States’ Financial Reserves Estimated to Surpass Pre-Pandemic Levels

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States’ Financial Reserves Estimated to Surpass Pre-Pandemic Levels

Editor’s note: On Oct. 21, 2021, this article was updated to correct a reference in the third paragraph to states’ total rainy day fund savings. The correct figure is $82.3 billion.

Unprecedented federal aid and smaller-than-anticipated tax revenue shortfalls have allowed the majority of states to avoid tapping their rainy day funds since the outset of the pandemic-driven recession in early 2020. After a one-year dip, states’ combined fiscal cushion—counting rainy day funds and leftover budget dollars—was expected to spring back and exceed pre-pandemic highs by the start of this budget year.

The 50-state total of rainy day funds fell temporarily in fiscal year 2020 when some states relied on their reserves to cope with the public health emergency and recession set off by the coronavirus pandemic. But states estimated that they would end fiscal 2021 with enough money collectively set aside in savings to eclipse their pre-pandemic highs, according to preliminary figures reported to the National Association of State Budget Officers (NASBO) between March and May 2021, just before the last fiscal year ended in June for most states. Estimates for 2021 and related rankings are subject to revision.

The estimates show that 28 states expected their rainy day fund balances to grow in fiscal 2021 from the previous year, increasing the national total by a net amount of $4.6 billion to a new high of $82.3 billion. States were able to add to reserves because tax revenue was on track to bounce back far faster than it did after the Great Recession, vaccines helped ease public health restrictions imposed to stem the virus’s spread, and unprecedented federal aid was made available to states. By March 2021, the American Rescue Plan Act began distributing nearly $2 trillion in federal aid for taxpayers, businesses, and state and local governments, and tax revenue had reached the benchmark of recovering its initial pandemic losses in a majority of states and nationwide.

Based on fiscal 2021 estimated savings, 21 of the 28 states with projected increases in balances also posted increases in the number of days they could run government operations using rainy day funds alone compared with the previous year. Because the size of state budgets varies widely, it is fairer to compare the strength of rainy day funds by measuring how many days’ worth of spending each state’s savings could cover rather than by ranking funds by dollar amounts. Days’ worth of spending increases when rainy day fund balances grow—except when expenditures rise faster than savings.

States’ rainy day funds, also known as budget stabilization funds, collectively fell for the first time since the last downturn in fiscal 2020—the first budget year affected by the pandemic—by a net amount of $1.3 billion. The amount held in rainy day funds decreased in dollar terms in 13 states in fiscal 2020 and an estimated 12 in fiscal 2021. Some states withdrew only a small share of their savings, but others tapped substantial amounts to help plug budget holes. Nevada, for example, emptied its rainy day fund by the end of fiscal 2020, and New Jersey used almost all of its savings. In fiscal 2021, Alaska estimated that it would reduce its balance by more than half. 

Among states that reported rainy day fund declines in fiscal 2020, most expected increases in fiscal 2021—including those that had made the largest withdrawals. California, for example, withdrew roughly $2.8 billion in fiscal 2020, but estimated that it would add $3.3 billion in fiscal 2021, including for the first time the balance of the state’s Public School System Stabilization Account. Nevada also planned to begin rebuilding its reserves with $98 million, or just under a third of what it withdrew in fiscal 2020. And New Jersey expected to deposit at least $1.4 billion into its rainy day fund, though its enacted budget for fiscal 2022 would again draw upon its reserves.

Most states were cautious about using their dedicated savings accounts initially because of uncertainty about how the pandemic and resulting recession would unfold, as well as about the availability and extent of federal aid. Instead of first drawing down reserves, many states managed fiscal 2020 budget gaps through a combination of spending cuts, federal aid, and a historically high cache of leftover general fund budget dollars, known as ending balances, that had built up over two previous years of widespread revenue surpluses.

Before the pandemic hit, the combination of states’ ending balances and rainy day funds—what is known as total balances—amounted to a record $121.6 billion. After declining in late fiscal 2020 as states managed the onset of the pandemic, total balances were expected to hit $126.5 billion heading into the current fiscal year—the largest amount of dollars in their fiscal cushion in at least the past 20 years. It was enough to cover a median of 15.1%, or 55.1 days’ worth, of operating costs.

Rainy day funds

With a record $82.3 billion in savings by the end of fiscal 2021, according to preliminary estimates from NASBO, states could run government operations on rainy day funds alone for a median of 29.4 days, equal to 8.1% of spending—a slight decline from a year earlier because of a rise in spending levels. Still, the strength of states’ rainy day funds ranged widely—from 301 days’ worth of spending in Wyoming to less than one-tenth of one day in Illinois.

Overall, states learned a lesson from the 2007-09 downturn, when tax revenue losses far outstripped savings and nine states nearly or completely emptied their rainy day funds by the end of fiscal 2008. States had pumped up total savings enough before the pandemic to run government operations for a median of 28.9 days, equivalent to 7.9% of spending, compared with 17.3 days or 4.7% of spending just before the Great Recession. At least 33 states could have covered a greater amount of government spending just before the pandemic than they could have just prior to the Great Recession.

Rainy day fund highlights

At the close of fiscal 2021, the first full budget year affected by the pandemic:  

  • Wyoming projected the nation’s largest rainy day reserves as a share of operating costs (301 days). North Dakota (105.6) was the only other state with more than 100 days’ worth of operating costs set aside.
  • Alaska’s estimated rainy day savings, although fourth-highest among states at 73.4 days, was at its lowest level in at least 20 years. Alaska has made withdrawals in eight of the last 10 years, largely in response to recurring shortfalls in oil-related revenue, which accounts for a substantial portion of its budget.
  • Four states reported less than a week’s worth of operating costs in reserve: Kansas (3.9 days), Hawaii (2.8), Pennsylvania (2.7), and Illinois (less than one-tenth of one day).
  • Half of states projected increases and half decreases in the length of time they could run government operations on rainy day funds alone compared with a year earlier. The largest gains were in New Jersey, whose savings rose by 12.6 days from next to nothing in fiscal 2020, followed by Connecticut (11.2 extra days), and Idaho (11). The largest decline was in Alaska, where savings fell by 103.2 days—more than half—from a year earlier, followed by New Mexico (55.1 fewer days), and Wyoming (52.8).

Total balances

The estimated $126.4 billion held in total balances at the end of fiscal 2021 is a fuller measure of states’ fiscal cushion against unexpected spending needs or revenue downturns because it counts not only rainy day funds, but also leftover general fund budget dollars. Together, those funds were enough to run state government operations at the end of fiscal 2021 for a median of 55.1 days, equivalent to 15.1% of spending—at least a 20-year high. By the end of fiscal 2021, total balances in 32 states could cover more days’ worth of general fund spending than a year earlier.

Rainy day funds accounted for 65 cents of every dollar in estimated total balances for fiscal 2021, compared with 45 cents heading into the 2007-09 downturn. The contrast highlights the more prominent role rainy day funds currently play in managing state fiscal uncertainty. Ending balances, which make up the remainder of total balances, were historically high because of a surge of tax collections before both recessions. But ending balances fluctuate from year to year, so policymakers cannot count on them as cushions against future budget uncertainty to the degree that they can with rainy day funds, which are saved until policymakers decide to draw them down.

In the first budget year affected by the pandemic, states relied more on ending balances than rainy day funds to make ends meet. In net dollars, which account for the fact that totals fell in some states while rising in others, ending balances fell by more than $7 billion to $35.9 billion in fiscal 2020, while rainy day funds declined by $1.3 billion to $77.7 billion. Conversely, both types of funds increased in fiscal 2021, reflecting improving economic conditions and states’ cautious budgeting approaches. By the end of fiscal 2021, states’ collective ending balances were expected to grow by $6.5 billion to $42.4 billion, while rainy day fund levels were projected to rise by $4.6 billion to $82.3 billion.

As with rainy day fund balances, states’ collective total balances could have covered more days’ worth of government operations before the start of the pandemic—a median of 50.8 days, equivalent to 13.9% of spending—than they could before the Great Recession—a median of 41.3 days, or 11.3% of spending. At least 28 states could have covered a greater share of government spending in fiscal 2019 than in fiscal 2007.

Total balance highlights

States’ estimates for fiscal 2021 show:

  • The highest-ranked state for total balances was the same as for rainy day funds: Wyoming (301 days). Two other states expected to have more than 100 days’ worth of operating costs on hand: North Dakota (176.9 days) and West Virginia (110.1).
  • Illinois (0.9 days) and Pennsylvania (0.1 days) were the only states with less than one week’s worth of operating costs held in total balances. In fiscal 2020, Pennsylvania was the only state to finish the budget year with a negative total balance, spurred by a $2.7 billion budget deficit.
  • Most states (32) projected increases in their total fiscal cushions as a share of operating costs from a year earlier, with the largest gains of more than 20 days’ worth of spending in Oklahoma (an extra 54.6 days), North Carolina (45.9), New Jersey (35.9), Pennsylvania (25.7), Texas (24.6), Arizona (24.5), and North Dakota (20.5).
  • Among 18 states whose total fiscal cushions were expected to decrease from a year earlier, the greatest declines of more than 50 days’ worth of government spending were in Alaska (103.2), Michigan (65.8), New Mexico (55.2), and Wyoming (52.8).

Download the data.

Why reserves matter

States use reserves and balances to manage budgetary uncertainty, including revenue forecasting errors, budget gaps during economic downturns, and other unforeseen emergencies, such as natural disasters. This financial cushion can soften the need for severe spending cuts or tax increases when states need to balance their budgets.

Because reserves and balances are vital to managing unexpected changes and maintaining fiscal health, their levels are tracked closely by bond rating agencies. For example, Moody’s Investors Service upgraded Connecticut’s credit rating in March 2021, citing the state’s buildup of reserve levels as part of its rationale.

There is no one-size-fits-all rule on when, how, and how much to save. States with a history of significant economic or revenue volatility may desire larger cushions. According to a report by The Pew Charitable Trusts, the optimal savings target of state rainy day funds depends on three factors: the defined purpose of funds, the volatility of a state’s tax revenue, and the level of coverage—similar to an insurance policy—that the state seeks to provide for its budget.

Reserves and balances represent funds available to states to fill budget gaps, although there may be varied levels of restriction on their use, such as under what fiscal or economic conditions they can be used. In addition, limits are often set on how much states may deposit into rainy day accounts in a given year when seeking to replenish their reserves.

General fund reserves and balances may not reflect a state’s complete fiscal cushion. States may have additional resources to soften downturns, such as dedicated reserves outside of their general funds or rainy day accounts. In addition, the scope of each state’s general fund expenditures can differ, so comparisons across states should be made with caution. For example, some states—such as Michigan—spend considerable amounts outside of their general fund, and Ohio is unusual because its general fund includes spending from federal Medicaid dollars. One way to standardize the size of reserves and balances is to calculate how many days a state could run solely on those funds, even though the scenario is highly unlikely.

Download the data to see individual state trends. Visit Pew’s interactive resource, Fiscal 50: State Trends and Analysis, to sort and analyze data for other indicators of state fiscal health.

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Fiscal 50: State Trends and Analysis

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Fiscal 50 is an interactive platform that provides clear, data-driven portraits of state fiscal conditions. Users can view, sort, and analyze data on key trends that shape states’ fiscal health now and over the long term. Fiscal 50 also features research and analysis to help users understand how these trends interact and fit together—and how they relate to real-time developments playing out in state capitols across the country.

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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.

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