City should consider growing its ‘rainy day’ fund
The past decade has been pretty good for Central Ohio.
In 2018, the Columbus metropolitan area experienced its ninth consecutive year of economic growth. Over this time period, Columbus' economy grew 3.1 percent per year on average, outpacing both the country and Ohio, which each grew at about 2 percent per year over that time period.
That being said, all good things eventually end. A recent poll by the National Association of Business Economics found that two-thirds of business economists in the U.S. expect a recession in the next two years.
Is Columbus ready for a recession?
This month, Columbus City Council is holding hearings on the 2019 proposed city operating budget. About two-thirds of the proposed budget goes to police and fire services, with the remainder going to parks, trash collection, health and human services, economic development and city administration.
When a recession hits, tax revenues go down and cities are forced to either raise tax rates or cut services.
Neither of these are good choices. Raising taxes further strains the wallets of workers who are already dealing with economic hardship. Cutting safety and human services can be unwise since homicide rates increase during recessions and temporary cuts to health and education programs have been shown to have long-term impacts on low-income families.
During the last recession, Columbus faced a shortfall of more than $100 million. In order to deal with this, the city passed a tax increase and avoided decreasing services.
In order to avoid this tradeoff during the next recession, the city has wisely grown its budget stabilization fund (popularly called the “rainy day fund”) over the past few years.
Currently, the budget stabilization fund stands at $76 million, or 8.6 percent of the general fund budget. It is supposed to climb to $81 million by 2020.
While this fund will fill some of the gap during the next recession, it may not make up the entire shortfall in city revenue.
Estimates for Ohio statewide revenue shortfalls say that a safe statewide budget stabilization fund should be somewhere in the mid-teens as a percentage of general revenues. At the city level, this would require tens of millions of dollars more than the fund has now.
On the one hand, you might say that Columbus' fund can be smaller than the state as a whole because of the relatively stronger Central Ohio economy.
On the other hand, the city budget is 75 percent dependent on income tax revenues, which are more volatile than sales tax revenues. This means that city revenues may fall faster than the rest of the state, which has more of a sales tax base.
Given these factors, the city should consider increasing its investment in its rainy day fund. While it may be tempting to spend all available funds right now, going to the voters for a tax increase in the middle of the next recession, or cutting police services, health services and education services when they are needed most is a dilemma we don't want to have to face in the future.