Before the COVID-19 crisis, state rainy day funds and total balances were at an all-time high, after a decade of rebuilding reserves following the Great Recession. In spring 2020, when the pandemic first hit, this financial cushion softened the immediate blow for states facing revenue shortfalls and helped them to close budget deficits by the end of the fiscal year – something most states are required by law to do. At the same time, as state revenue projections were plummeting further, concerns grew that states might end up depleting the rainy day funds they had worked so hard to build in recent years.
As it turns out, these concerns did not come to pass, mainly because state revenues later performed considerably better than was expected early in the pandemic. This was driven by an influx of federal funds, higher-income workers being relatively insulated from the effects of the COVID-19 recession, the shifting of consumption from services to goods (more commonly taxed at the state level), and the expanded ability to tax online sales following the South Dakota v. Wayfair Supreme Court decision.
Now, nearly two years after the initial onset of the pandemic, state rainy day fund balances have reached new record levels. This is largely due to revenues exceeding lowered budget forecasts in the vast majority of states and increased federal aid, which led to substantial budget surpluses in some cases that were at least partly deposited into rainy day funds. However, it also has a lot to do with deliberate steps that states took in the years leading up to the pandemic to strengthen their reserves, informed by lessons learned from the Great Recession.
This blog examines current trends in state rainy day fund balances while also putting those trends into context by exploring historical data dating back to 2000. The full historical dataset on state rainy day fund balances from NASBO’s Fiscal Survey of States is also now available for download on NASBO’s website.
A Brief History of State Rainy Day Funds
Rainy day funds, also known as budget stabilization funds, serve as states’ “savings accounts” and may be used to supplement general fund spending during an economic downturn or other events triggering a shortfall, if the specific restrictions on the use of the fund(s) are met. These funds play an important role in mitigating service disruptions when revenues come in below expectations and/or in helping states respond to unforeseen circumstances. They are one of many “tools in the toolbox” of budget management strategies available to a state facing a budget gap, along with spending reductions, other fund transfers, personnel actions, revenue increases, and other actions. Rarely do states rely on rainy day funds alone to address a shortfall, particularly when that shortfall is understood to be ongoing.
Many states first established a rainy day fund in the early 1980s after wrestling with the budgetary challenges of successive recessions between 1980 and the end of 1982. NASBO began reporting state-by-state data on rainy day fund or budget stabilization fund balances in the Fall 1985 Fiscal Survey of States. By fiscal 1988, roughly half of states reported having a positive balance in a rainy day fund, while the remaining states either had a zero balance or had no such fund established. In NASBO’s 1987 edition of Budget Processes in the States, 35 states reported having some type of budget stabilization fund established.
Heading into fiscal 2000, the starting point for the data analysis in this blog, the number of states with at least one rainy day fund rose to 45, based on data reported in the 1999 edition of Budget Processes in the States. More than two decades later, the 2021 edition of that same publication for the first time reported that all 50 states had at least one rainy day fund established. The policies and restrictions that govern these funds vary considerably by state, as discussed more here.
Total Rainy Day Fund Balance Trends
As one would expect based on the intended purpose of rainy day funds, balance levels have fluctuated over time, rising during “good years” when the economy was strong and state revenue growth was robust, and falling during “bad years” – recessionary periods and their aftermath. It is worth noting here that in a typical recession, the effects on state budgets typically lag a downturn in economic activity; for example, while the Great Recession started in December 2007 – the middle of fiscal 2008 for states – the most severe impacts on general fund budgets were felt in fiscal 2009 and fiscal 2010 for most states.
Figure 1 below shows the rise and fall of rainy day fund balances in the aggregate, which roughly correspond with recessionary periods. However, looking only at aggregate rainy day fund levels over time can obscure state-by-state variations in reserve use during recessionary periods and gains during economic booms. For example, we observe only a modest dip in total rainy day fund balances during the Great Recession and its aftermath, whereas a number of states tapped these reserve funds to help cope with budget shortfalls during that time period. In fact, according to NASBO historical data, at least 18 states drained or nearly drained their entire rainy day funds between fiscal 2008 and fiscal 2011.
For this reason, it can also be instructive to look separately at states that recorded increases in rainy day fund balances and those that recorded decreases in a given fiscal year. In Figure 2, we can more clearly see the extent to which rainy day funds were tapped by states during the Great Recession years by looking only at states that recorded decreases at the time. Meanwhile, the increases experienced during those years were heavily driven by two states – Alaska and Texas – whose budgets were less impacted by the Great Recession and whose rainy day funds were the largest in absolute size at the time. Both of these are energy-producing states that rely heavily on highly volatile severance taxes and have therefore historically held a greater amount of funds in budget reserves.
Also evident from both charts above is that states worked to rebuild their rainy day funds following the early 2000s recession and again after the Great Recession. A blog post earlier this month features some of the concrete steps states took to capture revenue gains and grow their reserves in the years leading up to the COVID-19 pandemic, for example. By the end of fiscal 2019, state rainy day fund balances were at an all-time high in nominal dollars at $79.0 billion and as a share of general fund spending at 9.1 percent.
Some states, facing budget gaps early in the pandemic, turned to their rainy day funds to close shortfalls in fiscal 2020. Fourteen states recorded net declines in their rainy day fund balance levels in fiscal 2020 compared to fiscal 2019, and rainy day fund balances totaled $76.9 billion across the states by the end of fiscal 2020 – a decline in the aggregate from fiscal 2019. Meanwhile, 34 states recorded increases in their rainy day fund balances. Some states experienced unexpected surpluses in fiscal 2020 (in some cases in specific revenue streams) that resulted in automatic deposits into their reserves. Moreover, due to uncertainty about the future trajectory of the pandemic and its budgetary impacts, many states were reluctant to tap their rainy day funds early on, which tempered withdrawals. Indeed, many states expected revenue declines in fiscal 2021 when they first adopted their budgets and anticipated having to draw down on their rainy day funds in that year.
As we know now, these predictions did not come to pass. Compared to the lowered revenue projections used by most states to adopt budgets, general fund revenues came in higher than budgeted in 47 states in fiscal 2021. This, coupled with lower general fund spending due to enacted budget cuts and availability of federal funds led to budget surpluses that helped rainy day fund balances rise to a new all-time high of nearly $113 billion. Overall, 34 states recorded net increases in their rainy day fund balances with only nine states reporting net declines.
Rainy Day Fund Levels as a Share of Spending Over Time
Measuring rainy day fund balances as a share of general fund spending is useful for comparing balance levels at different points in time, as it avoids having to adjust nominal dollars for inflation and population growth, and it appropriately measures reserves in proportion to the level of spending that those reserves are there to help support in the event of a downturn. When trying to discern national trends, it can also be more instructive to focus on the median rainy day fund balance as a share of spending, rather than just looking at the 50-state total percentage metric. This is because the median is less likely to be skewed by outlier states. For example, during the Great Recession, total rainy day fund balances as a share of general fund spending hardly declined, as shown in Figure 3. This is due primarily to the impact of Alaska and Texas growing their funds during that time period, as discussed in the prior section. However, the median balance as a share of general fund spending declined substantially, falling from 4.8 percent in fiscal 2008 to 1.6 percent in fiscal 2010.
Focusing on the median balance over time, we observe relatively steady growth since fiscal 2010-2011. By fiscal 2019, prior to the COVID-19 pandemic, the median balance was at a then all-time high of 7.9 percent as a share of general fund spending. Notably, the median balance did not tick down in fiscal 2020, even as aggregate balance levels dipped slightly. This is because a majority of states still recorded increases in their rainy day fund balance levels in fiscal 2020. The median balance recorded another increase in fiscal 2021, albeit a more modest uptick than when looking at the total rainy day fund balance level.
Measuring Variation in Rainy Day Fund Levels by State
Looking at rainy day fund balances as a share of general fund spending can also be helpful for drawing comparisons across states, as this metric accounts for differences in the size of state budgets. Rainy day fund levels as a share of expenditures vary by state, ranging in fiscal 2021 from a low of 0 percent to a high of 82 percent. This variation is related to differing rainy day fund structures, policy decisions, fiscal conditions, and other factors. Also, states that rely on more volatile revenue sources are likely to carry a larger relative balance in their rainy day funds than those states with more stable revenue sources. This explains why, for example, energy-producing states that rely heavily on highly volatile severance taxes have historically held a greater amount of funds in budget reserves.
As more states have deliberately focused on building reserves and changed deposit rules in recent years to align with this goal, rainy day fund balance growth has been widespread. In fiscal 2021, 24 states ended the year with rainy day fund balances greater than 10 percent as a share of their general fund expenditures, 16 states had balances between 5 percent and 10 percent, eight states had balances between 1 percent and 5 percent, and two states had balances of less than 1 percent of general fund spending. This marked the highest number of states ever to end the year with a rainy day fund balance greater than 10 percent of its general fund expenditures, as shown in Figure 4.
According to states’ budget projections for fiscal 2022, this breakdown is expected to change only modestly, with 25 states estimating rainy day fund balances greater than 10 percent as a share of their general fund expenditures, 14 states with balances between 5 percent and 10 percent, 3 states with balances between 1 percent and 5 percent, and five states with balances of less than 1 percent of general fund spending (data were not available for all states).
Current Rainy Day Fund Levels in Context
As already noted in this analysis, total rainy day fund balances and the median balance as a share of general fund spending both rose to new all-time highs in fiscal 2021 – reaching $112.7 billion with a median balance of 9.4 percent. According to enacted budgets, rainy day fund balances are expected to total $100.2 billion at the end of fiscal 2022 – however, this figure excludes data from 3 states that do not estimate future balance levels. Accounting for this exclusion, rainy day fund balance levels are expected to remain flat in fiscal 2022 budgets on a nominal dollar basis. As a share of general fund spending, rainy day fund balances in the aggregate are projected to decline from 12.1 percent in fiscal 2021 to 10.4 percent in fiscal 2022, while the median balance is projected to increase to 11.9 percent. These projections are subject to change, particularly as many states enacted their fiscal 2022 budgets based on revenue forecasts developed early in the 2021 calendar year.
In addition to rainy day fund balances reaching record highs in the aggregate, 34 states ended fiscal 2021 with record rainy day fund balance levels based on their state’s historical balance data (in nominal dollar terms). An additional six states that did not report record levels in fiscal 2021 expect to set new records in fiscal 2022 based on their enacted budgets, therefore resulting in a total of 40 states with historically high rainy day fund balances in at least one of those two most recent years. Even when measured in proportion to general fund spending levels, 21 states reached record balance levels in fiscal 2021, and an additional nine states were expecting to set records by this measure in fiscal 2022, for a total of 30 states.
Background on Total Balances
While this analysis has focused on rainy day funds specifically, it is important to recognize that states have other resources that may be used to help smooth revenue and expenditure volatility from year to year, namely general fund ending balances. While rainy day fund balances and general fund balances together make up a state’s total balance (or total reserves), there are usually more restrictions around the use of a state’s rainy day fund balance. A state’s general fund balance is more likely to fluctuate year-to-year than a state’s rainy day fund balance. If the rainy day fund is a state’s “savings account,” the general fund balance may be viewed as more analogous to a “checking account”. That said, in some states, the general fund ending balance is intended to serve as a reserve, for example with a minimum balance requirement in statute. It is important to consider this nuance when evaluating state reserve levels.
To help illustrate this point, we can look at states that have consistently held a sizeable total balance as a share of general fund spending, but where the rainy day fund has historically comprised a minority share of that state’s total balance. According to analysis of NASBO data, 11 states have in most years since fiscal 2000 maintained a total balance equivalent to at least 10 percent of general fund spending, while keeping less than 50 percent of that total balance in the rainy day fund in most years over the same period. States that fall into this category include Montana, which only recently established a separate rainy day fund, but also states such as Florida, Hawaii and Nevada that have had rainy day funds in place for decades but have also historically carried substantial general fund ending balances. It should be noted that in some states, a portion of the ending balance may be designated or reserved to be spent in a subsequent year.
In the aggregate, rainy day fund balances have comprised roughly 60 percent of total balances, on average, since fiscal 2000, with the largest digression from this trend occurring during the Great Recession years when sizeable rainy day fund balances in Alaska and Texas made up the lion’s share of total balance levels, as shown in Figure 5.
Recent Developments in Total Balance Levels
States recorded an approximately $10 billion net decline in total balances in fiscal 2020, followed by a sharp uptick in fiscal 2021, as can be seen in Figure 6. In the aggregate, states’ total balance levels more than doubled in fiscal 2021 compared to fiscal 2020 levels, rising to $217 billion, equivalent to roughly 23 percent of total general fund spending that year. This increase was driven mostly by revenues exceeding expectations from earlier in the pandemic, which resulted in unanticipated budget surpluses that bolstered states’ ending balances and rainy day funds. According to enacted budgets for fiscal 2022, states are planning to spend down some of their larger-than-expected ending balances, including for one-time investments, with 32 states forecasting declines in their total balance levels for fiscal 2022.
What is in store for state rainy day funds in fiscal 2023 and beyond? Based on NASBO analysis of budget proposals and state-of-the-state addresses so far, governors continue to prioritize rainy day funds as an important component of sound fiscal management, with a number of governors citing plans to replenish, maintain and/or expand these funds. With uncertainty about the future trajectory of the pandemic and how the economy will fare as the effects of federal stimulus dissipate, along with other long-term fiscal challenges facing states, rainy day funds will continue to be an important tool in the toolbox to manage uncertainty and support stability for state budgets.