Proposals for Rainy Day Funds:

What kind of rainy day fund would work for Colorado?

Colorado State Treasurer Mike Coffman:  In the fall of 2003 Treasurer Coffman unveiled a comprehensive budget reform proposal.  At the heart of the proposal is the creation of a Rainy Day Fund, according to Coffman:     

• The fund, created by merging the TABOR Reserve, proceeds from any asset sale not used for capital construction (e.g., tobacco securitization), and the existing and future revenue streams of the State Education Fund, may only be accessed by the General Assembly when there is a fiscal emergency, a natural disaster or to meet K-12 education spending requirements.  Capped in size at 15% of prior-year General Fund spending, any additional revenues above that amount will be counted as TABOR revenue.
• Tapping the Rainy Day fund for any purpose will be considered as TABOR revenues, but may only raise the TABOR base up to the prior year's level during a fiscal emergency - mitigating the ratchet effects of TABOR and Amendment 23.  Local governments will aslo be allowed to create a Rainy Day Fund using their TABOR Reserve.

University of Colorado Economics Professor Barry Poulson: Barry Poulson has been considering budget stabilization funds both in his function as vice chairman of the State Treasurer’s Advisory Group on Constitutional Amendments as well as his position on ALEC’s tax and fiscal policy task force. In a recent paper available on the Treasurer’s Advisory Group website Professor Poulson has outlined a rules-based rainy day fund for Colorado with the following provisions:

• “Given the volatile nature of our revenue system, a strong case can be made for rules designed to allocate a substantial share of surplus revenue [i.e. revenue in excess of the TABOR revenue limit] to a Budget Stabilization Fund.”
• “A Budget Stabilization Fund necessary to offset the revenue shortfall from the TABOR limit in this recession would be equal to 7.5 percent of TABOR revenues.”
• “A median voter approach suggests that money be transferred from the Budget Stabilization Fund to offset some, but not all, of the revenue shortfall. For example the rule might require that only half of the revenue shortfall be offset by money transferred from the Budget Stabilization Fund in any given fiscal year, with the other half offset by budget cuts.”
• “For the Budget Stabilization Fund to be effective the TABOR Amendment would also have to be modified when there is a revenue shortfall during a recession….The change in TABOR that is required to stabilize the budget over the business cycle is to suspend the limit whenever there is a revenue shortfall. The limit would be fixed a the revenue permitted prior to the revenue shortfall; when actual revenue recovers to that level the limit would again be triggered.” In other recent writings, Professor Poulson has referred to this as a “regenerative fiscal limit” (Poulson, “Putting state fiscal policies on cruise control,” American Legislative Exchange Council, State Factor, Forthcoming Spring 2003).

American Legislative Exchange Council: The tax and fiscal policy task force of ALEC is in the process of drafting model legislation for the creation of a budget stabilization fund nested within a tax and expenditure limitation amendment. The committee is meeting in December for final action on the proposal. Colorado Senator Bob Hagedorn serves as the chairman of the ALEC committee considering the proposal and Colorado University Economics Professor Barry Poulson was the principle drafter of the proposal that would:

• Create a rainy day fund that would be capitalized through revenues in excess of the state revenue limit (only after an “emergency reserve fund” for natural disasters if first filled). The entire surplus would be transferred into the rainy day fund, until the limit is reached, before any money is refunded to taxpayers.
• Require an upper limit on the size of the rainy day fund. However, the model legislation does not specify the size but instead leaves it to the states to set a limit, defined by a percent of the total state revenue limit, based on the budget particulars of that state.
• Transfers from the fund would be made by the state treasurer when revenues decline from one year to the next in the precise amount of the revenue decline.
• In a year in which revenue declines from the prior year, the revenue limit would be effectively frozen at the pre-decline level, for as many years as applicable, until revenue once again exceeds that level.
• Prohibit transfers from state cash funds other than the emergency reserve fund or the budget stabilization fund.

The Rocky Mountain News:  The Rocky Mountain News editorialized in December, 2003 in favor of creating a rainy day fund.  According to the Rocky:

• "Colorado's economy is improving and budget experts already foresee TABOR surpluses on the horizon that could be diverted to a rainy day fund with voter permission.  In its recent study of state fiscal issues, the Legislative Council concluded, 'Our office predicts that TABOR surpluses will resume in FY 2004-05...we expect that the cumulative surpluses will be over $1.3 billion during the four-year period beginning in FY 2004-05'
• Why not ask voters to transfer some portion of that surplus - say $1 billion - to refill the funds lawmakers raided and to create a rainy day reserve to cushion the state from a repeat of the recent budget trauma?  The measure could also abolish the TABOR-mandated reserve, which can be tapped only after natural disasters and must be refilled the following year.  That reserve will serve no purpose once a rainy day fund is on the books.
• Under the amendment, lawmakers could draw on the rainy day fund during a fiscal crisis to boost general-fund spending to the previous year's level - or perhaps above that level to some portion of the TABOR spending limit of inflation times population growth. That way, legislators could prevent the spending limit from being permanenetly reduced during slow-growth years."  ["Step 1 for voters: a rainy day fund," Rocky Mountain News Editorial (December 13, 2003)]