State Strategies to Manage Budget Shortfalls

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Case Study: Pennsylvania's Tax Stabilization Reserve Fund

Pennsylvania's Tax Stabilization Reserve Fund was created in 1985. Although the fund is capped at 3 percent of general fund revenue estimates, it peaked at 1 percent of revenue estimates in 1991. Before 1991, the fund required appropriations from the legislature for its funding, but a change was made that year allowing for the automatic deposit of 10 percent of any surplus revenues at the end of a fiscal year. Appropriations can still be made to the rainy day fund.

Withdrawal requires a two-thirds vote of the legislature when the governor declares an emergency or to counterbalance downturns in the economy that will result in a significant unanticipated revenue shortfall. The entire reserve, $138 million, was tapped in 1991 to deal with a downturn in the economy and falling state revenues. This is the only time that a withdrawal has been made from the reserve fund.

Because of the small balance in the fund and the magnitude of the state's fiscal problems, the fund was a minor factor in resolving the state's budget crisis in the early 1990s. In fact, the state ended up enacting a $3.2 billion tax increase and imposing budget cuts. But advocates of the fund indicate that it served a valuable purpose: Its availability and use bought the legislature time as it was debating an emergency tax increase package. According to some officials, this enabled state policymakers to make better informed decisions.

Part of the problem in fully funding the Tax Stabilization Reserve Fund is said to be political opposition to the existence of such a fund. Critics of the reserve fund believe that any surplus revenues that the state collects should be returned to the taxpayers. This argument was part of the debate at the inception of the reserve fund and is still a factor today. Critics also claim that simple across-the-board cuts in state spending during economic downturns can save more money than is available in the reserve fund.

Supporters of the reserve fund believe that it can be a useful budgeting tool if kept near its 3 percent cap. Advocates also argue that more deliberate actions should be taken to fully fund the reserve.

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Written December 1996, posted January 2003, reviewed December 2003
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