Rainy day funds can be valuable tools in helping to ease fiscal and economic challenges that are the result of the cyclical nature of the economy. The funds are kept separate from general funds and are intended to be used to amass extra money when available so it can later be used when needed during downturns. I have earlier discussed some issues facing state rainy day funds. Despite the challenges, 48 out of the 50 states presently have formal rainy day funds. The landscape is markedly different at the local level, however. When looking at the core cities of the 30 largest metropolitan areas in the United States, only 16 have formal funds defined in their statutes.
Previous research from The Pew Charitable Trusts identified three rainy day fund best practices at the state level. These best practices should apply to cities as well. In short, the best practices are:
- The fund should be designed with clear objectives.
- The fund’s deposits should be tied to revenue volatility. The specifics of this practice vary from place to place. As an example, both Baltimore and Los Angeles require that their budget officials examine revenues from the past several years, and make deposits into their rainy day funds exceeds the recent historical levels by previously-defined amounts.
- Fund withdrawals should be made in conformity with clear criteria.
Pew recently hosted a panel discussion with city leaders to discuss the nuances of managing rainy day funds. When these funds are administered in accordance with best practices, they can prove to be vital instruments in helping municipalities cope with recessions. In such times when revenue is in short supply, a city’s rainy day fund can help by enabling the city to prevent layoffs of public employees, as just one example.
It is important, however, to keep in mind that a city’s rainy day fund needs to be well-managed. If a fund is poorly managed and not adhering to the best practices outlined above, it can actually have a negative impact on a city’s credit rating. A recent example of this occurring is in Philadelphia, whose credit rating from Standard & Poor’s was downgraded from A+ to A. There were many reasons for the downgrade, but Philadelphia’s rainy day fund sitting with a zero balance was one of the factors.
In addition to a well-managed rainy day fund, partnering with a trusted collection partner is another piece of a diverse municipal fiscal management policy. IC System has a track record of partnering with state and local governments to help improve their economic outcomes by providing debt collection services which leverage technology, emphasize data security, and promote innovation.
IC System can help you plan with the service and experience you need.