Tuesday, March 3, 2009

A Permanent Rainy-Day Fund?

The Oregonian is reporting on a plan coming out of the state legislature to put in front of voters a plan to create a permanent rainy day fund. Friend of the blog Fred Thompson and co-authors have looked at this problem in the midst of the last round of budget woes (only a few years ago) and their analysis is interesting and raises some questions:
  • Why not also relax fiscal rules and allow borrowing during economic downturns?
  • Is $1.5 billion enough? Thompson, et. al., suggest it is in the right ballpark, but given the current revenue gap which might easily eclipse $4 billion over the next two and a half years, it might need to be bigger.
  • Why build something on top of this ridiculous rule that depends on an economic forecast (as Paul Krugman says economic forecasting is slightly less respectable than witchcraft)? We are fortunate to have a talented and professional state economist in Tom Potiowsky, but I am sure even Tom would tell you that forecasting is simply very educated guesswork. Why not come up with something new and better?
Still, I am very, very supportive of this initiative, it is the right idea and needs to happen. I think that this puts the emphasis in the right place: spending stability rather than revenue stability (which is unachievable).


Will N said...

One non-economic way to reduce the uncertainty in the forecasts would be to have annual legislative sessions so that budgets were 1 year at a time instead of two. When the second year in a session is the key inflection point where things change, life is hard.

Jeff Alworth said...

Is the forecast business related to the kicker?

Patrick Emerson said...

If the revenues exceed the forecast by 2% the surplus is returned to individuals and businesses. Is that what you were asking? Or are you asking: is the kicker endogenous to the forecast?

If the latter, I should think not as the kicker only happens if the forecast is wrong.

Begs an interesting question: what if the economic forecast would be higher if there was a kicker? Then repeated kicker years would sort of be a self-fulfilling prophecy: growth that beats the forecast leading to a kicker leading to growth that beats the forecast...

MPPBrian said...

The only state that allows borrowing for operations is New York, and they are a financial mess. I think it is unlikely this will change, which is probably a good thing when we look at the lack of discipline at the federal level!

This idea with redirecting part of the kicker to create a rainy day fund came out of the Governor's Revenue Restructuring Task Force. They settled on the 1.5 billion figure after running models showing how the change would have affected past recessions, and it would have significantly limited the cuts in services during the most recent few downturns. That being said, it appears that this downturn is going to be bigger than most, so you may be right that they should aim higher.

And why build it on top of the economic forecast? Politics. If voters see this as eliminating the kicker, it will be hard to win, since the voters put the kicker in the Constitution not too long ago. If voters see this as a reform to the kicker, which it is, since there will still be kicker payments, they will just be smaller, there is a better chance of passage.

Chuck Sheketoff said...

1. We have a "permanent rainy day fund." - Actually, we have two - the Oregon Rainy Day Fund created in 2007 and the Education Stability Fund created in 2002.

2. The recommended size is not a fixed $1.5 billion -- it is 15% of prior biennium GF revenues. It should be bigger. OCPP recommended a bigger fund. They should be using current biennium, not prior, for starters.

3. Say what you want about forecasting, but there is no way around it. What this proposal does is use the bounds - one standard deviation, and every dollar that comes in from the middle to the top of the standard deviation would go into the rainy day fund. By doing that the kicker would kick less often and when it kicks it would kick less.

4. We should outright eliminate the kicker -- that's what sets us apart from all other states that makes our budgeting bassackwards. First we give unanticipated revenues away. Other states don't do that.