Rainy Days in Colorado:
Do We Have The Right Umbrella?
Executive Summary

Since the second half of 2001, Colorado’s economy has been in a slump. State revenue has plummeted. To meet the constitutional requirement of a balanced budget, legislators have been forced to sharply cut state services, raid cash funds and resort to one-time accounting contrivances.

Several policy makers have asked whether Colorado needs a so-called “rainy day fund” – a reserve fund to help smooth out extreme revenue shortfalls over the course of a business cycle so that the state need not cut critical services. Approximately 43 other states have such budget stabilization funds, most of which accumulate money in “good times” to be used during revenue shortfalls or economic emergencies.

Colorado does not have a true budget stabilization fund to smooth out extended economic downturns. We do have two reserve funds. One is mandated by the Taxpayer’s Bill of Rights, and requires the state and each local government to maintain a reserve equal to 3% or more of its fiscal year spending for use in “declared emergencies.” However, under the specific terms of TABOR, economic conditions and revenue shortfalls cannot serve as a trigger for use of the TABOR reserve. The other reserve is the “statutory reserve.” It requires the legislature to maintain a General Fund reserve equal to 4% of total annual appropriations. But the statutory reserve must be replenished on an annual basis, and in practice, acts more as a short-term cash flow reserve.

Supporters of reforming Colorado’s fiscal policies argue that Colorado needs a true rainy day fund to avoid drastic reductions to state programs that cannot easily be reversed once the economy picks up. Opponents say that the state government should have to tighten its belt during a tough economy.

However, unless the “ratchet” provision of Colorado’s constitutional TABOR amendment is changed, budget cuts will continue to be required even if the economy rebounds. TABOR bases allowable revenue growth on the previous year’s revenue or spending, whichever is less.

Any discussion of whether and how to establish a rainy day fund in Colorado will need to address the following questions:

• Should Colorado establish a rainy day fund?
• How should a rainy day fund be capitalized?
• How large should a rainy day fund be?
• For what purposes should the funds be available?
• What restrictions are placed on withdrawal?
• What are the requirements for replenishment?

To link to the full report on rainy day funds by the Bighorn Center for Public Policy, click here.

For links to other reports and articles on rainy day funds, click here.