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story.lead_photo.caption FILE - In this April 10, 2017 file photo, Missouri state Auditor Nicole Galloway speaks at a news conference in Jefferson City, Mo.

Document: Budget Reserve Fund Audit

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Not only is Missouri not saving enough for a financial crisis, but the state is irresponsibly using what savings it has for day-to-day expenses, according to State Auditor Nicole Galloway's assessment of an audit released Tuesday by her office.

Galloway discussed findings of an audit of Missouri's Budget Reserve Fund — the state's "rainy day fund" — during a news conference Tuesday in her office at the Missouri State Capitol.

Galloway said the audit shows Missouri is "woefully unprepared for an economic downturn" and that it must stop borrowing from emergency funds meant to be saved in case of a budget shortfall that results from a natural disaster or financial crisis.

The Budget Reserve Fund, or BRF, was created in 2000 by constitutional amendment and per the Missouri Constitution is capped at having a balance equal to 7.5 percent of the net general revenue collections for the previous fiscal year — unless the Legislature is trying to increase the balance of the fund, in which case the cap is raised to 10 percent.

"The Missouri Constitution restricts the maximum balance of the BRF to a level well below the anticipated reserves necessary to weather the next recession," according to Galloway in her office's audit of the fund.

The audit cites a 2018 report from Moody's Analytics that found Missouri would need about $1.3 billion in its reserve fund to weather a moderate economic recession, or a balance of $2 billion to be prepared for a severe recession.

In the Great Recession, Missouri's general revenue declined by more than $1 billion between the 2008 and 2010 fiscal years, and using 2019 revenues, a similar recession would result in an about $1.2 billion reduction in revenue over two years, according to the audit.

The balance in Missouri's reserve fund in 2018 was $616 million, 5.7 percent of general fund revenues. Over the past three years, the balance has tended to be lowest around March — below $100 million in March 2017 — and in April of this year was at $144 million, the lowest of the 2019 fiscal year.

Furthermore, "the governor's administration, like prior administrations, has relied on the fund to supplement cash flow throughout the year," Galloway said in a news release that accompanied the release of the report.

Galloway is a Democratic gubernatorial candidate, running against incumbent Gov. Mike Parson, a Republican seeking a full four-year term as governor.

Using reserve funds to supplement cash flow has included supporting "the ability to make timely tax refunds," according to the audit.

"Since 2011, more than $360 million has been borrowed from the fund every fiscal year, with more than $500 million borrowed in both 2017 and 2019. This constant borrowing results in dangerously low balances, leaving no funds available if there was a recession," Galloway added.

Parson's office released a response Tuesday from Chief of Staff Aaron Willard: "It's no surprise Nicole Galloway is following the national liberal Democrats' playbook attacking Missouri and our country's booming economy, especially given the fact that she opposes pro-growth policies that have led to the largest increase in real incomes, historically low unemployment, and nearly 40,000 new jobs created in Missouri. She also has ignored the truth that Gov. Parson left over $100M in his budget specifically for cash flow purposes and that Missouri enjoys a AAA bond rating.

"The auditor also never used her official office in a capacity to criticize Gov. Nixon, whom appointed her, over the (Budget Reserve Fund) when budgets were tighter and reserves were lower."

"I think this has to be a high priority," she said of where addressing funding of Missouri's financial reserves should rank among other priorities in preparing for a financial crisis.

Her proposed solution is for the state to create a second reserve fund, to be used for budget stabilization in the event of a recession, while the current Budget Reserve Fund could be grown and continue to be used for cash flow needs.

The Budget Reserve Fund's creation was approved by 59 percent of voters in 2000, and its creation merged a previous Budget Stabilization Fund and Cash Operating Reserve Fund, "which were created in response to the recession of the early 1980s," according to the audit.

The audit cited that Moody's Analytics' 2018 report found Missouri ranked 43rd in the United States in terms of economic preparedness for a moderate recession, and that Missouri was the 8th most sensitive state to such a recession — "attributed, in part, to the state becoming more reliant on income taxes, and less reliant on sales taxes, for general revenue," in addition to a lack of Medicaid expansion.

The Moody's Analytics report also found 16 other states had "significantly fewer funds than they need for the next recession" — among them, Missouri neighbors Arkansas, Kansas, Illinois, Kentucky and Oklahoma.

This article was edited at 5:25 p.m. Oct. 15, 2019, to add a response from Gov. Mike Parson's office.

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