Saving for a rainy day

“One of the items in the newly passed and signed state budget that received a big boost in spending was reserves, or what some call the rainy day fund. What is this fund and why did it get a big boost? N.C. State University economist Mike Walden responds.

“Well, this is actually an idea that’s I think about 25 years old. I wrote about this back then. The notion is that we’re going to see ups and downs in state revenues, any state. It goes along with what economists call a business cycle. We have good years when the economy is growing. State revenues go up. We have bad years, recessions. State revenues go down.

“The notion of a rainy day fund is to say, ‘Look, unless we want our spending to go up and down with the revenues, what we maybe want to think about is during the good years actually not spending all of the state revenue but saving some, putting it in a fund, earn a little interest on it, and then, when we have bad years, we have a recession, we can draw from those funds.’

“And what that means is we won’t have to maybe cut state spending as much in the bad years. Now that also means in the good years, you can’t increase state spending as much. So obviously over the last four or five years as the state economy has been stressed, state revenues have been stressed, we’ve depleted the rainy day fund that had previously been built up. And now the General Assembly has decided to start to replenish that fund.

“They actually set aside or will set aside $600 million over the next two years for this rainy day fund to replenish it. My guess is the legislature will probably add more when they do the budget again. And again the notion is the next time we have a recession — and we will — we’ll have this pot of money to at least cushion some of the changes that would have to occur in state spending.”