Treasurer Kennedy Recommends Increasing the State's Reserves

During her campaign for Treasurer and throughout her first year in office, Cary Kennedy has repeatedly and urgently advocated for increasing the state's reserves, or "rainy day fund."  As she wrote in one Denver Post guest commentary in April 2007 on the issue:

"It's not surprising for the treasurer to advocate for increased savings. As the state's fiscal watchdog, it's my job to promote sound financial management. That means advocating that the government maintain cash reserves to protect against the effects of economic downturns. Solid reserves put the state on stronger financial footing and protect its ability to borrow funds at more reasonable rates. This is why past Colorado treasurers have also called for the state to save more.

The need for increasing the reserve today is different and more urgent than in the past. Never in the past 20 years has Colorado saved so little when times were good.

Fifteen years ago, Colorado held over 10 percent of its general fund budget in reserve. Ten years ago, it held more than 12 percent of its budget in reserve and in 2001, just before the recent economic downturn, the state held 8.8 percent in reserve. These reserves have been critically important to protecting the state's financial position. In the early 1990s, Colorado was forced to spend down its reserves to avoid cuts in services and to meet the state's financial obligations. We were able to weather normal fluctuations in the economy and protect the state's strong financial position.

Today, the state holds only 4 percent of its general fund budget in reserves. Calculated as a percent of the total state budget, this amounts to only 1.6 percent. This is the lowest level in 20 years (except during downturns), the lowest level in the Rocky Mountain region and among the lowest in the country.

The consequences of not putting Colorado on more sound financial footing are substantial and have far reaching effects.

First, by not increasing Colorado's reserve, we leave recipients of state funded services including hospitals, nursing homes, and colleges and universities vulnerable to budget cuts.

State economists estimate that Colorado's reserves are so thin that we do not need to experience an actual drop in revenues to necessitate cuts in the budget, but that a slower rate of growth will trigger cuts in services.

Furthermore, because of the way Colorado funds larger ticket items like transportation, an economic slowdown risks dramatic effects in that area, as well.

Second, rating agencies use reserve balances as an important factor in setting a state's credit quality. Our state has a long history of strong credit quality, which gives us access to capital markets and allows the state to borrow at low interest rates.

Failing to increase the reserve leaves Colorado ill-prepared to respond during future economic slowdowns. Texas had its credit rating dropped during an economic downturn and then upgraded only after the state placed adequate reserves in its budget stabilization fund. Washington, Oregon and Nevada each had their rating positions enhanced this year following legislation to set aside additional budget reserves.

Finally, Colorado voters approved a large budget-balancing package, Referendum C, in 2005. The voters expect that money from Referendum C will be used to strengthen Colorado's financial position and make investments in education, health care and transportation.

When Ref. C was presented to voters in 2005, projections showed Colorado would retain $3.7 billion in revenues. Today, because of unanticipated economic growth, the state expects to retain a total of $5.7 billion in state revenues. It makes sense to use a portion of the additional $2 billion to help keep the state from getting into the position that made Ref C so critical.

The trade-off legislators face today is whether to make long-overdue investments in capital and transportation projects or to keep a portion of state revenues in reserve. I urge them to strike a balance between these competing priorities. Through sound financial management Colorado can continue to support the state's economy and build upon our recent successes.

Colorado has a reputation for conservative fiscal management. Now it's our responsibility to live up to it."

Read the whole guest commentary .

Or an earlier call to action on increasing the reserves, " Rainy-Day fund is a must ," Denver Post (January 18, 2007)