Wonky Word Wednesday - Ending Fund Balance

Feb 04, 2015

By MBPC Staff

This session – like most sessions – there is an ongoing discussion about what Montana’s “ending fund balance” should and will be. But there is a bigger question. What is an ending fund balance? That is exactly what we decided to explain in this week’s wonky word.

Basically the ending fund balance is what it sounds like. It is the funds remaining in the Montana budget after the Legislature adjourns. Montana is one of only four states in the country that does not have a separate “rainy day fund” to protect against recessions or other unforeseen events. Instead, Montana relies on the budget’s ending fund balance to help the state through fiscally tough times or emergencies.

Think of it like this. Lets say your bank only allows you have a checking account. So everything you earn and spend goes into and out of the same account. If your fridge dies and you have to purchase a new one, you can’t go into your emergency account to pay for it. If this was how you had to bank, you would probably keep a big running balance in your checkbook for emergencies, right?

That is what Montana does but on a much larger scale. Each legislative session, our Legislators work together to decide on an ending fund balance that will be in place for the next two years after they adjourn. This reserve is based on the amount of money left over in the state’s general fund after all disbursements to schools, infrastructure projects, state programs (etc.) have been paid. For example, Montana had a general fund balance of $2.6 billion in the beginning of 2014. After all disbursements and appropriations were paid out, the state’s ending fund balance was $426 million, about 16% of the overall budget. This surplus could then be used, if needed, to cover costs incurred by emergencies during the year.

While the exact amount will change depending on legislative action throughout this session, an ending balance in 2015 is forecasted to be around $343 million.

The recession of the early 2000s taught many states that a rainy day fund is necessary. Across the country, states with established rain-day funds saved about $20 billion in cuts to services and/or tax increases. Because Montana has not had an ending fund balance below a $300 million threshold since 2005, the state was also able to weather this financially difficult period. Montana is now touted as a fiscally responsible and viable state, in part, because of its consistently strong ending fund balance.

In his State of the State, Governor Bullock reiterated the need to maintain an ending fund balance at or above $300 million to ensure the state’s fiscal health and to be used as Montana’s rainy day fund. Since we can never fully predict what storms the future holds, both financial and weather related, building and maintaining a healthy budget reserve is responsible fiscal management. It ensures that that there is adequate cash on hand, lowers the likelihood of having to make cuts to services and programs throughout the year, and reduces the need to increase revenue to cover expenses.