MEDIA RELEASE: Study: Reforms for Rainy Day Fund could protect investments in future recessions

MEDIA RELEASE: Study: Reforms for Rainy Day Fund could protect investments in future recessions
Implementing reforms now would ensure adequate savings in years before next economic downturn

RALEIGH (June 23, 2011) – Implementing Rainy Day Fund reforms now could help protect public investments in the future, new research from the Budget and Tax Center finds.

The North Carolina Rainy Day Fund – known officially as the Savings Reserve Account – was developed to help minimize the negative effect of economic downturns by making responsible saving deposits during years of economic growth. However, according to the study, state policymakers did not save adequately in the years before the 2001 recession or the Great Recession. As a result, inadequate savings led to broad tax increases and painful budget cuts in public investments, slowing economic recovery and causing further hardship for struggling families.

The study finds that although the current target for total savings in the Rainy Day Fund is 8 percent of the previous year’s budget, the Fund’s balance has never exceeded 5 percent of the prior year’s budget in its entire 20-year existence. Current contribution rules that rely on “left over” year-end funds are largely responsible for inadequate savings.

According to the study, changing state rules for Rainy Day Fund contributions could help to ensure adequate resources to address future budget shortfalls. Doubling the Fund’s target to 16 percent and moving savings decisions to the front of the budget cycle could help protect the state’s economy and critical public structures in the event of another recession. This would demonstrate a consistent commitment to savings, the study reports, and increase the likelihood of adequate contributions to the Fund, better positioning the state to deal with any future economic challenges.

The study also found that mandating contributions to the Rainy Day Fund only during periods of strong economic growth could ensure sufficient savings without depriving public investments of needed resources.

“The Great Recession has not only highlighted the need for such reforms, but also increased the public support needed to enact them,” said Edwin McLenaghan, BTC analyst and co-author of the report. “State policymakers should take steps to improve the Rainy Day Fund rules while support for such changes remains high to ensure that North Carolina is better prepared to address future revenue shortfalls in a manner that supports economic recovery and protects public services and programs that help struggling families in times of economic distress.”

For more information, contact: Edwin McLenaghan, edwin@ncjustice.org, (919) 856-3192; Jeff Shaw, Director of Communications, NC Justice Center, jeff@ncjustice.org, (919) 863-2402 (office) (503) 551.3615 (mobile).ET & TAX CENT