To prepare for future economic downturns, North Carolina should increase the resources in its Rainy Day Fund as the economy recovers, says a new report by the Center on Budget and Policy Priorities co-released Thursday by the NC Budget & Tax Center.
Rainy Day Funds are the budget reserves established to respond to the revenue declines and spending demands that states typically face during recessions.
While North Carolina has designed its fund effectively by not capping the amount that can be contributed to the fund in good times, limiting its uses or requiring its replenishment on a specific timetable, the state hasn't put enough money into the funds in good times to provide adequate help during downturns. North Carolina policymakers should increase the target level of resources in the Rainy Day Fund, experts say.
"North Carolina policymakers should shore up the Rainy Day Fund, so that in difficult times future policymakers have the necessary resources to fulfill demands for services like education and health care," said Alexandra Sirota, Director of the NC Budget & Tax Center. "Putting a system in place that sets aside resources for a rainy day is essential to keeping North Carolina on the path to shared prosperity."
Evidence suggests that a Rainy Day Fund with resources representing at least 15 percent of spending should be available to maintain state spending and reduce reliance on tax increases in difficult times.
Before the recession began, in Fiscal Year 2006, North Carolina's Rainy Day Fund represented just 3.7 percent of state spending. By Fiscal Year 2010, the Fund stood at 0.8 percent. The Fund served its purpose but it was relatively low compared to what was needed especially given the precipitous decline in revenues and demand for state services. This important resource for policymakers would have been more effective if the state had set more funds aside in better times.
North Carolina is not alone in using its Rainy Day fund. Nearly 70 percent of states reported having done so over the course of the Great Recession.
"Just as families are realizing that savings can provide some protection against economic downturns, states should do the same," Sirota said. "Leadership in North Carolina is needed to ensure the state has adequate resources now and in the future to support the economic recovery and opportunity."
To read the full report, click here.