pa rainy fay fund

The Rainy Day Fund

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Summary

  • The Budget Stabilization Reserve Fund, commonly referred to as the Rainy Day Fund, is Pennsylvania’s largest budgetary reserve fund.
  • Pennsylvania law dictates that lawmakers may only draw from the Rainy Day Fund in case of emergencies or unexpected revenue shortfalls—and that it “shall not be used” for new programs.
  • Political leaders, government officials, and credit rating agencies all agree that maintaining an adequate balance in the Rainy Day Fund is vital for Pennsylvania’s fiscal stability.
  • Using the Rainy Day Fund to balance the budget and cover the expected deficit violates state law. Moreover, illegal draws from the fund do not fix, but rather exacerbate and hide the underlying problem of overspending .

The Rainy Day Fund Law

  • Pennsylvania 1929 Act 176, Article 17-A establishes the Budget Stabilization Reserve Fund, or Rainy Day Fund. The law establishes strict parameters for when the legislature may appropriate money from this fund:
    • “Money from the Budget Stabilization Reserve Fund be appropriated only when emergencies involving the health, safety or welfare of the residents of this Commonwealth or downturns in the economy resulting in significant unanticipated revenue shortfalls cannot be dealt with through the normal budget process.”
    • “Money in the Budget Stabilization Reserve Fund shall not be used to begin new programs but to provide for the continuation of vital public programs in danger of being eliminated or severely reduced due to financial problems resulting from the economy.”
    • “The General Assembly may then through approval of a separate appropriation bill by a vote of two-thirds of the members elected to the Senate and the House of Representatives appropriate money from the Budget Stabilization Reserve Fund to meet the needs identified in the Governor’s proposal.”

The Importance of an Adequate Rainy Day Fund

  • Political leaders and government officials all agree on the importance of maintaining an adequately funded Rainy Day Fund:
    • Former Gov. Tom Wolf: “Over the past seven years, my administration has righted Pennsylvania’s shaky finances through sound fiscal management. When I took office, Pennsylvania was operating with a $2–$3 billion budget deficit, and the Rainy Day Fund had fallen to a mere $231,800. Today, Pennsylvania has nearly $5 billion in emergency savings, a growing economy, and a strong fiscal foundation for the future.”
    • Gov. Josh Shapiro: “Under my Administration, Pennsylvania has received two ratings upgrades in our first two years – a testament to our responsible fiscal stewardship that sets the Commonwealth up for success in the future while making critical investments in our economy and our workforce today.”
    • Treasurer Stacy Garrity: “Continuing to build our state’s Rainy Day Fund is a smart, prudent way to plan for the future. I applaud the General Assembly and the Governor for this substantial deposit, which will strengthen Pennsylvania’s fiscal outlook.”
    • Budget Secretary Uri Monson: “Sound financial management makes a difference in the lives of Pennsylvanians every day – and this rating and upgraded outlook affirms that the Shapiro Administration is making responsible decisions to ensure fiscal stability for our Commonwealth.”

Credit Rating Upgrades

  • Over the past two years, the “Big Three” credit rating agencies upgraded Pennsylvania’s credit rating, saving Pennsylvania taxpayers millions of dollars. Each credit rating agency cited increased Rainy Day Fund reserves as a main reason for the rating upgrade:
    • Moody’s Ratings: “The Aa2 issuer rating and general obligation ratings incorporate Pennsylvania’s large and diverse economy, solid financial position, and moderate combined long-term liabilities balanced by relatively weak demographic and revenue trends and growing demands on spending, especially K-12 school aid.”
    • “Maintenance of adequate reserves is particularly important in Pennsylvania given a history of late budgets and demographic weaknesses that challenge long-term job growth, overall economic performance and state revenue.”
    • Fitch Ratings: “The upgrade of Pennsylvania’s IDR and related ratings reflects recent use of revenue surpluses to build its reserves to historical highs and Fitch’s expectation that substantial reserves will be maintained in the near term…”
    • S&P Global: “The positive outlook on all long-term ratings reflects our view of a one-in-three chance that we could raise the rating over the next two years if the state demonstrates a commitment to structural budgetary solutions that narrow or close projected out-year gaps, while also preserving or increasing reserve balances in its budget stabilization reserve.”

Solutions

  • Pennsylvania faces a $3.6 billion structural budget deficit that the Independent Fiscal Office (IFO) projects to grow to $6.8 billion by the end of the decade, when removing adjustments for lapses.
  • Drawing from the Rainy Day Fund, a one-time revenue source, will not address the underlying causes of the budget deficit. Using these funds for overspending is illegal. Lawmakers should also avoid one-time gimmicks like delayed payments or under-budgeting to hide budgets shortfalls.
  • Additionally, drawing from the Rainy Day Fund would worsen the state’s financial position, potentially leading to credit downgrades. Draining this reserve fund could leave the state without a cushion for years in case of an emergency or economic downturn. In the past, it has taken several years to rebuild the Rainy Day Fund balance after it was depleted.
  • Lawmakers must avoid spending down reserves and enact a truly balanced budget that addresses the budget deficit by controlling spending and avoids tax increases to fuel more overspending.
  • Rapid expenditure growth in human services programs is driving the budget deficit. Over the next five years, IFO forecasts the long-term living and medical assistance programs to grow by 37.2 percent and 22.8 percent, respectively. Restraining unnecessary spending and controlling the growth of these programs is key toward balancing the budget and avoiding tax increases.