Lawmakers mull tapping state's rainy day fund

AAA bond rating could be at risk

Wednesday, Oct. 14, 2009

But as Gov. Martin O'Malley prepares to bring a third round of proposed budget cuts to the Board of Public Works next month with a $2 billion shortfall looming for fiscal 2011, a number of legislators and state officials say it's time for the General Assembly to consider drawing down the "rainy day fund" — a reserve amounting to at least 5 percent of general fund revenues.

The worst recession since the Great Depression has states nationwide searching for ways to balance their budgets without increasing taxes or cutting already pared programs.

Twenty-three states tapped into their reserves to reduce or eliminate budget gaps in fiscal 2009, said the National Association of State Budget Officers. At least 15 states planned to use their rainy day funds in fiscal 2010, according to a June 2009 NASBO report.

Citing the desire to protect Maryland's prized AAA bond rating from the three major Wall Street agencies — a mark shared by only six other states that enables Maryland to benefit from low interest rates when it floats debt for large-scale capital projects — O'Malley (D) said he would like to avoid using reserve funds for operating expenses.

But he acknowledged the increasing difficulty of slashing aid to programs, as revenue collections continue to lag.

"The longer we go through this recession, the more we are forced to cut from bone and muscle," he said during last week's Board of Public Works meeting.

That's prompted some lawmakers to consider a more appropriate level for the $651.1 million rainy day fund.

"It's there for a reason," said Del. Murray D. Levy (D-Charles). "If you never use it, why do you have it?"

The topic was also raised during a meeting of the Joint Committee on the Management of Public Funds as Treasurer Nancy K. Kopp delivered a briefing on the state's fiscal posture.

Kopp (D), whose office oversees bond sales and is therefore especially protective of the AAA rating, agreed that the fund should not be totally sacrosanct, but must be handled with care. If legislators decide to use reserves to close short-term gaps, there must be a plan in place to show the rating agencies that the state is being fiscally responsible in the long term, she said.

"I think the bond rating agencies would understand if it was part of a total package and the package was based on some credible numbers," she said.

For instance, Kopp said if the economy shows signs of rebounding and lawmakers decided to use the rainy day fund as a bridge until revenues pick back up, that would probably not jeopardize the bond rating.

"You don't want a bridge to nowhere, because then you've lost your last fallback," she said.

The possibility that economic conditions could worsen or something unexpected could happen causes many states to use their reserves only as a last resort, said Stacey Mazer, a senior staff associate for NASBO.

"States in general have built up their balances to pretty good levels prior to the downturn, but it goes away quickly," she said.

Connecticut lawmakers drained the state's $1.4 billion rainy day fund to resolve its budget morass. Ohio did the same with its $1.01 billion fund to balance the fiscal 2009 budget; it has 89 cents left in reserves. Large sums were also taken from the respective rainy day funds in Minnesota and North Carolina, according to a Stateline.org news analysis.

Warren G. Deschenaux, the Maryland legislature's chief budget analyst, prefers a cautious approach when considering the rainy day fund.

The state has always believed it could use the rainy day fund, with little risk to its bond rating, so long as it had a plan to replenish it.

"Just sucking it down, however, to further defer decisions probably wouldn't be viewed so positively," he said.

When the economy was still buzzing in 2006, the General Assembly passed legislation that sought to boost the state's reserves to 7.5 percent of the general fund, which is about $14 billion for fiscal 2010. But once the economy started to sag, the target became an unrealistic goal.

The rainy day fund will almost certainly be on the table once legislators start working on the fiscal 2011 budget next year, House Speaker Michael E. Busch said.

With health care having already shouldered substantial cuts and state employees being forced to take up to 10 furlough days, it's difficult to consider big pots like K-12 education and the rainy day fund off limits, said Busch (D-Anne Arundel).

States have little ability to cut education budgets that have been supplemented with federal recovery aid because the guidelines stipulate that education must be funded at the fiscal 2008 or fiscal 2009 level — whichever is higher — or states would forfeit the stimulus dollars. The state's high water mark for education funding was in fiscal 2008, following the six-year phase-in of the $1.3 billion Thornton funding formula.

"It leaves us keeping our commitment to education, but it limits our budget actions," said Sen. Richard S. Madaleno (D-Montgomery).

Education represents about 38 percent of the general fund, making it more difficult to find the necessary reductions in the rest of the budget.

"The cuts have to come out of other places," said Madaleno, a fiscal expert who sits on the Senate Budget & Taxation Committee

Staff writer Sean R. Sedam contributed to this report.

abrody@somdnews.com