No Shelter from the Storm: DC’s Rainy Fund Is Inaccessible in the Midst of a Severe Fiscal Crisis

The District of Columbia has a substantial amount set aside in “rainy day” reserves, but restrictive federal rules make it hard for the city to access these funds when needed.  While 26 states have tapped their rainy day funds to close budget gaps during the current economic downturn ‘ including Maryland and Virginia ‘ the District has not used its $284 million in reserves.  This forced the city to adopt both substantial budget cuts and tax and fee increases.

As the District begins preparing for the fiscal year 2011 budget season, with a projected budget gap of $500 million or more, the Mayor and Council should start working now with Congress to modify the federal rules that make DC’s reserves more restricted than the rainy day fund in nearly every state.   Fixing DC’s rainy day fund rules now — so that DC leaders can consider using the fund to address the ongoing budget crisis ‘ makes sense for several reasons.

  • Rainy day funds are a fiscally responsible tool.   States set aside funds in rainy day reserves when fiscal conditions are strong ‘ rather than spending all of their growing revenues.  During the early 2000s, states collectively set aside more than $30 billion in rainy day reserves.  States then use those funds when fiscal conditions weaken.  Rainy day funds thus promote long-term fiscal stability.
  • Rainy day reserves limit the need to cut services or raise revenues during an economic downturn. Cities and states use rainy day funds to preserve services without tax increases during a budget crisis, helping ease budget problems until the economy recovers.  Spending rainy day reserves also provides an important stimulus to the local economy during a recession.
  • DC’s rainy day fund is more restricted than any state rainy day fund.  The U.S. Congress adopted legislation in 2000 requiring the District to set up a rainy day fund ‘ with local funds ‘ but it included rules that make it hard for DC to use the fund.  These rules ‘ which apply to DC but not to any state ‘ require the District to start repaying any withdrawals within one year and to complete repayment within two years.  By contrast, most states rainy day fund rules require replenishment when the economy recovers and the budget returns to surplus.

Some have suggested that the District should not modify its rainy day fund rules now because it might appear irresponsible to alter the rules so that the funds can be used.  In particular, some have expressed the concern that the city’s bond rating may be adversely affected.  Yet seven of the 11 states with AAA bond ratings from Standard and Poors have used their rainy day fund in recent in recent years ‘ with no reduction in their bond rating.  Of all 26 states that have used rainy day funds, only one ‘ Illinois ‘ has seen its S&P rating decline, and this appears to reflect factors unrelated to using its rainy day fund.  These findings are consistent with statements from bond rating agencies that using rainy day funds prudently during a fiscal crisis is expected and will not imperil a state’s bond rating.

Moreover, any revision to DC’s rainy day fund rules could be designed to maintain important fiscal safeguards, such as limiting the amount of the funds that can be used in one year.  Without a change in rules, the District may never be able to utilize its rainy day reserve in an economic downturn, defeating its primary purpose.