Five years ago, as the national recession loomed and state revenues continued to plummet, Kentucky’s rainy day fund — an emergency pot of money set aside to cover fluctuations in tax revenues that create budget deficiencies — was empty. The following year was the same: $0.
The fund was insufficient to counter massive revenue losses from the recession, but Kentucky was in good company: In the summer of 2008, all the states combined had about $60 billion in their emergency funds, according to the Pew Charitable Trusts. The following year, states’ budget holes totaled more than $117 billion. In Kentucky, the rainy day fund went from $214.8 million in fiscal year 2008 to $7.1 million the following year, then two consecutive years of a zero balance.
So the news on Tuesday that unexpectedly high revenues for fiscal year 2015 — the result of increases in income, sales and business tax receipts — have grown the rainy day fund to roughly its 2008 level is a welcome surprise.
In a news conference Tuesday, Gov. Steve Beshear announced the state had a $139.1 million General Fund surplus, of which he would dedicate $82.5 million to the rainy day fund, more than doubling its total year over year. The fund balance is now $209.4 million, or roughly 2 percent of state spending, a ratio that remains lower than most experts advise.
“We grew our revenues — not by raising taxes — but the old-fashioned way: We earned it,” Beshear said. “We earned it by growing our economy. In fact, it appears that our economic recovery was even stronger than we thought when this two-year budget was written.”
Beshear cited statistics that will be familiar to regular observers: Kentucky’s unemployment rate, now at 5.1 percent, has remained below the national average for 11 straight months. In 2014, the state announced more than $3.7 billion in new business investment with 350 expansion and new location projects — although in a previous request, the state did not provide IL with data about the type and economic quality of those projects.
In addition to the windfall announced Tuesday, the General Assembly this year added $63.5 million to the rainy day fund via the biennial budget. State law requires the sitting administration to contribute the lesser of either 50 percent of that year’s surplus or whatever amount is required to make the fund equal to 5 percent of General Fund receipts collected that fiscal year. Kentucky is one of 21 states where contributions to the rainy day funds are directly tied to surpluses.
Still, the state budget constricted dramatically during the recession, and lawmakers have continued to cut ever since. State agencies have seen at least 15 budget cuts since the recession. According to the Kentucky Center for Economic Policy, a think tank, several agencies have seen inflation-adjusted cuts totaling more than 30 percent during the past eight years.
Jason Bailey, executive director of KCEP, told IL he is encouraged at the growth of the fund. However, he said, the state is facing significant shortfalls, and tax revenues from economic growth alone won’t meet the need. The pension system for state workers is now the most underfunded in the country, with a projected $9 billion shortage, for instance.
“While it’s good news to see economic growth pick up overall in Kentucky over the last year, we can’t expect that growth alone will generate the revenue to face the enormous budget challenges Kentucky faces come January,” he said. “There is a serious need to put much more money into pensions and begin to seriously reinvest in education, health and other areas that have been cut so deeply. We can’t do those things until we generate more revenue through tax reform.”
In his remarks on Tuesday, Beshear reiterated a commitment to tax reform, a common message since the General Assembly session closed earlier this year without any serious consideration of it. In an interview, state Budget Director Jane Driskell said that growing the reserve fund shows progress, if it’s only a portion of a much bigger whole.
“Obviously we still have some large issues to deal with,” Driskell said. “But the way we use the rainy day fund — it’s for a rainy day — and so being able to continue to build it up is a positive.”