Tennessee GOP leaders won’t tap reserve funds

Tennessee’s rainy day fund and total reserves are hitting record highs, but Republican leaders are loath to use them, even amid the COVID-19 pandemic. 

It also could take months to form a new plan for increasing cash assistance to needy families, even though lawmakers recognize they let the Temporary Assistance for Needy Families reserve grow too large.

Gov. Bill Lee opted to leave the $1.45 billion rainy day fund untouched during the pandemic of 2020-21 and will add $50 million to it next fiscal year. The governor is also adding funds to the TennCare reserve, bringing the total of both reserves to a combined $2 billion in fiscal 2021-22, if the Legislature approves.

“A rainy day fund should be used for the most catastrophic events,” Lee said recently. “It takes legislative approval, and it would be the last used funds when there are no funds left to keep the state operating.”

The state avoided using the rainy day fund in 2020-21 mainly because of budget reductions, better than expected revenue and a $2.3 billion injection of COVID-19 relief from the federal government. About $1 billion of the federal money was used to prop up the state’s unemployment insurance fund and avoid a tax increase on businesses statewide.

Other federal funds went toward business relief, local government and education programs. Some $200 million remains unspent.

The governor points out the rainy day fund would be able to operate state government for 34 days if the state’s finances are depleted.

“It’s the fiscally responsible way to establish a budget, and we’ll continue to keep a rainy day fund when it’s possible to have that fiscal stability within our state budget,” he said.

Although critics of the governor’s spending plan say the state should be directing funds toward residents suffering from the pandemic’s economic downfall, Lt. Gov. Randy McNally isn’t ready to redirect rainy day funds either.

Asked when the fund should be used, McNally said recently, “when it rains, and it hasn’t.”

The lieutenant governor acknowledged the state saw a “dramatic downturn” in revenue last March when the pandemic struck and Lee shut down all but essential services and businesses.

“We had enough reserves and cuts … and then it started picking back up. Revenue right now is actually in a real good place,” McNally said.

In fact, the state could have about a $1.6 billion surplus heading into the next fiscal year. The economy was buoyed in 2020 by strong sales in home construction, furnishings and even auto sales when most people were asked to stay at home. 

The state’s general fund surplus increased to $1.08 billion in the first six months of fiscal 2020-21 as sales tax collections came in $733 million more than projected.

Sen. Bo Watson, chairman of the Senate Finance, Ways & Means Committee, points out the Legislature gave the governor permission to use the rainy day fund if necessary. But strong revenues and budget cuts enabled the governor to dodge that move.

“We’re not going to tap into that rainy day fund until we have exhausted all other measures in government,” said Watson, a Hixson Republican.

Tennessee has been recognized as one of the most financially sound states in the nation. In fact, the rainy day fund and the TennCare reserve make up less than half of the state’s reserve funds. 

After closing the fiscal year 2020 budget last June 30, the state’s reserves totaled $4.8 billion, courtesy of a $325 million bump in the rainy day fund, a $110 million addition to the TennCare fund and other increases of $220 million, mainly related to the COVID-19 pandemic funding, according to the Budget Office. 

With so much money on hand, Democratic leaders in the Legislature say this is the time to put those reserves to use instead of hoarding them.

Between strong tax collections and one-time dollars from the federal government, the state has an opportunity to provide short-term economic relief to people hurt by the pandemic and a long-term investment in education, said Senate Minority Leader Jeff Yarbro.

“But instead, we’re putting more money into the rainy day fund and going on what appears to be a billion-dollar spending spree for buildings, which makes virtually no sense in the current environment for the state,” said Yarbro, a Nashville Democrat.

Gov. Lee is putting nearly $1 billion into his fiscal 2021-22 spending plan for building maintenance.

Sen. Raumesh Akbari, who serves on the governor’s federal financial accountability group, contends the state needs to make a “serious investment” in education, including repairing what she calls a “broken funding formula” and a substantial pay increase for teachers.

Akbari, a Memphis Democrat, agrees revenues are better than expected but asks whether the state is increasing unemployment compensation payments, now at about $275 a week, better funding for school systems and increased cash payments through the Temporary Assistance for Needy Families fund.

“I’d like us to try and tackle some of those things before we just put additional money away in the rainy day fund, because the rainy day fund already has a healthy balance,” Akbari said.

Democrats recently announced a slate of bills designed to boost education spending. Those include legislation by Akbari and House Minority Leader Karen Camper of Memphis to increase the state’s share of instructional salaries to 75% from 70% in the Basic Education Program formula.

Democrats also want to reduce K-3 class sizes in districts where half of third-graders aren’t reading at grade level; increase the number of intervention specialists; hire more school nurses, increasing to one per 750 students; add social workers and counselors at a rate of one for every 250 students; bolster special education funding with grants to school districts; and enact a comprehensive BEP reform.

Those measures will face a rocky path without support from the governor in a Legislature with supermajority Republican control. But GOP lawmakers do acknowledge the state sat on the TANF fund too long.

The Department of Human Services came under fire in 2019 because it built up a reserve fund of $740 million and had no proposal to spend that money on needy families.

A working group of lawmakers started holding meetings in 2019, but those were derailed in 2020 when the pandemic hit.

Watson, who serves on the panel, said he hopes to keep a reserve of only about $191 million in the TANF program, which comes from federal funding.

“Everybody seems to agree we need to look for effective ways to get that out in the public,” Watson said.

Yet the working group made no headway on a plan in 2020, and even as the pandemic stretches on, no proposal has been made to increase cash payments to needy families or to widen the eligibility to boost enrollees in the midst of the viral crisis. Unemployment hit a high of 15% last year and remains at 6%, compared to 3% before the pandemic struck the state and nation.