Nebraska’s rainy-day fund has just helped the state government weather a serious fiscal storm. It’s time to build the fund back up.
In the fall of 2008, Nebraska and the rest of the country was hit by the worst economic downturn since the 1930s. That triggered a multiyear plunge in revenues for the Nebraska state government.
By the start of 2011, Nebraska’s budget shortfall approached $1 billion.
It was fortunate that farsighted state leaders had built up and maintained a cash reserve of significant size. In 2009, the fund totaled almost $600 million.
Those extra funds proved critical both in helping balance the state budget and in providing one-time funds for major construction projects. For the current fiscal year, for example, the cash reserves were tapped to provide $78 million to the general fund. Another current transfer provides $80 million to higher education construction, as well as Centennial Mall renovations in Lincoln.
All but two states (Kansas and Montana) have a cash reserve, or “rainy day” fund. During the recent recession, the National Association of State Budget Officers reports, some 17 states drained their reserve funds.
The most dramatic example was Ohio, where over a two-year period the cash reserve went from more than $1 billion down to a mere 89 cents.
At present, Nebraska’s cash reserve stands at around $384 million. For the next two-year budget, Gov. Dave Heineman is proposing tapping it for $47 million for construction of a new veterans home in central Nebraska. Those funds, he says, would pave the way for $74 million in federal funds, and the state dollars would be repaid by general funds from the state’s Division of Veterans’ Homes. That is the only transfer the governor is proposing out of the cash reserve.
Under his proposal, current projections indicate that by fiscal year 2016-17 the cash reserve would increase to around $442 million.
The governor’s proposal needn’t be the only way to manage the cash reserve — and there’s no guarantee his veterans home proposal will win lawmakers’ approval — but there should be no question about the importance of rebuilding the cash reserve now that the economy has begun to improve. If Nebraska is fortune enough that revenues to the general fund exceed the budgeted spending, those additional funds automatically go into the cash reserve.
Michael Calvert, longtime director of the Legislature’s Fiscal Office, has studied the cash reserve topic extensively. The level for the fund at the start of the recent recession, around $600 million, was generally appropriate for providing a needed cushion, he told The World-Herald last year.
State lawmakers and the governor deserve credit for their responsible fiscal management on this matter in recent years. The public, too, deserves credit for not demanding, before the recession, that the cash reserve be whittled down.
In the early 2000s, many Nebraska lawmakers argued that there was little point in letting the cash reserve rise very far, because the people would demand that it be used either for more spending or tax cuts. That thinking produced poor budget management.
In October 2001, for example, Nebraska lawmakers returned to the State Capitol for a special session to address budget woes in the face of a major revenue shortfall. How much had lawmakers left in the cash reserve fund? A mere $45 million.
Before the special session was over, senators had to find $171 million in spending cuts. The cuts might have been less had the cash reserve been adequately maintained.
Lawmakers acknowledged that fact as the special session came to a close. The lesson: Don’t let the rainy-day fund run dry.
It’s good that Nebraska leaders have put that principle into practice in subsequent years and that the public hasn’t pushed to draw down the fund for short-term needs.
With sunnier economic times, the state needs to build the fund back up. Because sooner or later, it will rain again.