One budget amendment makes sense, one doesn’t

October 28, 2010 

SMART STATE budgeting is in the eyes of the beholder. Some say the state should spend whatever it takes to avoid reducing school funding. Some feel that way about Medicaid. Some say since doing either would force us to close down much of the rest of the government, nothing can be spared. Some want to raise taxes to make up the difference. Some think we should cut taxes and spend even less.

Smart fiscal management is a little less open to interpretation: Don’t get into the habit of using one-time funds to pay for new or expanded programs. Don’t make across-the-board cuts as part of your regular budgeting process, and take reasonable steps to avoid situations where they’re the only option. Don’t spend more money than you have, and have a contingency plan in case everything goes terribly wrong and you do despite your best efforts.

Constitutional Amendment 3 on next week’s ballot would strengthen our contingency plan for those times when things go terribly wrong and the amount of money the Legislature voted to spend is more than what turned out to be available. It would require the Legislature to gradually increase the amount of money it puts into the General Reserve Fund from the current 3 percent to 5 percent of the most recent year’s state budget.

The 3 percent fund was designed to help the state meet its constitutional mandate to close out every year with a balanced budget. It used to be sufficient. But as the global economy has gotten more complicated, it has become more difficult for budget forecasters to correctly predict revenue collections, and that 3 percent isn’t enough any more.

Of course there’s a cost to putting that much money in reserve, just as there’s a cost to putting more money into your savings account instead of using it to pay your bills. But the cost to maintaining the smaller fund is lower bond ratings that force state and local governments to pay higher interest rates when they borrow money.

Constitutional Amendment 4 would further bolster the General Reserve Fund, by requiring the Legislature to use the smaller Capital Reserve Fund to replenish it if it has to be tapped in emergencies.

This has the advantage of effectively giving us a 7 percent reserve cushion. But it has the downside of undermining the reasonable steps the Legislature has taken to avoid or at least mitigate midyear budget cuts — which are the most destructive and irresponsible way of dealing with shortfalls, because they must be across-the-board cuts and they can’t be planned for the way prospective cuts can be.

Currently, officials tap the Capital Reserve Fund to help avoid midyear cuts. So this amendment would effectively eliminate one smart contingency program in order to bolster another one. We don’t see how that makes sense.

If the Legislature is convinced that we need a 7 percent reserve fund to protect against year-end deficits, then it needs to make the case for increasing the General Reserve Fund to 7 percent. In fact, there is nothing in the constitution or state law to stop the Legislature from putting more than 5 percent into that fund right now. But if Amendment 4 is approved, there would be something in the constitution to make it much more difficult to avoid midyear across-the-board cuts. That’s not a change we need.

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