain revenues, including mineral revenues in excess of $850 million, be deposited in the state’s Rainy Day Fund. At the end of fiscal year 2005 excess mineral revenues will add $137 million, bringing the fund balance to $390 million. Next year’s mineral revenues have been projected conservatively so that only about $3 million would go into the Rainy Day Fund. If mineral revenues come in higher than expected next year, as much as another $323 million could go into the fund before hitting the cap.

The Rainy Day Fund serves two purposes, one is to provide a cushion in bad years and the other is to avoid letting the state become dependent on one-time mineral revenues. The current cap makes this possible.

The basic question is how much of a fiscal cushion should the state have in the form of a rainy day fund? The administration suggests that Wall Street has typically considered a 5% reserve balance to be adequate. However, the impact of the recent market meltdown on the fiscal condition of governments has led to some rethinking of traditional ideas about appropriate balances. A 2002 statement of best practices by the Governmental Finance Officers Association recommended a minimum fund balance of 5% to 15% of general fund operating revenues. The bond rating agency, Standard and Poor’s, considers a balance of 15% or more to be “strong” and 5% or less to be “low” for local government tax-backed general obligation bond ratings.

Louisiana’s Rainy Day Fund cap at 4% of total state revenues is equal to about 8% of general fund revenues (limited to taxes, licenses and fees). This cap is far from being excessive, particularly considering that only one third of the fund can be used in any one year. If the fund were at its cap today, and a drop in state revenues triggered access to the fund, about $240 million could be tapped in a given year. This amount would provide a useful stopgap in an economic downturn, but would still equal only about 1.3% of the total current budget.

The current Rainy Day Fund cap is barely adequate now, lowering it to free up potential one-time money for ongoing operating programs would be unwise. The cap should be left as is.

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