Once a year my wife and I have a short conversation about our rainy day fund. The conversation is short because, well, because talking about a rainy day fund is about as boring as it gets.
On the other hand, running out of money would be really exciting -- but not at all fun. So we make ourselves have the conversation.
The Legislature in Olympia has just finished up its short-session business and gotten out of town. Not surprisingly, the state's broken down rainy day fund didn't get fixed.
If the rainy day fund worked the way the voters set it up, the state government would put money in this set-aside account in years when tax collections were high (instead of ramping up spending) and draw down the account when tax collections are unusually low (instead of slashing programs).
Unfortunately, the Legislature is better at draw down than build up. The just-passed budget leaves the rainy day fund at zero dollars and zero cents.
It's hard to get constituents excited about the minutiae of the Emergency Reserve Fund, as the state's rainy day fund is known. Fortunately there are just two points voters need to remember: (1) when the state budget got hit in the last economic downturn, the existing reserve system flunked the test and, (2) for the system to work we need to write it into the state constitution.
In 2000, the boom of the '90s had started to cool off here in Washington. While the state economy was doing moderately well, a possible downturn was in sight. Unemployment was just a little higher than in the best days of the boom, hitting five-and-half percent by the end of the year, but was heading upwards. The stock market had peaked around midyear.
Given these signs, it looked like we might need to call on our rainy day fund in the not too distant future. And in fact, the rainy day fund established by Initiative 601 voters seven years earlier was projected to hit $800 million.
So what did the Legislature do? It cut the maximum size of the reserve fund in half and sent all the interest payments off to help pay for transportation.
When the lawmakers returned to Olympia for the 2002 session, the real budget crunch had hit. And less than half the $800 million was available to deal with it.
Faced with insufficient reserves, the Legislature went into crisis mode, wiping out, for example, three-quarters of the money for the school class-size reduction program that voters had ordered in Initiative 728 less than two years before.
Legislators aren't the only people who seem to think that the rainy day reserve can be treated as a convenient slush fund. One of the big talking points used to argue in favor of cutting taxes during the I-695 car tab initiative debate was that a healthy sized rainy day fund was evidence that taxes could be cut without causing too much pain.
It's time to take the rainy day fund out of everyday politics by putting it in the state constitution. This will accomplish two things. First, it will take the pressure off the politicians to raid the fund for spending du jour. Second, it will help those of us in the body politic not to mistake a healthy reserve for fat.
This is pretty much what my wife and I do in our annual conversation about the family rainy day fund. Once we decide how much we'll need to set aside each month, the money is off the table. The rainy day fund isn't spending money -- it's our emergency reserve.
Most states have rainy day accounts, which commonly let the balance build until it reaches 5 percent of one budget cycle. That's what the voters chose here in Washington.
But since the decision wasn't in the state constitution, the Legislature was able to cut the cap in half. Similarly, while the voters put in rules for drawing down the reserve fund, the Legislature can -- and did -- override the rules without much difficulty.
Once the rainy day fund is transferred to the state constitution, it would be much harder for pols -- in or out of office -- to monkey with it.
There's nothing controversial about this. The Legislature's own bipartisan Washington State Tax Structure Study Committee suggested it 18 months ago.
The only thing standing in the way of moving the rainy day fund into the state constitution is that it's awfully boring thinking about the details.
Better the legislators should be a little bored now then back in crisis a few years down the road.
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Dick Startz is Castor Professor of Economics and Davis Distinguished Scholar at the University of Washington. He can be reached at econcol@u.washington.edu
This column appeared in the following publications:
Everett Herald -- March 31, 2004
Walla Walla Union Bulletin -- March 31, 2004
Tacoma News Tribune -- April 1, 2004