Offset spending reserves with cuts
By Sen. Randy McNally • Tennessean.com
November 18, 2008
By now, it will come as no surprise to anyone that the state, nation and even the world are dealing with a severe economic downturn.
Governments, like households and businesses, are not immune from these cycles. When revenues fall below what is expected, government has three options to address the problem: raise taxes, cut spending, or spend down reserves if available.
Tennessee has saved money in reserve accounts for a “rainy day.” With good fiscal management and restraint by Gov. Phil Bredesen and the General Assembly, we currently have a record amount in reserves.
Revenues were already falling when the current year’s budget was passed, and we planned accordingly. We opted for a combination of options two and three above: We cut more than $400 million in spending, and we used $287 million of the more than $2 billion the state held in various reserves. A substantial amount of our reserve funds were used for economic development to recruit the Volkswagen plant. However, no one predicted that the downturn, now a recession, would be as big as it has become. We are now facing a predicted shortfall of
another $600 million-$800 million on top of the adjustments we have already made.
To address this revenue undercollection, I believe the state should use a combination of cuts and spending reserves, not a tax increase. increasing taxes in the middle of a recession is the worst possible choice, as it would hurt individuals and businesses that are already struggling to make ends meet.
Avoid repeat of 2001
You may have done the math by now and see that we still have more than $1.7 billion in reserves. These reserves come from the “rainy day” fund ($750 million), TennCare reserves ($500 million) and various funds in departments and agencies, some of which are restricted in their uses. It would be easiest just to take the $800 million needed from reserves and avoid further painful cuts. However, this would be the worst solution, because if we pay for recurring expenses with one-time money, it creates an even larger problem.
You don’t have to look too far back in the state’s history (1997–2001) to see how we got in trouble with this method before. In 2001, a 1-cent sales-tax increase was enacted, generating more than $900 million in additional revenue. Almost half of this revenue was needed just to balance the budget with recurring revenues for recurring expenses that we had been paying for with one-time money. That is not a road I want to travel again.
There is no question that it is “raining” right now. The question is whether it is prudent to use only the reserves to get the state through these tough times. Because we don’t know how long the recession will last or how deep it will go, draining the reserves is not a good solution. I will, with reservation, support using a portion of the reserves, but only with corresponding cuts so that we do not dig ourselves into a hole.
The first rule of holes is: When you’re in one, stop digging. Now is the time for state government to continue showing restraint and to work our way out of this recession without leaving a fiscal mess for someone else to clean up.
Sen. Randy McNally, R-Oak Ridge, served as chairman of the Senate Finance, Ways and Means Committee for the 105th General Assembly. He represents Anderson, Loudon, Monroe and part of Knox counties.