Report Shows Legislature Locked Itself Out of New Rainy Day Fund and Has Failed to Save Enough

Oregon’s education, health and other vital state services remain highly vulnerable to an economic recession, despite the Legislature’s creation of a Rainy Day Fund earlier this year. That is the conclusion of a study issued today by the Oregon Center for Public Policy (OCPP), which shows that the much heralded Rainy Day Fund has no money available to protect Oregon until July 2009 and that the state’s other reserve fund is too small to respond adequately to an economic downturn.

If a recession were to strike Oregon now, the state would have at its disposal just $237 million in emergency funds, OCPP found. Nearly 10 times that amount — about $2 billion — would be needed to ride out a recession of the same magnitude as the one in 2001 without cutting services, the Silverton-based public policy research institute estimated.

The severe funding shortfall, the study noted, stems partly from the fact that the Legislature locked itself out of the Rainy Day Fund until July 2009 due to what the study calls “a flaw” in the legislation passed during the 2007 session.

“As of today and through June 2009, the Legislature cannot tap a penny from the Rainy Day Fund,” said Charles Sheketoff, executive director of the Oregon Center for Public Policy and co-author of the report.

According to OCPP, the legislative “flaw” places the approximately $321 million currently sitting in the Rainy Day Fund out of reach for the next year and a half. The only money available in the event of a recession — $237 million — is in the Education Stability Fund, not the Rainy Day Fund.

“If a recession strikes anytime soon,” said OCPP policy analyst Michael Leachman, co-author of the report, “the Rainy Day Fund will be like a parachute that won’t open. It will be useless.”

Even after the state gains access to the Rainy Day Fund on July 1, 2009, it will still have far too little money to weather a recession, according to OCPP. The group’s analysis showed that at the present rate of funding, nearly eight years from now total reserves available to the state in case of an emergency — the sum of the Rainy Day Fund and the Education Stability Fund — will have grown to less than half of what might be needed to avoid cuts in services should a 2001-like recession strike.

“The Legislature should be applauded for creating the state’s first-ever all-purpose rainy day fund, but it cannot rest on its laurels,” said Leachman. “The current funding scheme is doomed to failure. We are far from where we need to be to avoid a repeat of the last recession, when the state was unprepared for the revenue shortfall, services got slashed and schools were forced to close early.”

While not predicting that a recession is imminent, neither does OCCP rule it out. “The problem with recessions is that you don’t know you’re in one until you’re in it,” said Sheketoff. “The Legislature hasn’t and can’t repeal the business cycle, so sooner or later a recession will arrive.”

Oregon would be in much better shape to face a recession had it tucked away in the Rainy Day Fund the $1.1 billion in unanticipated revenues that will be sent to taxpayers in a few weeks, according to OCPP. The so-called kicker is triggered when revenue exceeds the state’s forecast at the start of the legislative biennium by 2 percent, in which case all unanticipated revenue is sent back to taxpayers the following budget period.

“We missed a golden opportunity to set our house in order,” said Sheketoff. “Sometime in the future Oregonians will be kicking themselves for not saving this year’s kicker.”

Referring to the voters a measure that would require that unanticipated revenue be saved in the Rainy Day Fund until it reaches its maximum cap is among the recommendations contained in the OCPP report.

The report also identifies features of the Education Stability Fund that limit its effectiveness. According to the report, a portion of the Education Stability Fund will not be available to legislators during a recession because it will be locked up in investments or seed capital for emerging growth businesses.

“Five years ago, Oregon voters agreed that 18 percent of lottery receipts would be saved to protect Oregon’s schools during recessions, but today a portion of this money is locked up in investment ventures,” said Leachman, referring to Measure 19, passed in September 2002. “Providing seed capital for emerging growth businesses may not be the most fiscally prudent use of reserve funds.”

The Oregon Center for Public Policy is a non-partisan research institute that does in-depth research and analysis on budget, tax, and economic issues. The Center’s goal is to improve decision making and generate more opportunities for all Oregonians.