By Caleb Taylor
How could Arkansas be better prepared for the next recession?
Keep increasing the state’s Long Term Reserve Fund balance and improve its deposit and withdrawal rules, according to UCA Assistant Professor of Economics and ACRE Scholar Dr. Jeremy Horpedahl.
Horpedahl joined Jay Bir of Capitol View on KARK on March 8 to discuss Gov. Asa Hutchinson’s proposed state budget and ACRE research on the Long Term Reserve Fund, or the state’s savings account.
The Long Term Reserve Fund had a balance of $152.5 million (about 2.7 percent of FY 2020 projected general revenue) as of November 2019. The average U.S. state’s rainy day fund has reserves of about 8 percent of general revenue.
Horpedahl said:
This (Long Term Reserve Fund) is something that’s fairly new in Arkansas. Before 2016, we didn’t even have this fund. I think the Governor and recent legislatures have done a good job of getting this set up and making sure it is funded. I think what we’d like to see changed is that not only should the balance be bigger, which the Governor is looking at …[but also] having some rules about when money gets deposited. Most states that have these funds have had them longer than Arkansas and they’ve set up rules such as when there’s a budget surplus that half of it will go into the fund. While I think the current administration has done a good job of putting money in there, another thing they can do is ensure future administrations will do that. The main reason to have this fund is if we have another recession — which there will be someday — you won’t have to cut the budget. This money will be used to support the budget so you don’t have to cut services as tax revenue goes down in a recession as well.”
Horpedahl also outlined rules on withdrawals for similar funds in other states.
Horpedahl said:
Most states have rules about deposits and withdrawals. Most states have some sort of rule that the economy or state budget has to be shrinking in order to take money out. With our fund in Arkansas, if the growth of the state budget is less than three percent then they’re allowed to take money out. They don’t have to and they never have, but that’s not a very tight rule. Some states say only if the economy or state budget is shrinking can you pull money out so it’s truly an emergency.”
For more on this topic, check out UCA Associate Professor of Economics Dr. David Mitchell’s op-ed “Rainy Days Ahead” in the Arkansas Democrat-Gazette published on November 7, 2019 and Mitchell’s blog post entitled “Why Arkansas’s Long-Term Reserve Fund May Not Weather the Next Rainy Day.”