State’s untapped ‘Rainy Day Fund’ now tops $200 million

DOVER — As lawmakers and budget officials grappled with resolving a budget shortfall in the range of $400 million earlier this year, few outside state government were aware Delaware has an emergency account containing more than $200 million that has never been touched.

Rather than raising taxes or cutting services, some legislators asked, why not use that money to balance the budget?

The Budget Reserve Account, more commonly known as the Rainy Day Fund, has for nearly 40 years collected money, growing almost every budget cycle. While the account has never been accessed, the state constitution says it can be utilized “to fund any unanticipated deficit in any given fiscal year or to provide funds required as a result of any revenue reduction.”

At the time the account was created, the Farmers’ Bank of Delaware had nearly collapsed, placing financial stress on the state. The Rainy Day Fund was designed to be able to help alleviate any sudden financial pressures, such as a major drop in revenue at the end of the fiscal year or a catastrophic weather event.

“I think the purpose of it at the time was thought to be, create a reserve that you can use in … bad times” while adding money to in good times, Secretary of Finance Rick Geisenberger said.

The account acquired the name “Rainy Day Fund” because people or entities who set money aside for the future are sometimes said to be saving it for a rainy day, an expression meaning someone is planning for potential hard times to come.

The constitution prevents the allowance from exceeding 5 percent of total state revenue, although it doesn’t otherwise say how money should be placed in it. The fund currently totals $231.6 million, the maximum allowed based on revenue for this year.

Tapping that fund is quite difficult, however, because it requires a three-fifths supermajority. That restriction, Mr. Geisenberger opined, “frankly makes it somewhat improbable that it will get used.”

While many lawmakers say the fund should not be touched except for a true emergency akin to the recent devastation felt by Houston, Texas, as a result of Hurricane Harvey, others question if that’s the best possible use of the account.

House Minority Leader Danny Short, R-Seaford, believes the fund needs to be examined and legislators should consider utilizing it to close a budget gap.

In a recent opinion published in a House GOP newsletter, Rep. Short and House Minority Whip Deborah Hudson, R-Hockessin, compared the fund to “buying a muscle car that never leaves the garage.”

Rep. Short said Friday while the account has been useful, it’s time to consider potential changes, such as making the money easier to access or altering how much gets put in every year.

But others feel the account is serving its purpose.

Delaware has received the top credit rating from the three major credit rating agencies for the past 17 years, allowing the state to borrow money at a low interest rate, and state officials say the Rainy Day Fund is a big reason behind the AAA score.

“Its only value is in the nonuse of it, and that’s for people in New York and elsewhere that have to evaluate us as to how we’re doing fiscally,” Sen. Harris McDowell, D-Wilmington, said.

A May report from The Pew Charitable Trusts concludes states that make withdrawals during recessions or other major events “will not necessarily jeopardize their credit ratings as long as other budgetary actions meant to address the decline in revenue are also taken.”

The report found Delaware was one of 11 states that did not take money from any reserve accounts during the Great Recession of 2007 to 2009.

While using the money could solve a problem one year, it doesn’t address any underlying concerns driving budget shortfalls, meaning the state could find itself in a similar situation 12 months later.

“To some extent, by bailing yourself out of a deficit you could technically be creating a deficit the following year,” Rep. Quinn Johnson, D-Middletown, noted.

Mr. Geisenberger pointed to Alaska, Wyoming and North Dakota as examples of states that use their reserve accounts in down years. All three states are oil producers, and when oil prices are high, they put money in the funds, Mr. Geisenberger said. When prices dip, the states can reach into their pockets and pull out some extra money to balance the budget.

As a consequence, they have worse credit ratings than Delaware — although all three had AAA scores as recent as 2015.

Some lawmakers have advocated creating a second reserve account, which would be used to control budget growth in boom years and fund services in bust years.

The idea of a “budget-smoothing fund” is particularly popular with Republicans because it would limit government growth.

A task force created a few months ago is examining the value of forming such a stabilization fund, as well as changing the Rainy Day Fund, although the latter is incidental to the overall goal.

A spokesman for Gov. John Carney said in an email the governor would not back a proposal to make using the Rainy Day Fund easier.

“The current structure has served us well since 1979 and is one of several important fiscal controls that help maintain the state’s triple-A bond ratings,” Jonathan Starkey wrote.

“But it may make sense to modernize the Rainy Day Fund to require the state to store excess funds during good times so the state’s budget can more easily navigate through bad times. That’s especially true if we also enact proposals that broaden the state’s tax base to reduce volatility and ensure that revenues grow with the overall economy.”

Sen. Anthony Delcollo, R-Marshallton, noted the state’s budget growth has outpaced its population increase in recent years. From 2008 to 2016 Delaware has seen a 7.7 percent increase in population, while its expenditures have expanded by 22 percent.

In years with a surplus, Delaware should set aside that extra money in preparation for future years where revenue won’t match planned spending, Republicans say.

“We’ve got to take a stance a little bit differently or we’re going to have the same situation like we keep having these June 30s,” Rep. Short said, alluding to the recent difficulty the state has had in balancing the budget on the last day of the fiscal year.

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