It’s Time to Use DC’s Rainy Day Fund

| July 13th, 2009 | PDF of this report

The District, like most states, has a rainy day fund that it can use to address a major economic crisis.  Some 27 states have tapped their rainy day funds to close budget gaps in 2009 or 2010, but the District has not.[1]  Yet the decline in the District’s economy and finances indicate that now is an appropriate time to use the rainy day reserves.  Projected revenues for fiscal year 2010 have fallen by nearly $1 billion, and unemployment in the city has hit a 25-year high.  DC’s Chief Financial Officer has certified that that District has met conditions needed to tap its rainy day fund.  DC should consider using its rainy day fund now, especially to address the FY 2009 shortfall.

  • Using half of the rainy day fund would reduce DC’s 2009-2010 budget gap by one-half or more. If the District were to use half of the rainy day funds now – $165 million – that would cover nearly half of the revenue shortfall for FY 2009 and FY 2010, leaving additional reserve funds for use in the future if needed.
  • Rainy day reserves limit the need to cut services or raise revenues during an economic downturn. Spending rainy day funds stimulates the local economy and can help offset the effects of a recession.
  • Rainy day funds are fiscally responsible. When states have rainy day reserves, they set aside funds when fiscal conditions are strong – rather than spending all of the growing revenues. They can then use those funds when fiscal conditions weaken.

Use of the rainy day fund would not fully eliminate the budget gap (and it would be unwise to fully use the reserve now).  Even if the District taps its rainy day fund, it will need to find ongoing budget savings to balance the budget in FY 2010 and beyond.   In this way, using the reserve does not delay budget-balancing efforts, although it does make them easier.

Federal Restrictions on DC’s Rainy Day Fund Need to Be Addressed

The District’s leaders should work with the federal government to give DC the same kind of flexibility over its rainy day fund that other states have.

  • Eliminate the Rule that Requires DC to Repay its Rainy Day Fund Within Two Years. Some 39 of 46 states with a rainy day fund have no time-specific replenishment rule. (See the table on next page.)
  • Allow DC’s Rainy Day Fund to be Used Flexibly to Meet Emerging Needs. Nearly one-third ($100 million) of DC’s rainy day reserves is restricted for use in a natural disaster or a declared state of emergency. No other state restricts a portion of their rainy day fund for natural disasters.
  • Allow DC’s Rainy Day Fund to be Used Whenever Falling Revenues Push the Budget Out of Balance. Currently, the fund cannot be used unless a revenue shortfall is greater than five percent of the budget or roughly $250 million. In 39 states, the rainy day fund can be used whenever revenue collections drop below expected levels by any amount.[2]

[1] National Association of State Budget Officers, Fiscal Survey of the States: Spring 2009, tables A-5a and A-5b (http://www.nasbo.org/publications.php#fss2007)

[2] DC Fiscal Policy Institute, Fixing DC’s Rainy Day Fund, April 2003, page 6 (http://dcfpi.org/?p=73)