Rainy Day Funds: Best Practices to Mitigate Revenue Volatility

Pew research shows proper management can safeguard states’ fiscal health

Rainy day funds are an essential fiscal tool to help states weather the ups and downs of the business cycle. If properly managed, money set aside in these funds can be used to bolster state budgets during economic downturns or other unforeseen events. During the Great Recession, however, many states found that balances in their rainy day funds—formally known as budget stabilization funds—did not provide a sufficient financial cushion. As state leaders look to better prepare for future downturns, there are policies they can adopt to make these funds more effective.

In a series of reports, The Pew Charitable Trusts has identified several best practices for building better rainy day funds. The reports emphasize that states should study how sensitive their tax systems are to economic volatility; identify concrete objectives and an appropriate savings target; link deposits to economic or revenue growth; and establish withdrawal conditions that encourage use during periods of fiscal stress. This collection also includes briefs, fact sheets, and other resources to help state leaders better understand, predict, and deal with revenue volatility.

3 Steps to Strengthen Your State's Rainy Day Fund

January 02, 2015

Is your state ready for a rainy day— such as the next natural disaster or economic downturn? If not, policymakers may face tough choices, like cutting funding for schools and road construction, or raising taxes.

To help states prepare, The Pew Charitable Trusts has identified three steps to strengthen state reserves. The key: planning for tax revenue volatility when designing a rainy day savings fund. Twelve state governments already do it—watch to find out how yours can too.

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Catherine An

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