Pew report recommends Vermont increase reserve funds to 8 percent
MONTPELIER -- A study released Tuesday suggests the state of Vermont should change the way it manages reserve funds.
Vermont is among the top five U.S. states in revenue volatility for the period of 1994-2012, according to a report by The Pew Charitable Trusts titled "Building State Rainy Day Funds." The study suggests that states that tie reserve funds to economic volatility fare better in the event of fiscal emergencies such as a recession or budget shortfall.
Vermont's Rainy Day Fund is fueled by surplus revenue and is not tied to fluctuations in tax receipts. The state frequently taps the fund to pay for unanticipated expenses that are part of the mid-year annual budget adjustment legislation each January.
The state also has a Tax Stabilization Reserve, which is pegged at 5 percent of the previous year's expenditures. Pew analyzed the state's Rainy Day Fund and stabilization fund combined. Vermont has roughly $67 million in the two funds.
The states with the highest rates of volatility (Alaska, North Dakota, Wyoming and Vermont), according to the report, are those that depend heavily on one or two major sources of revenue.
For Alaska and North Dakota, taxes on energy production are a major source of revenue and are subject to considerable swings. For Vermont, the main source is the personal income tax, which is also subject to fluctuation.
The Pew report makes three major recommendations that would help states prepare for unanticipated deficits. Vermont officials say they are already addressing several of these areas.
The report says states should:
-- Conduct regular studies to identify changes in the economy that affect tax revenue;
-- Tie Rainy Day funding to unexpected windfalls or spikes in revenue growth so that states put more aside during good times;
-- Adjust the size (or cap) of the reserve fund to match trends in budget shortfalls.
The authors of the report dispute the prevailing wisdom of setting aside 5 percent of state expenditures in a reserve fund, as Vermont does. The study shows the state's setaside funds should be closer to 8 percent or 10 percent in many cases.
Steve Klein, chief fiscal officer for the Legislature's Joint Fiscal Office, said Tuesday the Pew report characterized Vermont's reserve policies fairly but did not include recently enacted changes.
Lawmakers last session placed a 50 percent cap on the amount of Rainy Day Funds from the previous fiscal year that can be used to fund emergency shortfalls. It also requires that money be added to the Rainy Day Fund if revenue falls 2 percent or more below projections.
"I think we're doing the right things in Vermont," Klein said. "We've taken some of the steps that (the report) called for, but we could do more."
Klein said next year's budget adjustment process will be particularly painful due to the lack of a surplus in fiscal year 2014 receipts.
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