From rainy day fund to cloudy day fund.
The General Assembly managed to close a $1.5 billion budget shortfall in the budget it just passed, but don’t credit legislators with a lot of fiscal discipline. More than a third of the gap was closed by drawing down Virginia’s Revenue Stabilization Fund, more commonly known as the “rainy day” fund.
The idea behind the fund was to have a reserve to draw upon during times of acute fiscal distress such as a recession. But the economy, though tepid, is growing, employment is increasing, incomes are rising, and state revenues are climbing — just not as rapidly as forecast.
Michael Cassidy, president of the Commonwealth Institute for Fiscal Analysis, has written the best analysis I’ve seen of how lawmakers closed the revenue shortfall.
By far the biggest piece of the pie comes from drawing down the maximum allowable amount from the rainy day fund. That alone covers more than a third of the shortfall.
It is certainly preferable to draw $567 million from the rainy day fund than to make $567 million in additional cuts to core services. At the same time, it’s important to remember that this fund is intended to help Virginia get through tough economic times.
Also important: The average amount of time between U.S. recessions since 1945 has been five years. We’re now almost eight years into the recovery from the last recession. And by the end of the budget period, the fund will be less than one-quarter of the size it was before that recession, even before accounting for inflation.
Make no mistake: There will be another recession — and Virginia needs to be better prepared for it. The state can’t keep drawing from the rainy day fund instead of dealing directly with its structural revenue problems.
Bacon’s bottom line: I couldn’t have put it better myself. While Cassidy and I might disagree on the remedy, we are 100% in accord about the problem. Given current economic growth prospects, Virginia’s budget has deep structural issues, and drawing down the rainy day fund today will make the pain even more acute when a recession hits, as it inevitably will.
One approach to dealing with the structural issues is to raise taxes. Well, we raised taxes during the Warner administration, and raised them again during the McDonnell administration. While those tax increases papered over the structural budget imbalances for a time, revenue gaps inevitably re-emerged. Unless we want to slide down the slippery slope of raising taxes every five or six years until we look like New York or New Jersey, we need to fundamentally re-think the way we deliver government services.
Tweaking the system won’t hack it. We need fundamental change. I will continue to explore alternatives — from reforming land use patterns to enacting school vouchers to Uber-izing the transportation system — on this blog.
