Why State Rainy Day Funds are Re­bound­ing

The Bond Buyer - - Front Page - By Brian Tu­multy

WASH­ING­TON – States in­creased their cu­mu­la­tive rainy day funds for a seventh straight year to a record $54.7 bil­lion in fis­cal year 2017, enough to run gov­ern­ment op­er­a­tions for a me­dian of 20.5 days, Pew Char­i­ta­ble Trusts said Tues­day.

The Na­tional As­so­ci­a­tion of State Bud­get Of­fi­cers ex­pects that 2017 fig­ure to be sur­passed when fi­nal fis­cal 2018 data be­comes avail­able.

Most states ended their fis­cal years on June 30, but Texas does not close its fis­cal year un­til Aug. 31 while Alabama and Michi­gan end theirs on Sept. 30.

NASBO Ex­ec­u­tive Di­rec­tor John Hicks said that de­posits

made to rainy days funds from bud­get sur­pluses will likely bring the to­tal to more than $58 bil­lion for fis­cal 2018.

Two of the three states that Pew re­ported to have noth­ing in their rainy day ac­counts at the end of fis­cal 2017 – Kansas and Mon­tana – re­cently cre­ated rainy day funds, Hicks said.

That leaves New Jer­sey as the only state with the du­bi­ous dis­tinc­tion of not hav­ing any money stashed away to weather an eco­nomic down­turn.

“I can say from ob­serv­ing state re­ports of end­ing fis­cal year 2018, that at least 15 states said they would be adding to their rainy day funds above their ear­lier es­ti­mates,” Hick said in an email.

One ex­am­ple of the up­turn is Ok­la­homa, which an­nounced it would de­posit $381.6 mil­lion into its rainy day fund, its first de­posit in four years. The fund pre­vi­ously had $93 mil­lion.

Re­build­ing rainy days funds has been an ex­cru­ci­at­ingly slow process for many states since the end of the Great Re­ces­sion in June 2009.

Na­tion­ally, to­tal state tax rev­enue re­cov­ered in mid-2013 from its plunge dur­ing the re­ces­sion but has re­bounded more slowly than af­ter the three pre­vi­ous down­turns, Pew said. But only 34 states were tak­ing in more rev­enue at the end of fis­cal 2017 on an inflation-ad­justed ba­sis than they did for the Great Re­ces­sion.

Rainy days funds are im­por­tant fac­tor in de­ter­min­ing credit rat­ings.

“Credit rat­ing an­a­lysts from all three agen­cies agree that well-man­aged states ad­min­is­ter rainy day funds in a way that re­in­forces struc­tural bal­ance, or a bud­get that is fi­nan­cially sus­tain­able over sev­eral years,” Pew Char­i­ta­ble Trusts said in a May 2017 re­port. “This means that pol­i­cy­mak­ers make de­posits into re­serves dur­ing times of eco­nomic ex­pan­sion and rev­enue growth, while they make with­drawals dur­ing times of dis­tress when rev­enue falls.”

Rainy day funds have height­ened im­por­tance in states with the great­est rev­enue volatil­ity.

The boom-and-bust cy­cles of the oil and gas sec­tor have given Alaska, North Dakota and Wy­oming the high­est rev­enue volatil­ity.

Pew said that sev­er­ance tax was “the most volatile rev­enue source in eight of the nine states where it ac­counted for enough rev­enue over the past decade to be con­sid­ered a ma­jor tax.”

Broad-based per­sonal in­come tax and statewide sales taxes were found to be less volatile. Forty-one states levy broad-based in­come taxes and 45 have statewide sales taxes.

Ken­tucky and South Dakota have the low­est rev­enue volatil­ity, ac­cord­ing to Pew. “Both states rely on rel­a­tively sta­ble tax streams for over half of their rev­enue — sales for South Dakota and sales and per­sonal in­come for Ken­tucky,” Pew said.

In 18 of the 22 states where the cor­po­rate in­come is a ma­jor tax, it was the most volatile source of rev­enue, Pew found. ◽

One spe­cific is­sue is that cities owe money to oth­ers and those oth­ers may be af­fected by the GDB deal’s han­dling of the cities’ money, Spi­otto said.

A le­gal mat­ter for the court to de­ter­mine will be if all par­ties af­fected by the pro­posed re­struc­tur­ing deal will have been al­lowed in­put on it, Spi­otto said.

In its fil­ing on Aug. 22 the Un­se­cured Cred­i­tors Com­mit­tee said it was con­cerned that the ne­go­ti­a­tions for the GDB re­struc­tur­ing deal “were not con­ducted on an arms’-length ba­sis be­cause cur­rent and for­mer GDB in­sid­ers are (i) board mem­bers of the Over­sight Board, (ii) of­fi­cers of [FAFAA], (iii) manag­ing di­rec­tors of [FAFAA’s] fi­nan­cial ad­vi­sors, or (iv) the ex­ec­u­tive di­rec­tor of a GDB bond­holder group sup­port­ing the trans­ac­tion (the so­called ‘Bon­istas Del Pa­tio’).“

Among the UCC’s le­gal ar­gu­ments against the pro­posed deal is that it vi­o­lates re­quire­ments in PROMESA sec­tion 201(b)(1)(M) re­gard­ing as­set trans­fers among Puerto Rico in­stru­men­tal­i­ties.

The UCC also said that “to the ex­tent this, “there shall be a cause of ac­tion to chal­lenge un­law­ful ap­pli­ca­tion of this sec­tion.”

“The dis­trict court shall nul­lify a [debt] mod­i­fi­ca­tion and any ef­fects on the rights of hold­ers of bonds re­sult­ing from such mod­i­fi­ca­tion if and only if the dis­trict court de­ter­mines that such mod­i­fi­ca­tion is man­i­festly in­con­sis­tent with this sec­tion [of PROMESA],” PROMESA states.

“I can’t see that the court is just a rub­ber stamp,” Spi­otto said. He said he thought the judge will look at whether the deal treats some sorts of cred­i­tors bet­ter than oth­ers. ◽

NASBO’s John Hicks said de­posits made to rainy days funds from bud­get sur­pluses will likely bring the to­tal to more than $58B for FY-2018.

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