REVIVING THE RAINY DAY FUND
NEW MEASURE WOULD MANDATE REGULAR CONTRIBUTIONS TO STATE SAVINGS
Is Illinois’ Rainy Day Fund finally ready to grow up and be a real, robust reserve account like most states have, instead of just an afterthought?
State leaders may be ready to finally start using the Rainy Day Fund the way it was intended.
For most of its 20 years, The Rainy Day fund has had less than it would take to run the state of Illinois for three days should calamity strike — as it sometimes does in Illinois. But a change in the weather may soon blow in.
The Governor’s proposed budget for fiscal year ’23 recognizes the importance of saving for future economic downturns. It suggests major infusions into the Budget Stabilization Fund, more commonly known as the Rainy Day Fund, and into the state’s Pension Stabilization Fund.
Gov. JB Pritzker proposes allocating $600 million from the General Revenue Fund (GRF) into the Rainy Day Fund for the current fiscal year and another $200 million from GRF and $79 million from cannabis sales in fiscal year ’23. His plan also calls for a $500 million allocation into the Pension Stabilization Fund to reduce an estimated $1.8 billion in pension liabilities.
This proposed infusion is a positive sign that Illinois is on the road toward steady and stable finances and budgeting.
Comptroller Mendoza believes the state should make regular deposits using the state’s bill backlog projection of under $3 billion as a trigger for automatic deposits until the fund reaches a cap of 7.5% of revenues.
Comptroller Mendoza’s proposed legislation, HB 4118, sponsored by State Rep. Michael Halpin and State Sen. Elgie Sims, would codify regular contributions into the Rainy Day Fund to help make this possible. It builds on legislation former State Sen. Heather Steans was shepherding through the General Assembly in 2020 before the COVID-19 pandemic cut that session short.
The Governor’s proposal, if accepted by the legislature, would put Illinois on the right path by ensuring the Rainy Day Fund alone has close to a billion dollars by the end of the next fiscal year.
These resources, combined with the Comptroller’s proposed legislation, would ensure a robust financial reserve for Illinois. And that would likely translate into credit ratings upgrades as well as better fiscal health overall for Illinois.
Why should Illinois save for a rainy day?
We all know it is a responsible practice to set aside money for emergencies and unplanned expenses, such as home or car repairs, job loss and medical bills.
These sudden, unplanned costs or losses of income can be detrimental to a family budget. Having a healthy savings account for these unexpected bills can lessen their impact.
Similarly, state governments are faced with unexpected dilemmas such as economic downturns, natural disasters, public health threats and other emergencies that can impact a state’s incoming revenues and increase spending demands.
Having an adequate, healthy Rainy Day Fund is not just essential to assist in paying bills during unexpected events, but it can also be used as a tool for the Illinois Office of Comptroller (IOC) to help cash-flow problems resulting from timing variations between receipt and disbursement of funds in a given fiscal year. This enables the Comptroller to better protect the appropriations made by the General Assembly.
Also, when the IOC is faced with fewer revenues, it can result in bill-processing delays. This not only affects state vendors that depend on predictable state payments but can also lead to an increase in the state’s bill backlog that could in turn cost taxpayers more in late payment interest penalties.
Perhaps most importantly, a healthy Rainy Day Fund could help stave off the temptation of looking to raise taxes or increase state borrowing to make up a loss of state revenue, especially when an emergency hits the state.
For instance, Illinois faced revenue shortages during the onset of the COVID-19 pandemic. As revenues plummeted by more than $1.1 billion, Illinois did not have reserves to help fund emergency supplies, such as Personal Protective Equipment for the state’s public health response.
Illinois had to borrow from the Federal Reserve so medical bills could be paid to Illinois health-care providers fighting on the front lines of the pandemic. Borrowing was a last resort, given that Illinois didn’t have other options like a Rainy Day Fund to draw from.
With only about $60,000 in the state’s Rainy Day Fund at the time — which would cover less than 30 seconds worth of state operations — Illinois’ reserves were grossly inadequate in terms of providing the resources needed to properly address the public health crisis caused by the pandemic.
Illinois’ Rainy Day Fund balance
When the state’s Rainy Day Fund was first created in 2000, Illinois was one of the last states in the nation to establish a reserve fund. The expectation was that during growth periods, state government wouldn’t spend every cent of revenue it took in, but rather it would set aside funds in a contingency account to use when needed.
The law provides that the fund would be used to reduce the need for future tax increases or short-term borrowing, which would help the state maintain high credit ratings and address budgetary shortfalls.
The plan was for the fund to receive annual deposits when state revenue estimates grew by more than 4%, reaching a level over time capped at 5% of the state budget. This way, Illinois could be prepared like other states to weather tough revenue cycles and unexpected emergencies.
In fiscal year ’02, the legislature committed $225 million in “seed money” to the Rainy Day Fund from Tobacco Settlement Funds. The legislature made its last deposit into the fund of $50 million in fiscal year 2004, bringing the highest total to $276 million, less than 1% of General Funds.
Since then, no other special deposits were made into the fund given that the 4% growth threshold did not trigger the required statutory deposits. The fund balance remained virtually at the same level until it was fully tapped in fiscal year ’17 to help address the revenue shortages caused by Illinois’ budget impasse.
“Under the current law, it’s ambiguous and not followed with consistency — in fact, it’s never been triggered,” State Rep. Halpin told the House Revenue & Finance Committee. “HB 4118 provides a more intuitive process based on an actual concrete number, a metric, to trigger those savings.”
When the COVID-19 pandemic hit the Rainy Day Fund had only about $60,000 in it — not enough to cover 30 seconds worth of state government operations. The legislature approved committing 10% of cannabis sales into the fund to help address the state’s backlog of bills.
“According to a Pew Research Center analysis reported in October 2020, Illinois earned the dubious distinction of being one of only three states in the country that did not have enough reserves to pay for even one day’s worth of bills,” Comptroller Mendoza told the committee. “This is something we really have to make a habit of: Not spending every cent of revenue we take in and instead build up reserves during revenue growth periods.”
Half of the states had reserves in 2020 to cover more than 28.5 days. As of the end of February 2022, the balance in Illinois’ Rainy Day Fund was less than $22 million, enough to cover about one hour’s worth of state operations.
National credit rating agencies have taken notice of Illinois’ poor Rainy Day Fund balances and have even cited it as a negative reflection of Illinois’ credit worthiness.
Last year, two of the three primary rating agencies upgraded Illinois credit rating for the first time in more than 20 years — in part due to Illinois’ successful management of the state budget and paying down the state’s bill backlog that reached a high of $16.7 billion during the budget impasse. However, the agencies noted that inadequate levels of Illinois’ reserves continue to be a concern for them.
Comptroller Mendoza believes it is in the best interest of taxpayers to build Illinois’ rainy-day balance to help improve the State’s creditworthiness, which would result in paying lower interest costs on the State’s bond sales, saving on extra interest costs for taxpayers.
UPDATE (August 2022)
Good news! Not only did the General Assembly and the Governor approve of a $1.8 billion tax-relief plan for taxpayers in the state budget, they also resisted to spend, and instead decided to save $1 billion into the state’s Rainy Day fund for FY ’22 and FY ’23.
Comptroller Mendoza immediately directed deposits into the fund, which were completed in August 2022. The more than $1 billion in the fund marks the highest balance in the Budget Stabilization Fund/Rainy Day Fund to date.
The approved budget also called for paying an extra $500 million into the Pension Stabilization Fund, which lowers pension liabilities by $1.8 billion.
While these welcomed infusions into the Rainy Day Fund and the Pension Stabilization Fund are certainly a great boost, Comptroller Mendoza continues to call for more regular automatic deposits into these funds during strong economies — which would mean not having to depend on one-time infusions of future legislatures. ■
