How Much Do You Need In Your Rainy Day Fund?

Joseph Scott — Tue, 24 Feb 2009 14:30:56 +0000

Utah, like so many other states, is trying to adapt their state budget to the current economic conditions. In general this translates into budget shortfalls, often resulting in spending cuts and tax increases. I recently received a flyer from Senator Wayne Niederhauser that included a survey about political priorities. Question two was:

This past year, Utah was named the “Best Managed State” by the Pew Center in Governing Magazine. This recognition is a result of Utah’s proactive fiscal management and AAA bond rating (the highest rating given to States) and having over $400 million in Rainy Day Funds, a credit to Republican leadership in Utah. In light of declining tax revenues, please list your priorities for funding from 1 to 10, with 1 being the highest priority.

That as followed by a list of options to prioritize. The part that struck me was the $400 million plus in rainy day funds. I was pretty impressed, a state that actually set aside money when times were good to be used when times were bad. Many folks are now calling for these rainy day funds to be used to offset the shortfalls in the current budget. From what I’ve been reading in the Deseret News (one of the major Salt Lake City newspapers, Salt Lake Tribune being the other) politicians don’t seem to be very eager to make use of these rainy day funds right now.

I’ve been wondering why that is. Maybe they are worried that they might need that money if things continue to go down hill, the idea being that the rainy day fund is a fix of last resort. I don’t know, but I wanted to find out a bit more about what the Utah state budget looks like. The Governor’s Office of Planning and Budget (GOPB) has a budget summary PDF that looked like a good place to start. For fiscal year 2010 the budget summary page (page 9 of 177 in the PDF) indicated that the total recommended budget for 2010 is $10.6 billion. Utah has less than 3 million people, so the size of the state budget is relatively modest when compared with other states.

Utah Rainy Day Fund - From 2010 Budget Summary

There is a chart on page 14 of the PDF showing the historic balances of the rainy day fund. It peaked at $414 million and indicates the governor is requesting that some of that money be used to shore up the 2009 and 2010 budgets. When looking at the $10.6 billion and $414 million next to each other I realized that the rainy day fund is really only a small percentage of the annual state budget. How small you ask? 3.9 percent. I was disappointed when I saw that number, the way the rainy day fund is talked up I’d hoped for something a bit more.

With an annual budget of $10.6 billion the rainy day fund has enough money in it to run the state for 14.3 days. With the rainy day fund shrinking the reality is it wouldn’t even last that long. I hope your personal budget has a rainy day fund that would at least get you through one month.

Of course California would kill for a rainy day fund of any size right about now :-)

What Are Credit Default Swaps?

Joseph Scott — Mon, 27 Oct 2008 15:51:45 +0000

Since the economic markets started imploding in a major way earlier this year we’ve hear a lot about about “credit default swaps” (CDS). I’ve seen a few attempts to explain what these particular financial tools are but still didn’t feel like I had a good grasp on what they were.

Last night 60 Minutes had a segment on CDS (The Bet That Blew Up Wall Street) which I think does a pretty good job of spelling out what these beasts are. The audio is pretty poor, but it’s worth the 12 minutes and 26 seconds to watch:

Watch CBS Videos Online

After seeing this it seems pretty clear that the limitations the government removed eight years ago was not really a good idea. Not one Senator voted against it. Anyone know if they’ve learned their lesson and moved to make this illegal again?

Joseph Scott » economics

How Much Do You Need In Your Rainy Day Fund?

What Are Credit Default Swaps?