Editorial: Keep boosting state’s rainy day fund

Listen to this article

Politicians on both sides of the political aisle get positively giddy when there is an unexpected surge in tax collections that buoy Wisconsin coffers — like the one that is currently projected to give the state a $3.8 billion general fund balance at the end of fiscal 2023.

So many dollars — and so many ways to spend it.

Gov. Tony Evers in January proposed additional spending for schools and sending $150 checks to every state resident — which was derided as an election-year gimmick by Republicans. GOP legislators, meanwhile, are talking longingly about tax cuts in the next biennial budget and other spending proposals.

And no, state officials said in January, socking some of that surplus away in the state’s “rainy day fund,” to be used in the event of an economic downturn was not on the priority list.

After all, Wisconsin put $967 million into the fund at close of 2021, bringing the total to about $1.73 billion — the largest amount in state history. Under state law two decades ago, lawmakers requited that half of excess tax revenues be deposited into the rainy day fund until it reached 5% of state funding levels. Today, the rainy day fund balance equates to 8.4% of state spending.

So we’re good, right? Well, maybe. For now.

But there are still some alarm bells ringing. This month a report by the Wisconsin Counties Associations nonpartisan research arm, Forward Analytics, said Wisconsin needs to almost double the rainy day fund — that it should be 15% to 16% to properly withstand a future recession.

Dale Knapp, the author of the report, suggested additional contributions to the emergency fund should be the first claim on what’s in the general fund balance.

“Even if we do that, there’s enough there to fund some other priorities that the governor or legislators might have and and it sets us up in a position where we’re actually prepared for the next downturn and we don’t have to make significant cuts to spending or raise taxes significantly like we did in the last recession,” Knapp said.

Knapp said Wisconsin’s 5% level is too low and that the Government Finance Officers Association recommends holding at least 16% of spending in reserve.

Knapp is not the only one signaling this may be a time for caution.

The Federal Reserve is fighting a tricky battle to dampen down soaring inflation by raising interest rates while still not hurting the economy or the labor market — or triggering a recession. Last month, the Fed raised its benchmark interest rate by 0.25% — the first raise since 2018 — and as many as seven rate increases are projected this year, including bumps of 0.5% in May and June, according to some economists.

Economists argue that the Fed’s response was tardy and even Fed chair Jerome H. Powell conceded last month the Fed “obviously” should have begun tightening rates earlier before they got so high.

It’s a complicated situation compounded by the war in the Ukraine, the disruption of Russian oil shipments, the struggles in China with COVID that continue to disrupt supply chains around the world and a tight labor market here in the U.S.

That calls for a little bit of caution by the governor and state lawmakers before they start writing checks for new programs, tax cuts or anything else to sop up the state’s surplus.

The Reuters news service polled economists last week and they projected the probability of toppling into a recession is 25% this year and 40% next year.

They’re saying it’s fairly likely it’s going to rain. Wisconsin should have a healthier rainy day fund to use as an umbrella, just in case.

– Racine Journal Times