Rainy Day Funds: Best Practices to Mitigate Revenue Volatility

Pew research shows that 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. In the years following, states focused on building up their reserves and strengthening rainy day fund policies to ensure that the money is available when needed. As state leaders continue to prioritize being prepared for future downturns, they can adopt policies 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.