Budget crisis in Illinois shows wisdom of Washington’s rainy day fund and four-year balanced budget requirement

Illinois has become something of an object lesson for fiscal hawks. The Seattle Times carries a good Associated Press story on the latest development. 

A stopgap spending plan that lawmakers approved to address Illinois’ lack of a state budget for a second straight year is quickly draining the state’s “rainy day” fund, focusing more attention on the state’s unique and long-running financial management problems.

An account that experts say should have $1.5 to $3 billion to help weather an economic downturn was down to about $180 million as of Friday. In a matter of weeks, the balance in what is supposed to be a savings account will be zero.

The consequences are stark and obvious, but we won’t dwell on them here. More important, we want to emphasize that this is an area that Washington gets right. In 2007, Washington voters approved a constitutional amendment establishing a budget stabilization account. The Office of Financial Management describes the account this way:

Senate Joint Resolution 8206, passed by the voters in November 2007, established the Budget Stabilization Account, also referred to as the “Rainy Day Fund.” By June 30 of each fiscal year, the State Treasurer transfers an amount equal to 1 percent of the general state revenues deposited in the General Fund for that fiscal year to the Budget Stabilization Account.

In a report on the proposed amendment, the Washington Research Council cited opponents’ concerns and concluded,

None of the concerns expressed by legislative critics is unfounded. On balance, however, we believe that a constitutional rainy day fund is good fiscal policy and will help Washington weather future economic storms.

Maintaining a healthy reserve makes sense as a moderating influence on state budget writers. As the WRC wrote,

A rainy day fund is a way to alleviate some of the strain put on government spending programs during a recession. Typically, in periods of high growth tax revenues increase, while the need for government support services is less pressing. The opposite is true during a recession; tax revenues decrease and need for government services increases.

Legislators have an incentive to increase spending in good years when tax revenues are high, this then necessitates drastic cuts in programs in economic downturns. The rainy day fund would require the legislature to set aside a portion of the revenue from good years to limit spending cuts in lean years.  

The measure was strengthened in 2011 when voters approved SB 8206, described by the WRC as a “prudent savings measure.”

Four years ago, Washington voters adopted Senate Joint Resolution (SJR) 8206, establishing in the constitution a budget stabilization account (BSA). This year, another proposed constitutional amendment, again numbered SJR 8206, strengthens that measure by requiring “extraordinary revenue growth” to be transferred to the BSA.

While we’re unlikely to see extraordinary revenue growth soon, this is the right time to put in place a mechanism that will help stabilize the state budget. The benefits are twofold: By saving more money during the boom, lawmakers will be inhibited from increasing spending to an unsustainable level. Then, when revenues slow, a better funded BSA will provide the cushion necessary to maintain critical programs.

A recent complement to the protection of reserves is the four-year balanced budget requirement.

In 2012, the Legislature enacted a law requiring the state Operating Budget to be balanced for the current twoyear fiscal period. The law also requires the projected state Operating Budget to be balanced for the following two-year period, based on current estimates for state revenues and the projected cost of maintaining the current level of state programs and services. Together, these two requirements are often referred to as the “Four-Year Balanced Budget.”

In our foundation report two years ago, we noted that the forward-looking provision showed initial success. 

In 2014, for the first time in six years, the legislative session began without a budget shortfall. This was due to an improving economy that resulted in revenues coming in as forecast, as well as to the fact that the 2013-15 budget had been shaped in accordance with the Legislature’s new four-year balanced budget requirement. 

Last April, the Washington Research Council published a blog post reviewing how the requirement has worked.  Spoiler alert: It’s working well.

Fiscal restraint has paid off for Washingtonians. For a glimpse at the alternative, look to Illinois.