Utah Taxpayer

Utah's financial situation looks better now than it has in a very long time, due to an expanding economy that has generated huge increases in state tax revenue.

Utah's rainy day funds -- officially known as budget reserve accounts -- are now at all-time highs and have reached their statutory limits. According to data just released by the Division of Finance, the General Fund Budget Reserve Account now has a $132.1 million balance, and the Education Budget Reserve Account now has $122.9 million for a total of $254,925,000. State statute allows the budget reserve accounts to retain a maximum of 6% of general fund and education fund appropriations.

Some may dispute that the statutory 6% reserve limit is too low. Cities are allowed to have reserves equaling 18% of general revenues while counties are allowed to have 20% in reserve. School districts, on the other hand, are allowed to have 5% in reserve. The lower limits for the state and school districts are probably attributable to the fact that there is significant overlap between state and school district budgets and reserves held at the school district level lessen the need for the state to have reserves of its own and vice versa.

It was only a couple of years ago that Utah had bled its rainy day fund down to $19.5 million in FY2002 from the previous high of $120.3 million in FY2001.

Also, Utah unofficially has a "working" rainy day fund. A "working" rainy day fund consists of cash revenues -- as opposed to bonds -- that are used for capital projects. In FY2007, about $708 million in cash are being used for capital projects like roads and buildings. Normally, state and local governments in the U.S. use bonds to fund capital projects, but the state of Utah to its credit has also relied heavily on cash to fund capital projects. In addition to avoiding interest expenses, using cash to fund capital projects allows the state to manage its budget more effectively if projected revenues do not materialize.

These funds are frequently called "working" rainy day funds because

• the funds are actually being "put to work" by funding the construction of a capital project instead of just sitting in a bank account collecting interest
• the funds can be transferred from capital projects to cover ongoing operating general expenses if projected state revenues end up being lower than initially projected.

If cash is transferred from capital projects, the projects are then either funded with bonds or are delayed.

Diverting cash, particularly ongoing revenues, to capital projects has the added advantage of slowing the growth of ongoing operating expenditures, although some would argue that using ongoing revenues to build state buildings ultimately increases ongoing expenditures because these buildings are then filled with state employees and the buildings require ongoing maintenance. Nevertheless, even if ongoing expenses are increased when buildings or roads are built, the increase in onging expenditures would be higher if the ongoing revenues had initially been used exclusively for ongoing expenditures instead of capital.

During the last recession when revenues stopped growing, the state relied on rainy day funds and "working" rainy day funds to balance the budget. Although the state raised taxes in the last recession (K-3 district option property tax, cable and satellite TV tax, individual income taxes due to lack of bracket adjustments), these tax increases were small compared to the tax increases of 1987 which in today's economy would be the equivalent of hundreds of millions of dollars.

Posted by Utah Taxpayer on Thursday, September 21, 2006 at 9:11 AM | Permalink