Public Policy Focus: Nevada’s Rainy Day Fund Needs Reform

Posted on by & filed under Nevada by the Numbers Blog, Public Policy Issues.

Publisher’s Note: In advance of the 2015 Nevada legislative session and in the interest of contributing to the state’s perennial tax-and-spend debate, Nevada by the Numbers is introducing a Public Policy Focus column this month. The intent is to spur and engage in an open, fact-based dialog on taxes, revenue, and related matters. Our inaugural piece addresses Nevada’s so-called “rainy day fund.” It is provided by guest columnist and commentator/political journalist Elizabeth Thompson. We hope you find the piece interesting and informative. As always, your feedback is welcome.

Nevada’s Rainy Day Fund Needs Reform

It rarely rains in Nevada, but the state has suffered through many metaphorical rainy days in the form of state budget shortfalls and associated cuts. Whether because of general economic volatility as a result of an economy that lacks diversity, decreased tax revenue as a result of the recent Recession, a tax structure that doesn’t generate enough revenue per resident, or new expenditures like the expansion of Medicaid embraced by Gov. Sandoval, Nevada continues to come up short on money despite the existence of a so-called rainy day fund.

A number of states have rainy day funds. They exist in order to guard against economic ups and downs and maintain consistent state support for education, health care, transportation, and other services, which in turn serve to maintain and promote economic growth. By the end of fiscal year 2013, 18 states had general fund reserves of more than 10 percent of their state budget, according to a report by the Center on Budget and Policy Priorities (CBPP). States with bigger rainy day funds weathered the Recession better, staving off more than $20 billion in combined cuts, according to CBPP. States with no rainy day funds from which to draw – Colorado, Illinois, Kansas, and Montana – were hit hard by the economic downturn, and states with smaller funds like Nevada also suffered significantly.

A Brief History

In 1991, the Nevada Legislature created the Fund to Stabilize the Operation of State Government. The measure directed that when the State General Fund surplus reached a certain threshold at the end of a Fiscal Year (FY), a portion of the excess was to be transferred to the fund. The intent was to divert money into the fund during good economic times and access it during financial emergencies.

The conditions under which monies from the account could be accessed for expenditures were set forth in NRS 353.288. In general, the measure provided that the Chief of the Budget Division of the Department of Administration could submit a request to the State Board of Examiners to transfer funds from the Rainy Day Account to the State General Fund in order to offset a budget shortfall or fiscal emergency.

The 2011 Legislature changed the name of the Account to Stabilize the Operation of State Government within the State General Fund (hereinafter referred to as the Rainy Day Account or the Account).

Recent Statutory Revisions

Revisions to the Rainy Day Account were approved by the 2009 Legislature through the passage of Assembly Bill 165, which sought to fund the Account more aggressively than in prior years. Rather than funding the Account only in times of surplus, the measure required that the Governor reserve one percent of the total anticipated revenue for each fiscal year as projected by the Economic Forum.

However, due to the dire economic condition of the state during the Recession, the provisions was delayed, first by the 2011 Legislature and again by the 2013 Legislature, resulting in a July 1, 2015, effective date for the statutory revision.

History of Transfers

The governor and Legislature resisted pressure in 1995 to use Nevada’s rainy day Account to shore up school programs. They similarly resisted using funds from the Account in 1997 when flooding in Northern Nevada reached disaster proportions, as well as in 1999 and 2002 when state Sen. Bob Coffin suggested using the fund to relieve a budget crunch and reduce cuts.

In response to a budget shortage and to get the state through FY 2003, the Assembly unanimously passed a bill to tap the Account for $100 million. The Senate went further, unanimously amending the bill to add $35 million — resulting in a balance of $1.3 million. Surpluses subsequent to the 2003 transfer built the fund up to its highest historical balance; the account held $267.6 million at the close of FY 2007.

The 24th Special Session of the Legislature (2008) transferred that $267 million ($195 million in FY 2008 and $72 million in FY 2009) to the General Fund, resulting in a Rainy Day Account balance of $632,516. The 26th Special Session (2010) of the Legislature then transferred that $632,516 to the General Fund resulting in a zero balance. The 2011 Legislature transferred $41.3 million to the General Fund, again resulting in a zero balance.

The 2013 Legislature transferred the balance in the Rainy Day Account ($84.7 million) to the General Fund effective July 1, 2013, resulting in a zero balance. A small surplus General Fund balance triggered a transfer of $28.1 million into the Account resulting in a $28.1 million balance as of the end of FY 2014.

Where Do We Go From Near Zero? And When?

When it comes to weighing fiscal pain vs. gain, there are two optimum times to restructure a financial entity or account. One is when that entity or account is well-funded and humming along, and the other is when it is at or near zero. In both cases, there exists a low risk, high reward environment that is prime for accommodating change.

Additionally, the painful layoffs, furloughs, and cuts of recent budget years is an experience that nearly no one – regardless of political party or ideology – wishes to repeat. Had Nevada’s rainy day Account been larger in 2003 and subsequent years, cuts could have been mitigated to a far greater degree than they were. The state should have a substantial reserve Account to guard against future downturns and ensure economic development efforts don’t stall.

The 2015 Nevada Legislature should therefore consider enacting a structural change to the Rainy Day Account that will aggressively build up funds.

Lawmakers should pass a measure requiring that – in addition to structural tax reform and irrespective of present-day budget shortfalls – funds the Account at a rate of not one but two percent of total anticipated revenue as forecast by the Economic Forum each year. Lawmakers should further require that the transfer rate of two percent cannot be revised except when the Account balance reaches its current legal cap of 20 percent of total of appropriations from the General Fund.

It’s time for Nevada to adopt a fiscal reserve policy that places a high priority on saving each and every fiscal year.

This column was originally published in the November issue of The Stat Pack, a joint publication produced by RCG Economics principal John Restrepo and HighTower Las Vegas managing partner Mike PeQueen.

Elizabeth Thompson is a Nevada political commentator/reporter and bimonthly host of Nevada Week in Review on Vegas PBS. She also does communications and public relations work for RCG Economics and HighTower Las Vegas.