Save it for a Rainy Day

InsideCapitolDome

Save it for a Rainy Day

InsideCapitolDome

Save it for a Rainy Day

Financial advisors tell us that we should all set aside a little money, an “emergency fund,” to help us meet crises like a layoff, prolonged illness, or unforeseen expenses. Most state governments have chosen to follow a similar strategy and create budget stabilization funds, commonly called “rainy day funds.” Oregon is not one of those states, but it should be.

This is how a rainy day fund works. When the economy is good and tax collections higher, (like the economic expansion of the mid to late 1990s), the state legislature sets aside a portion of tax revenues in a special “rainy day fund.”

Some budget watchers have suggested that Oregon’s unanticipated revenues — the kicker funds — be used for a rainy day fund. If the kicker funds from the past four biennia had been set aside, the state would have had over a billion dollars, plus interest, saved for an economic downturn. That is over eight percent of the legislatively approved 2001-03 budget.

The economy has cycles. During an economic downturn when fewer people are working and wages are stagnating, income tax revenue decreases. In such a situation state government must either raise taxes or reduce funding for schools, public safety, care for the disabled, or other important services. Just when working families are facing harder times, their taxes increase or holes appear in their safety net.

Rainy day funds help state governments get through economic downturns without having to take these drastic steps. To ensure the money could only be used when there was real need, the legislature would set rules on the fund specifying when the fund could be tapped. Tax collections would have to be down a certain percentage, or the state would have to be in recession, for example.

Oregon budgets are based on projected tax collections over a two-year period. If collections are below projections, the legislature may have to meet in special session to redo the budget. It happened in the early 1980s. The September, 2001 revenue forecast suggests it could well happen again. Oregon’s economists now say the state will collect over $200 million less than the Legislature approved for spending during the next two years.

The 2001 Legislature considered creating a rainy day fund. Unfortunately, the state is already in a situation where a fund would have been useful. The idea competed with other important programs for funding. Some legislators were willing to create an empty fund just to “get it on the books,” without success.

A rainy day fund is part of a prudent, sound, long term, fiscal strategy for Oregon. The Legislature missed its chance to prove that it could think strategically about Oregon’s state budget and its economy.

In 2003 the Legislature should revisit the idea. It is never too late to start saving for a rainy day. Think of it as an umbrella: you may still get wet, but at least you don’t get soaked.

OCPP

OCPP

Written by staff at the Oregon Center for Public Policy.

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