Some folks believe a surplus fund is the same as a rainy-day fund; in fact, many discussions and articles use these terms interchangeably. They are not the same. New Jersey has a rainy-day fund but there is no money in it (in statute it is technically referred to as a surplus-revenue fund).
New Jersey depleted its rainy-day fund in fiscal year 2009 during the Great Recession, when $734 million — which had accumulated during previous years — was used to offset partially decreasing revenues. Between fiscal 2008 and fiscal 2009, state revenues decreased over $3 billion. Monies in the rainy-day fund, plus significant funding from the federal government (known as the stimulus program), plus program reductions, principally in school aid, allowed the state to end the year with a positive surplus.
I am hopeful we will not soon encounter another Great Recession, but I have no doubt we will encounter some decline in the economy and tax revenues in the coming years.
A surplus (properly referred to as an undesignated fund balance) can and is utilized as a resource to support spending. Monies in the rainy-day fund cannot be routinely used. In fact, there must be a significant downturn in revenues or a declared emergency for it to be used. In such a situation, the governor is required to request approval of the Legislature to use the monies from the rainy-day fund.
It is important that New Jersey re-establish its rainy-day fund as a protection against future economic decline and the subsequent impact on revenues. Simply having a surplus is not enough.
But first, we need a better understanding of both surplus and rainy-day fund.
What is surplus?
Simply stated, surplus is the difference between revenues and expenditures. For example, if the state collects $32 billion and expends $31.5 billion it would presumably end the year with a surplus of $500 million. But this simple example does not tell the entire story.
Some states express surplus as cash — simply the difference between cash collected and dollars disbursed. The correct way to calculate surplus is on a modified-accrual basis (the accepted standard for all state and local governments in the United States, as promulgated by the Government Accounting Standards Board – GASB.). Many states maintain they have a balanced budget and a surplus — but only if using cash as the criteria. Some discussion here is informative.
If only cash disbursements are counted as expenditures, the impact would deceitfully overstate surplus. Let’s say, for example, at the end of the fiscal year the state disbursed $5 billion to various Medicaid providers, but had an additional $1 billion in bills received and still owed for services delivered. On a cash basis, expenditures would be recorded as $5 billion. On a modified accrual basis (the correct way) the expenditures would be reflected as $6 billion.
Revenues can also be manipulated. Consider just one example: The state collects $14 billion in income taxes, but has not yet made required refunds of $800 million. On a cash basis, the collections are recorded as $14 billion, but the correct accrued amount is $13.2 billion.
In accordance with GASB rules, states are required to have their annual financial statements prepared on a modified-accrual basis; unfortunately and unbelievably, budgets are not required to be calculated in the same manner.
New Jersey has always determined surplus in the correct manner. Good for New Jersey state government: It’s a really important practice.
Some would argue I have conveniently forgotten about the unfunded liabilities in the pension funds. Without delving into the machinations of government accounting, I argue — and most do — that pension funds are separate and not part of the general-fund surplus calculation. An important discussion, but for another time.
What is a rainy-day fund?
A rainy-day fund requirement was signed into law in June 1990 by Gov. James Florio. Monies can be deposited into the rainy-day fund in two ways. The first is to appropriate an amount directly to the fund. The second is a little more complicated: If the amount of revenue collected is in excess of the amount certified on July 1, then 50 percent of the excess must be deposited into the rainy-day fund — not counting income tax. The income tax is excluded because by constitutional amendment all income taxes must be used for property-tax relief.
Since fiscal 2009, however, no monies were deposited into the rainy-day fund. Presumably, language was included in the budget that overrode the basic law or there was no excess revenue, which would be unlikely. Regardless of the 50 percent rule, the governor and Legislature should have appropriated funds directly into the rainy-day fund regardless of revenue flows. If we had simply put $100 million each year we would now have $1 billion in the rainy-day fund — in addition to a surplus amount.
Why would money not be placed into the rainy-day fund? Simply put, it limits spending opportunities. Money in the surplus account (undesignated fund balance) counts as a resource to the general fund — and thus can be utilized for spending in the annual budget.
Also, during the course of a fiscal year if supplemental appropriations are needed, the surplus account can be utilized. Portions of such funds could not be utilized if they were in the rainy-day fund. Such a requirement would certainly add more discipline to the budget process, since sometimes appropriations are not included in the budget to make the budget appear smaller, knowing that a future supplemental appropriation can be made.
Now I realize that placing monies in the rainy-day fund might limit spending flexibility for both the governor and the Legislature, but wasn’t that the reason it was established? The intent was to have secured funds in case of an emergency — such as a recession or a natural disaster.
Two final points. Almost every reputable public policy organization dealing with governmental finance urges states to have a rainy-day fund. These organizations suggest how such funds could be established; how they could be used; and if there should be caps or limits. Here are two links for readers who would like more information: one from the Pew Charitable Trusts, the other from the National Conference of State Legislatures.
Further, if New Jersey were to contribute to its rainy-day fund, it would have a powerful argument to make to rating agencies to increase its very low credit rating, thus saving money on future borrowing costs. Specifically, not only do we have a legitimate undesignated fund balance (surplus) and thus a true balanced budget, but also we also have a rainy-day fund, and as long as the economy is stable we should add money each year, starting with this budget year.