Montana’s rainy day fund, which neared $360 million a year ago, could fall as low as $163 million by next summer, fueling debate between Gov. Steve Bullock and his Republican challenger Greg Gianforte about how best to manage the state’s informal savings account.
The issue is more than just political posturing about fiscal philosophy.
Moving the figure causes ripples throughout the state budget with consequences for taxpayers. Residents might see reduced services, changes to taxes and fees, or more public dollars spent on interest for short-term loans to pay basic operational bills. Because Montana is one of just three states without a formal rainy day fund with rules written into state law, the amount of cash in the bank also affects how quickly the state can spring back from economic downturns without significant budget cuts.
“There’s no time to change tax policy mid-year, so state governments end up cutting spending when there’s a recession,” said John Hicks, executive director of the National Association of State Budget Officers that surveys rainy day funds nationwide.
Gianforte has called for the state to reduce the size of its informal savings account by at least a third from Bullock’s $300 million minimum, echoing some Republican legislators who think more of that cash should stay with taxpayers or be spent on infrastructure projects. Bullock and other Democrats caution that keeping less than $300 million in the bank could create cash flow problems and might harm the state’s bond rating, which influences interest rates on debts.
To understand the campaign claims, it helps to understand the state budgeting process.
The candidates technically are debating the state’s ending fund balance, cash still in the bank at the end of a fiscal year that was unmarked during the Legislature’s appropriations process. The governor can only spend money as directed by legislators. That leftover cash is used to operate programs and pay bills until enough revenues are collected to replenish them. The general idea is similar to dipping into a personal savings account to pay for a big expense, such as annual car registration or a medical bill, until the next paycheck arrives to restore what had been socked away.
Because the state Constitution requires a balanced budget, the state ideally would end a two-year budget period with the same amount of cash left in the bank as it had at the start. But fluctuations in the economy, and therefore revenues collected, as well as fluctuating demand for some mandatory spending programs, such as Medicaid, make it difficult to predict a state budget down to the dollar. Some years the Legislature reconvenes to find more money left over than planned. When state leaders return in January 2017, they likely will find about $190 million less than they hoped as revenues come in more slowly than projected.
In order for the governor to have authority to make emergency, mid-year budget cuts without legislative approval, the ending fund balance would have to dip below $118 million, or 5 percent of annual state spending. State budget analysts, legislators and the governor’s office all agree that revenues are unlikely to drop that far, suggesting the lowest might be $163 million.
The shortfall has become fodder for claims by the gubernatorial candidates.
Gianforte declined repeated requests for interviews over two weeks for this story. Campaign spokesman Aaron Flint attributed Gianforte's refusal to campaign responsibilities and time needed to prepare for Sunday morning's debate with Bullock.
Flint, speaking for the campaign, said falling revenues are proof Bullock’s policies strangle the economy. He pointed to a slowdown in natural resource development and the missed opportunity to boost growth by spending some of the cash on infrastructure projects rather than hoarding it in savings. Gianforte has previously said that he thinks the ending fund balance should be “between $100 million and $200 million” to maintain the state’s bond rating.
If legislators had left only $150 million in the bank instead of $350 million, the state would have run out of cash for daily operations mid-fiscal year in December, falling $31 million short of making annual payments to schools, according to weekly cash flow records released by Dan Villa, Bullock’s budget adviser. Later collections would backfill the gap, but that would have enabled the state to pay bills on time. Some states keep less cash in the bank, as Gianforte suggests, and issue “tax anticipatory notes,” essentially short-term loans, in the middle of each year to pay big bills until enough taxes and fees are collected to pay them off.
FY 16 cash balance simulation with $150 million rainy day fund
Using actual weekly balance figures from the Governor's Office of Budget and Program Planning, below is a simulation of the state's weekly cash flow assuming the fund had started at $150 million rather than $350 million. The state would have run out of money mid-fiscal year in November as the state made large payments to schools and local governments, months before the bulk of income and property taxes were collected.
Flint did not answer detailed questions about how Gianforte would manage cash flow needs during the year or handle another recession with less than $300 million in savings.
“It goes back to the big picture,” he said. “Why are we seeing declining revenues right now? This is a direct result of the governor’s failed leadership.”
Bullock defended his record.
“Most of the revenue that’s collected from the state, actually mostly from individual income taxes, over 50 percent doesn’t come in until April. Part of it is cash flow management,” he said, explaining why he insists on a $300 million ending fund balance. “It also doesn’t make sense to me to be calling the Legislature back every time there’s a dip in revenues.”
He said international commodity markets and overreaching federal policies are primarily to blame for a drop in state collections from natural resource industries, which he notes are a small wedge of the budget compared to personal income and property taxes. He opposed lowering his rainy day savings benchmark, even to fund infrastructure projects. With interest rates lower than inflation on construction costs, he said it would have been cheaper for the Legislature to bond for some needs.
An infrastructure bill that used a mix of cash and bonds failed by one vote in the final day of the 2015 Legislature as some conservative Republicans called for less money to be saved. In 2013, Bullock vetoed an infrastructure bill that had near-unanimous support because the total spending approved by legislators would have reduced the rainy day fund below the governor’s target of $300 million.
Montana State University political scientist David Parker said this election cycle is hardly the first time rainy day funds and budget projections have been politicized.
“A lot of people say, ‘This is simple math.’ Well, it’s not that simple,” he said. “Budget projections are always difficult to figure out and clearly the amount of money that’s left in the ending balance is a political hot potato. Using optimistic or pessimistic projections will create different pictures that advantage the incumbent or not.”
Dan Villa, Bullock’s budget adviser, attributed the shortfall to worse-than-expected economic conditions and dismissed poor projection methodology as a key factor.
“Three items drive it: Congress passing the PATH (Protecting Americans from Tax Hikes) Act in December is worth about a $30 million loss to corporate revenues this year alone due to bonus depreciation and additional tax cuts that impact Montana revenues. (Also there's) OPEC production remaining high, making oil prices lower for longer, and Asian market slowdowns hitting coal,” he wrote in an email, noting that the blow might be softened by some revenues – such as income taxes and tourism-related collections – coming in stronger next year than initially projected.
Republican Sen. Fred Thomas, a longtime Stevensville legislator who chairs the Revenue and Transportation Interim Committee, said he is less convinced that the gap is just the result of a deeper economic dip than expected. He noted that the latest projections more closely match the initial calculations made by the Legislative Fiscal Division than those made by the governor’s office, which he said led legislators to expect more revenue as they budgeted.
With so many factors at play, Thomas said it’s tough to know to what degree poor projections could be to blame, but said the result is clear: Montana has spent more money in the past year than it has brought in, draining its savings.
Thomas, like most Republicans, argues that the state does not need to keep so much cash out of fear of another recession, saying that in a true emergency the state could crack into the $1 billion principal of the Coal Severance Tax Trust Fund.
During the last recession, states nationwide were forced to make massive budget cuts to key services and lay off thousands of state workers as revenues plummeted. By 2011, Montana was one of only two states to make it through the recession in the black and without making emergency mid-year cuts.
Analysts generally agree that strong oil prices buffered Montana from some of the dip, as did its reliance on income taxes, which tend to be less sensitive to economic fluctuations than a sales tax. With targeted spending cuts directed by former Gov. Brian Schweitzer and by plugging holes with federal recovery dollars, the state avoided the same kinds of steep reductions seen elsewhere. The state’s cash savings also absorbed some of the shock. The ending fund balance dropped from $393 million in FY 2009 to $311 million by FY 2010. By the end of 2013, the balance peaked at $538 million, according to annual surveys by the National Association of State Budget Officers.
The news that declining revenues have cut into Montana’s savings this year did not surprise Hicks, the association’s director.
“Energy-dependent states particularly are facing tough fiscal conditions,” he said, referencing a survey of actual 2015 state spending and estimated 2016 spending released in late May. “In all 50 states, total balances are down slightly.”
Hicks said there is no magic formula for determining how much states need to save to withstand economic fluctuations and recessions. It varies based on the sensitivity of revenue collections to economic changes and the diversity of its industries, among other factors.
The Government Finance Officers Association recommends saving “no less than two months of regular general fund operating revenues,” which averages out to about 16 percent of annual spending, and supports formal rules on how to build that fund and when to withdraw from it. The National Conference of State Legislatures had for decades recommended savings be 5 percent of spending, but doubled it following the 2009 recession. Montana has regularly exceeded those baseline recommendations.
Since FY 2005, when Schweitzer took office, the state’s annual ending fund balance has been large enough to operate state government for an average of 84 days, peaking at 118 days in FY 2007 and dipping to 66 days by FY 2010, according to a Pew Charitable Trusts analysis of data collected by state budget officers. From 2000 to 2004, during Republican leadership, the savings were enough, on average, to run government for 36 days, ranging from 58 days in 2000 to 12 days in 2003 at the end of a mild recession. Despite the variance, Montana has consistently ranked in the top 10 states for its savings.
Academic research conducted in the last decade suggests previous economic contractions and expansions be measured to estimate the sensitivity of state revenues to fluctuations so that savings more closely match the realities legislators might face.
A 2016 update to a series of studies by University of Arkansas economist Erick Elder and the Federal Reserve Bank of Philadelphia’s Gary Wagner, suggests that Montana needs to save 13.2 percent of its annual operating revenue to successfully weather three of four recessions without budget cuts. Elder said a severe recession like the one in 2009 would require Montana to save more than 35 percent. Montana’s $455 million fund balance at the end of FY 2015 was 21 percent of annual spending, according to the state budget survey. If projections hold that cash reserves will dip as low as $163 million, that figure drops below 7 percent.
Whether that is enough depends on a candidate’s political philosophy about how to cover shortfalls.
“This will always become a fraught battle about what the numbers mean and should mean,” Parker said.
Both Gianforte and Bullock said they would consider writing rainy day fund rules into law like most other states if legislators request a discussion about it, although there’s no indication they will. Neither gubernatorial candidate finds particular fault with the current system, which leaves the ending fund balance up to the discretion of state leaders every two years.
Both hope to be at the state’s helm when those negotiations next begin.