The Fiscal Year 2012 state budget took effect on Saturday October 1.  Buried deep within the budget is a $256 million deposit to the state’s Rainy Day Fund.  This is the first substantive deposit to the Fund in over ten years and the result of a trigger contained in state law tied to changes in inflation-adjusted state personal income growth.  The deposit will help restore the state’s major funds’ (General, School Aid, and Rainy Day) cash position and assist with the state’s FY2012 cash flow needs. 

Throughout the early 2000s and as a result of a series of budget decisions, policymakers exhausted nearly $3 billion in combined major fund cash reserves.  These one-time resources were used to help achieve annual balance in the state budget.  At the end of FY2000, the major funds had a combined cash position of $2.9 billion; however, by the end of FY2003 all of these resources had been used to support state appropriations and the cash position was negative $490 million.  At the end of FY2010 the combined major funds’ cash position, although slightly improved, was negative $371 million.

Until such time that policymakers decide to tap into the $256 million deposited in the Rainy Day Fund, the cash will be used to help manage the state’s cash flow.  When available, these reserves are used to help smooth out the timing differences that occur throughout the year between cash receipts and payments required from the General and School Aid Funds.  The figure represents about 1.3 percent of total General and School Aid Fund revenue in FY2012.  In FY2000, the $2.9 billion cash balance represented 15 percent of annual revenue collected in the two funds.  

When cash reserves are not available, however, the state is forced to turn to other cash management tools (e.g., issue short-term notes and borrow from other funds) to meet its monthly obligations.  These mechanisms can cost the state money (interest and other borrowing costs) and temporarily divert state resources from other priorities.  The $256 million is expected to reduce some of these costs.

The $256 million Rainy Day Fund deposit is one piece of the state’s new fiscal plan, which represents a significant break from many of the budget maneuvers of the past.  Among other components of the new plan, the budget ends the long-standing practice of using temporary, nonrecurring financial resources to achieve annual balance.  It takes aim at long term ballooning financial obligations by setting aside resources today to honor bills that will come due in the future.  Finally, the new plan takes steps to improve the state’s weakened cash position and reserves some resources in case the economic assumptions undergirding the budget do not materialize.

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