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story.lead_photo.caption A pile of dollar bills is shown in New York in this Oct. 24, 2016, file photo. (AP / Mark Lennihan )

Arkansas ranked seventh-worst among states in the number of days of operating expenses that its rainy-day funds would cover as of the end of the last fiscal year, according to a new report from The Pew Charitable Trusts.

Gov. Asa Hutchinson has already told lawmakers that the state needs to do more to build up its reserves.

The state's long-term reserve fund -- which the Pew report considers to be rainy-day funding -- was created in 2016 to be a savings account that could be used to shore up state programs in economic downturns.

At the end of fiscal 2019, Arkansas' long-term reserve fund had enough money to cover 9.9 days of state operating expenses, or 2.7% of spending, according to the Pew report released Wednesday. The state said the fund had nearly $153 million.

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By comparison, the fund would have covered 8.4 days of operating expenses at the end of both fiscal 2017 and 2018. The state is now in fiscal 2020, which ends June 30.

According to the report, the median for all states was enough money to cover 27.9 days of operating expenses, or 7.7% of spending, the report showed.

HOPES FOR GROWTH

Hutchinson told lawmakers a few weeks ago that the long-term reserve fund has increased from $103.1 million in fiscal 2016 to $152.5 million in fiscal 2019, but that it was still inadequate based on today's standards associated with state government.

In a written statement Friday to the Arkansas Democrat-Gazette, Hutchinson said, "While the report may not consider all of our surplus funds, it is absolutely correct that we need to do more to build our reserves.

"Reserve funds help improve bond credit ratings and lower interest fees," the Republican governor said. "More importantly, the reserves help the state weather emergencies like we are currently experiencing."

In light of the economic fallout from the coronavirus pandemic, the co-chairmen of the Legislature's Joint Budget Committee said Friday that state lawmakers may want to hold off until the 2021 regular session to decide how much surplus money is shifted into the long-term reserve fund. The state has $170 million in unallocated surplus funds.

The Legislature is scheduled to start meeting April 8 in a fiscal session.

"We just got to see how it shakes out," state Rep. Lane Jean, R-Magnolia, a budget committee co-chairman, told the Democrat-Gazette.

Because of the pandemic, the stock market has dropped to levels not seen in a few years; businesses are curtailing operations or shutting; unemployment is rising; travel has been cut back; and sporting events have been delayed for months or outright canceled. The United States has not hit a peak in the growing number of people with infections.

Because of the coronavirus emergency, Hutchinson said Friday that he's reevaluating priorities in the state's budget and use of surplus revenue.

SURROUNDING STATES

In an interview, Justin Theal, an officer at The Pew Charitable Trusts and author of the report, said Arkansas has made some progress since creating its long-term reserve fund.

But Arkansas' numbers fall below those of surrounding states, whose rainy-day funds by the end of fiscal 2019 were sufficient to cover operating expenses for:

• Louisiana, 15.1 days

• Mississippi, 22.9 days

• Missouri, 24.9 days

• Oklahoma, 41.9 days

• Tennessee, 21.4 days

• Texas, 70.4 days

States collectively increased their rainy-day funds or budget stabilization funds for the ninth-straight year, reaching a record total of $74.9 billion in fiscal 2019, the Pew report showed.

But their numbers vary widely from state to state, according to Pew.

Wyoming, Alaska and North Dakota each had more than 100 days' worth of operating costs stowed away.

But five states had less than a week's worth of operating costs in their funds, the report said. They were: Kentucky with four days; New Jersey with 3.9 days; Pennsylvania with 0.3 days; Illinois with less than a tenth of a day; and Kansas, which had yet to make a deposit after creating its account in 2016.

On March 4, Hutchinson told lawmakers that "my goal and our goal is to increase this fund significantly within the next three years." He didn't say how much higher he wanted the fund to be.

"A significant portion of the [$170 million] unallocated surplus can go to strengthen our long-term reserve fund, so that we will have reserves that will last us longer in the state and we will be better in terms of our bond ratings, but also recognized as a prudent state in terms of our savings," he said at the time.

Asked whether that was still the goal, Hutchinson said in Friday's statement, "under the current COVID-19 emergency, we are having to reevaluate the priorities of our budget and use of surplus."

The governor said at a news conference on the coronavirus Wednesday that he's grateful that the state has a "rainy-day" fund and a surplus, "but that will be eaten up very, very quickly, if we don't take the right measures in terms of watching the state budget and making any adjustments that are needed."

He has declined to set a time frame for deciding whether the state's general revenue budget should be cut.

HOW MUCH?

Sen. Larry Teague, D-Nashville, the other budget committee co-chairman, said he would love for the state to have $1 billion in reserves.

"We don't have to get it tomorrow, but it's good goal," he said Thursday in an interview. "With $1 billion in there, we could ride out anything except the apocalypse."

Teague said Friday in another interview that "if it's up to me, I don't think it is a good idea to put any in there because we don't know where we are" as a result of the fallout from the coronavirus.

Deciding how much to put into the long-term reserve fund "can always wait until January" 11 when the General Assembly will convene in a regular session, he said.

"That's my opinion, and it could get changed," Teague added.

Some of the surplus funds may be needed to cover current budget needs.

"We may have to wait until the 2021 regular session" on decisions about allocating more money to the state's long-term reserve fund, Jean said.

TOTAL RESERVES

By the end of fiscal 2019, states collectively amassed reserves of $113.2 billion, a record high that includes both rainy-day funds and ending balances of their general funds, according to the report from Pew.

Pew reported that Arkansas' total reserves totaled $448 million on June 30, which would cover 29.1 days of operating expenses. The report calculated the state's total reserves based on the ending balance of $295 million in general revenue and $153 million in rainy-day funds. That ranked the state ninth-worst.

That's the highest number of days in operating expenses that Arkansas' total reserves covered in the past few years, up from 12.5 days in fiscal 2016 and from 8.4 days in both fiscal 2017 and 2018, the report showed.

At the end of fiscal 2019, the median total reserves for all states would cover 48.1 days of operating expenses, or 13.2% of their spending, the report showed.

Compared with surrounding states, Arkansas ranked below four neighbors but above two others at the end of fiscal 2019, based on the report. The days of operating expenses covered by total reserves of Arkansas' neighbors for that fiscal year were:

• Louisiana, 15.1 days

• Mississippi, 23.2 days

• Missouri, 49.9 days

• Oklahoma, 58.1 days

• Tennessee, 42.5 days

• Texas, 103.4 days

For the first time, a majority of states -- 28 -- had enough in total balances to cover a greater share of government spending than they could heading into the 2007-09 recession.

Scott Hardin, a spokesman for the Arkansas Department of Finance and Administration, said it's difficult to compare the reserves of states against each other because they each operate under varying financial structures.

"Arkansas, unlike other states, is not allowed to borrow or create debt due to the state Constitution," Hardin said.

"Our system is built to absorb any potential downfall in revenue while prioritizing essential services provided to Arkansans," he said. "The General Assembly categorizes individual budget categories from A to C based on level of importance. In the case of a revenue shortfall, agencies have a clear understanding regarding the impact. Category C is the first to receive reductions followed by category B. In many cases, categories B and C may include capital investments such as new facilities. Essential state services remain in category A.

"Additionally, the study does not consider the variety of reserve funds that have been established in Arkansas. The surplus funds available are simply not considered," Hardin said. "As we work through this time period, we are in a unique position knowing we will emerge without debt."

SEEKING IMPROVEMENT

Jean said Arkansas "needs to be in the middle of the pack" rather than seventh-worst in the nation for its long-term reserve fund and ninth-worst for total reserves.

"There is no size-fits-all rule when it comes to how much to save," Theal said.

State officials should study the volatility of the tax revenue and economy and should determine the purpose of the fund and "the preferred level of coverage" to help determine the optimal size of dedicated savings, he said.

Total revenue in nine states fell short of covering those states' expenses between fiscal 2004 and 2018, according to the Pew report.

New Jersey has accumulated the largest gap between its revenue and its bills in the period from fiscal 2004 through 2018, according to Pew.

That state took in enough to cover 91.1% of its expenses in that period, the report said.

At the same time, Alaska collected 136.9%, yielding the largest surplus, Pew reported.

The typical state's revenue covered 102.6% of its annual bills over the past 15 years. Arkansas' revenue totaled 102.1% of its annual expenses during this period, according to Pew.

SundayMonday on 03/22/2020

Print Headline: Arkansas said to lag in reserve funding

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