MONTPELIER -- At the same time Vermont lawmakers are scrutinizing Gov. Peter Shumlin's plan to shore up a $51 million revenue shortfall in fiscal year 2015, they're also eyeing the state's parched Rainy Day Fund.

With an optimistic rainy day balance estimated at 1 percent of the prior year's appropriations, the buffer is much thinner than it's meant to be -- and nowhere near new recommendations from public policy think tanks around the country.

The Rainy Day Fund (technically called the General Fund Balance Reserve) is one of five official reserves built into state coffers. Along with a Stabilization Reserve, it's one of two attached to the state's General Fund. The other three reserves are for education, transportation and health care.

JFO Chief Fiscal Officer Stephen Klein. (Photo by Josh Larkin/VTDigger)
JFO Chief Fiscal Officer Stephen Klein. (Photo by Josh Larkin/VTDigger)

Balances in the transportation and education reserves match their goals -- 5 percent of the prior year's appropriations from each -- but Shumlin has proposed spending down the health care reserves next year. And the Rainy Day Fund has just 1 percent -- about $9.5 million, after state economists upgraded revenue projections at the January meeting of the Emergency Board.

The combined General Fund reserves of 5.7 percent rates Vermont about average among the 44 other states that set money aside.

But new and pending studies from the New England Public Policy Center, Pew Charitable Trusts, the Center for Budget and Policy Priorities and some regional Federal Reserve Banks suggest 10 to 15 percent is a better target.

The reasoning matches guidance for households, which are advised to set aside two to three months of operating money in case of an emergency that interrupts regular income.

Amid growing volatility in both the economic markets and within the federal government, states are now being advised to also put away two months worth of capital.

"Smoothing volatility across business cycles can lessen (the) need for difficult choices," the state's chief fiscal officer, Steve Klein, advised the House Ways & Means Committee on Jan. 31.

Chair Janet Ancel, D-Calais, had asked him to give her colleagues a refresher course and update on the state's reserve funds as the group figures out how to raise money in fiscal year 2015.

As they try to set funds aside, they'll also struggle with the balance between the prudence of saving for hard times and the value of keeping money in Vermonters' pockets in the meantime.

"How much money can you take from the voters that you don't need?" Rep. Carolyn Branagan, R-Georgia, asked.

Klein acknowledged the conundrum. "You can say give it all back to the taxpayers, but in a bad year you're raising taxes," he said.

The counter-cyclical nature of that scenario -- having to find money when times are tight -- is exactly what the reserves are designed to hedge against.

Vermont began its savings program in 1987 with the establishment of the stabilization reserve, joining the tail end of a wave that started started after the 1974-75 recession, Klein said.