Thursday, March 25, 2010

Save a Little Money for a Rainy Day

By Marc Korman.

County Executive Ike Leggett’s fiscal year 2011 budget proposal was recently released. Included was a proposal for the current fiscal year (2010) that the County tap its Revenue Stabilization Fund, also known as the rainy day fund, to meet its fiscal obligations.

In 1992, the state of Maryland authorized the counties to establish rainy day funds. Montgomery County began its fund in 1993 and has never before tapped into it. The Washington Post did a good job last September of explaining how the fund works and the rules for utilizing it here. If you are interested in the primary source, you can read Chapter 20, Article XII of the County Code on the Revenue Stabilization Fund here.

Briefly, the fund can only be used if:

o The Council finds that a reasonable reduction in expenditures would not be sufficient to offset a revenue shortfall.

o The use accounts for no more than half of the difference between the County’s original projected revenue for the year and the revised forecast, assuring that the rainy day fund is not being overused.

o If two of the following conditions are met:

 The Director of Finance estimates the total General Fund will fall more than 2% below the original projected revenues.

 County resident employment has declined for six months compared to the same period the year before.

 A local index of leading economic indicators has declined for three consecutive months.

However, by a vote of six Councilmembers the rainy day fund can be used even if those limits and conditions are not met (wait until Robin Ficker finds out the Council does not need nine votes to do something).

The County Executive is proposing that $102 million be taken from the $119.7 million fund to fill the remaining fiscal year 2010 budget gap. He anticipates no further reductions from the fund next year, but rather a transfer back into the fund of $37 million.

I think most people would agree it is a rainy day here in the County. But when accessing the fund, it is important for County leaders to keep in mind two things.

First, the Rainy Day fund is not an infinite source of money. Its current $119.7 million balance is less than 3% of the County’s $4.3 billion operating budget. The County cannot go to the well too often so when it does, it needs to be sure that it is really necessary. As the County Executive’s budget said, if the fund “had been accessed in the past…it would not have been available in the current fiscal crisis.”

Second, it is worth remembering what the Rainy Day fund is actually for. Its major purpose is so credit rating agencies continue to give Montgomery County good ratings so we can borrow more cheaply for projects such as school construction. I had an opportunity to explain the importance of bond ratings in the context of the state in a letter to the Gazette in February. I was responding to this editorial. In addition to downgrading our bond rating (the agencies use a letter grade system that varies a bit from rating agency to agency), the bond rating agencies can also alter the “rating outlook,” which is done outside of the formal rating review and is a leading indicator of where a bond rating will go.

In many ways, state and local government bow to a false idol with the reverence in which they hold bond ratings. The 2008 financial meltdown demonstrates how flawed these ratings can be and how easily they can be manipulated. But as long as bond purchasers rely on them, it is important we keep our rating up so we can keep our borrowing cheap.

The rainy day fund needs to be used sparingly. It is up to the County Council to determine if the County Executive’s proposal is using it properly.