As state leaders struggle to find solutions to this year’s revenue shortfalls and funding gaps, it is not too soon to draw lessons from the current state fiscal crisis to design policies that will allow us to respond better the next time the economy falters. This post, the second in a four-part series that will recommend changes to our budget and tax system, looks at options for strengthening our budget reserve funds.  Our first post recommended enhanced and expanded budget forecasting; subsequent pieces will consider multi-year revenue commitments and tax expenditures. Together, our proposals are designed to improve the Legislature’s ability to manage budget downturns.

Like most every state, Oklahoma has established a budget reserve fund to put money aside during times of robust growth that is then made available to cushion the impact of economic downturns.  Oklahoma’s Constitutional Reserve Fund, known as the Rainy Day Fund (RDF), was created by a vote of the people in 1985. Under the Constitution, deposits are made into the Rainy Day Fund of all General Revenue (GR) collections that exceed 100 percent of the final certified estimate made by the State Board of Equalization for a given year. Deposits are capped at 10 percent of the General Revenue Fund certification for the preceding year.  If the RDF is already at its cap, additional surpluses spill over to the General Revenue Fund. Read the rest of this entry »