NCPA - National Center for Policy Analysis

States Debate Fate of Reserve Cash

March 29, 2013

During the recession, many states dipped deep into rainy day funds, the money that states set aside for emergencies. Today, states are boosting their cash reserves to the highest levels since 2008 and many state lawmakers disagree about how the surplus should be spent, if at all, says the Wall Street Journal.

  • Falling tax receipts during the Great Recession forced many states to raid their rainy day funds and cut spending deeply.
  • With housing values and employment on the rebound, states that are breaking even or running small surpluses with their reserve funds are unsure whether to pocket the money or to spend the money to boost the economy.
  • States are projected to increase their cash reserves by $3.4 billion to $41.4 billion, which would be equivalent to roughly 9 percent of state revenue.
  • At their lowest point, state rainy day funds were 5.2 percent of revenue.

Michigan Governor Rick Snyder wants to add $76 million to the existing $505 million fund this year and Tennessee Governor Bill Haslam wants to add $100 million to the existing $356 million reserve fund.  According to these governors, having more cash in reserve lowers interest rates for borrowing, which lowers long-term costs and creates a cushion for rising health care costs and lower federal aid in the future.

State lawmakers in each state believe that with unemployment at high levels, the extra money should be spent to help boost the economy, job market and education.

Some Michigan lawmakers are calling for the money to be used to restore school funding, which was cut early in the governor's term. Other lawmakers believe the money should be refunded to state citizens through tax cuts. While the extra money is good news under any circumstance, states must determine where the money will be most beneficial.

Source: Josh Mitchell, "States Build Cash Reserves, Raising Rainy-Day Debate," Wall Street Journal, March 24, 2013.


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