April 24, 2014
Governor Pat Quinn’s recommended budget for FY2015 proposes that the State of Illinois build a financial cushion to deal with future economic downturns. The Governor suggests the creation of an adequate “rainy day” fund in a five-year blueprint for the State, but specifics of the plan have not been provided.
The State’s perilous financial situation—a looming revenue loss due to income tax rate rollbacks, billions of dollars in unpaid bills left over from the Great Recession and uncertain implementation of a new pension reform law—might suggest that creation of a financial reserve cannot be a priority for Illinois. But financial experts regard such reserves as a key element of a comprehensive, long-term financial plan.
According to the Government Finance Officers Association, best practices in public finance require that governments place a portion of their general operating revenues in a general fund reserve or rainy day fund. Rainy day funds are savings accounts that governments can use to address revenue shortfalls or unanticipated expenditures and to help stabilize tax rates. Governments that maintain adequate reserves are better positioned to deal with funding issues in bad times. Putting money into reserves is a more fiscally prudent action than spending surplus funds on new or expanded programs.
A recent report by the Illinois General Assembly’s Commission on Government Forecasting and Accountability (COGFA) concluded that a healthy fund balance for the State would be at least $2 billion, or roughly 5% of FY2013 General Funds revenues of $36.4 billion. The COGFA report points out that Illinois has a rainy day fund, called the Budget Stabilization Fund, which was created in May 2000 at the urging of the Comptroller’s Office. At that time, Illinois was one of only five states that did not have such a contingency fund.
However, the fund has not served as a true rainy day fund because the State has not had sufficient surpluses to transfer to it, according to COGFA. The Budget Stabilization Fund was originally funded at $226 million in 2001 by a transfer from the Tobacco Settlement Recovery Fund. It received a single additional one-time infusion of $50 million in FY2004. The Budget Stabilization Fund had $276 million at the end of FY2013—less than 1% of General Funds revenues.
In 2004 Illinois enacted a law establishing a goal of maintaining 5% of General Funds revenues in the Budget Stabilization Fund. According to the law, the fund would be used to reduce the need for future tax increases or short-term borrowing, maintain high credit ratings and address budgetary shortfalls. In authorizing withdrawals from the fund, priority was to be given to services for children. Deposits into the fund would be triggered by projected revenue growth of more than 4% from the prior year.
However, transfers based on the statutory formula have not occurred, apparently because revenue projections did not meet the threshold requirement. Instead of being used during fiscal emergencies, the fund is used for cash flow problems resulting from timing variations between receipt and disbursement of funds in a given fiscal year. By law, any cash flow borrowings transferred during a fiscal year from the Budget Stabilization Fund to the General Funds are to be reimbursed by a transfer back by the end of that fiscal year. During the State’s fiscal crisis, the fund has recently been used for short-term borrowing, with reserves depleted at the beginning of the fiscal year and repaid in at the end.
The adequacy of reserves is one of the factors considered by credit rating agencies in assessing a state’s financial condition. Fitch Ratings noted in January 2012, for example, that Illinois’ financial options were limited during the recession because it failed to build reserves prior to the economic downturn.
Illinois’ lack of a substantial rainy day was noted in an October 2012 report by the State Budget Crisis Task Force, which said not having such a fund was a threat to the State’s fiscal stability. The report recommended that Illinois should shore up its rainy day fund during good times and allow time to replenish the reserve fund after a fiscal emergency ends.
In its State budget roadmap for FY2015, the Institute for Illinois’ Fiscal Sustainability at the Civic Federation also urged the State to create a significant rainy day fund as part of a long-term plan to end its fiscal crisis.