Rainy Day Funds: Best Practices to Mitigate Revenue Volatility

Pew research shows proper management can safeguard states’ fiscal health

Rainy Day Funds: Best Practices to Mitigate Revenue Volatility

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.

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Report

Building State Rainy Day Funds

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Report

This report will help policymakers prepare for the next economic downturn by explaining the ways states can design their rainy day funds to harness fluctuations in revenue.

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City rainbow
Report

Why States Save

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Report

This report examines how state policymakers should design the fund to help inform an optimal savings target. This report examines existing guidelines – set in statutory or constitution language – around the management of rainy day funds and offers key questions to consider while crafting such guidelines.

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Lockbox
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When to Use State Rainy Day Funds

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When the Great Recession hit in 2008, it put enormous pressure on state budgets. Tax revenue dropped precipitously and mandatory costs—particularly for health and human services—rose. Delaware, for example, entered fiscal year 2010 facing a $750 million budget shortfall because of declining revenue from personal and corporate income taxes.

Rainy Day Funds
Rainy Day Funds
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Rainy Day Funds and State Credit Ratings

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Research by Pew has found that even in states with the agencies’ highest rating (triple-A), policymakers often are unsure about how best to manage their rainy day funds to earn or keep high credit ratings. As a result, some state officials are reluctant to tap reserves even during recessions for fear of a ratings downgrade.

3 Steps to Strengthen Your State's Rainy Day Fund
2min 26sec
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.