The
Patriot Ledger
Massachusetts, June 7, 2007
OPINION:
Saving
requires deposits, not withdrawals
By Deirdre Cummings
As the
Massachusetts Senate and House wrangle over the final budget numbers in
conference committee, there is one clear loser: the state’s own savings
account.
Rather than put away the $100 million deposit required by law during this
moderate-growth year, the House budget proposes to draw down $325 million from
the rainy-day fund and the Senate proposes to finance their budget with a $150
million withdrawal.
The situation has alarmed Secretary of Administration and Finance Leslie Kirwan
enough to express concern about ‘‘relying on onetime revenues to balance the
budget,’’ adding, ‘‘in our view, they’re actually growing the structural
deficit.’’
A smart budget includes reserves for leaner times. Unlike the federal
government, Massachusetts
is required by law to balance its budget every year. Toward this end, the state
is supposed to deposit at least a half-percent of its annual budget to the
rainy-day fund. Officially known as the Commonwealth Stabilization Fund, the
account earns interest and saves government money because strong reserves
reduce government borrowing costs. Most importantly, strong reserves allow the
state budget to shorten recessions instead of prolong them.
Budget instability hurts citizens, businesses and local communities. When the
economy slows, more people apply for state assistance and unemployment
benefits, while stagnating incomes and sales reduce tax collections.
During the last recession in 2002, the state’s tax revenues fell by 15 percent
and the state drew down almost half the rainy-day fund, nearly $1 billion in a
single year, and was still forced to make major cuts in public programs. When
the next economic downturn inevitably comes, Massachusetts may be forced to make deeper
cuts, or communities will be forced to raise taxes at the very time that
residents and businesses will be most vulnerable. Either option would make the
recession deeper.
Recessions hit Massachusetts
harder than most states because we rely more than others on capital gains
taxes, which swing wildly with the business cycle. Capital gains taxes are a
fine revenue source, but reliance on them puts an extra onus on the
Commonwealth to be disciplined about maintaining a healthy rainy-day fund to
avoid unstable budgets.
Studies by economists Russell Sobel and Gary Wagner at West
Virginia University
and the University
of North Carolina have
shown that rainy-day funds make little difference unless rules mandate deposits
and limit withdrawals. When strict rules do exist, states save more, can borrow
less expensively, and experience less volatile ups and downs in their budgets.
The reason these
rules matter is simple. In the 11th hour of budget negotiations, it is
difficult not to spend available funds or draw down reserves. Budget makers
need rules that require deposits in the event of surpluses or rapid economic
growth. Massachusetts’
rainy-day fund should be a commitment to prudent budgeting, not just a slush
fund in the general budget.
Rules should spell out how stabilization funds can only be used if revenues
fall well below forecasts or the economy slides sharply. Money taken from the
stabilization fund should be paid back when state finances improve.
Relying on one-time budget gimmicks can allow public officials to avoid
difficult budget decisions, but it destabilizes public structures in the long
term.
In blocking closure of corporate tax loopholes, House Speaker Salvatore DiMasi
justified his decision largely by saying that Massachusetts businesses need more
predictability.
However,
the best way to ensure a predictable budget situation would be to build a
healthy rainy-day fund.
Rainy-day funds are smart policy, but like any savings account, they only work
if we pay into them.
Deirdre Cummings is the legislative director for MASSPIRG, a nonprofit
based in Boston
