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Rein in the rainy day fund
Oklahoma
’s economy is bright and sunny, but taxpayers should note the balance of the interest-free loan we have made to the state in the form of our rainy day fund.
For the third consecutive year, Oklahoma will deposit a maximum contribution in the state’s Constitutional Reserve Fund, bringing the balance to more than $561 million by the end of June, nearly quadruple the high-water mark of $154 million in 1998.
The fund is capped at 10 percent of prior-year receipts, and anything left over is split between tax refunds and a special-purpose fund for research and development, health care, infrastructure and endowments.
Most states now have rainy day funds, which caught on in the Eighties. Oklahoma’s voting taxpayers approved ours in 1985 when the state was faced with plunging tax revenues due to a nasty recession from the energy and banking bust.
Conceptually, rainy day funds allow states to function without making drastic cuts in services or employee layoffs or issuing additional bonds at unfavorable terms in the event of revenue shortfalls. Wall Street also likes rainy day funds, as a state’s fund and its adequacy now are factored into its bond credit rating.
Critics of these interest-free taxpayer loans, however, contend they promote “political” budgetary solutions, not macroeconomic ones, and, in essence, remove the need for difficult decision-making, prioritization and, when necessary, spending cuts if state lawmakers are faced with revenue shortfalls.
Economic libertarians argue rainy day funds presume a state government is better able to decide how to use excess taxpayer funds than taxpayers themselves and that the interest derived from rainy day fund investments is potentially less than the yield individuals and businesses could obtain if they invested their funds in other opportunities.
Oklahoma’s rainy day funds are invested in U.S. government securities, safely yielding a moderate return of 4 percent to 5 percent, which generally is less than the return on investment from, say, a new oil rig, a new business, a stock portfolio or a $4 mocha latte.
If, for the sake of argument, the state returned all $561 million to individual taxpayers, we — like most Americans in a country now boasting a negative savings rate — would spend all of it (in Oklahoma, of course). Ironically, the state would collect about the same amount in sales taxes, about $25 million at a sales-tax rate of 4.5 percent, as it would in interest.
Oklahoma
communities, which also collect sales taxes, would stand to reap a windfall of nearly another $20 million. Better yet, money circulating throughout the economy multiplies this effect, so sales taxes foregone by hoarding a half-billion dollars in T-bills could be far greater.
In the 2006 legislative session, lawmakers shelved an idea to raise the rainy day fund cap to 15 percent of receipts, which at the end of this fiscal year would have resulted in more than $800 million squirreled away from productive economic use.
Someday, we know, that rainy day will come and our fund will be spent. In the meantime, perhaps, when many Oklahomans’ rainy day funds consist of unused credit card limits, lawmakers might want to consider reducing the cap and returning some of this money to its rightful owners.
Hazelton is a wealth manager living in northwest Oklahoma City.
