State Reserves Cover Record Level of Spending as Budget Conditions Tighten

Most states increased their rainy day fund balances at the end of fiscal year 2023, allowing them to cover a larger share of spending if needed compared with one year earlier. Despite this, savings growth was notably slower than the dramatic gains posted in fiscal 2021 and 2022 and leftover budget dollars shrank dramatically. As fiscal conditions tighten amid mounting uncertainties, most states expect their total financial cushions to decline by the end of the current budget year.

After back-to-back years of dramatic increases, states’ combined rainy day funds decreased by $4.2 billion in fiscal 2023 from fiscal 2022’s record high to $160.1 billion, according to estimates collected by the National Association of State Budget Officers (NASBO) between February and May of this year. In most states, the numbers rose in fiscal 2023, but the collective balance dropped because of a more than $28 billion withdrawal in California. Excluding that would reverse the reported nationwide decrease. States also reported a significant annual decline in leftover general fund budget dollars, known as ending balances.

Rainy day funds hit all-time highs in 38 states at the end of fiscal 2023. Of those, 19 reached record numbers of days they could run government operations using rainy day funds alone as annual spending also increased. Days’ worth of spending can fluctuate because of changes in state balances, changes in spending levels, or both.

In addition to deposits directed by policymakers, deposit rules tied to revenue volatility have played a role in shoring up rainy day funds in some states over the past three budget years through required deposits of at least some of the above-normal revenue growth or one-time influxes of dollars. For example, Tennessee saves 10% of its year-over-year additional revenue, Maryland saves all or a portion of its nonwitholding income tax revenue that exceeds the 10-year average, and Louisiana deposits 25% of higher-than-forecasted revenues.

Although abundant federal pandemic aid and higher-than-forecasted tax collections helped spur widespread gains in states’ total financial cushions in recent years, state fiscal conditions appear to have passed an inflection point as many of the temporary factors that had bolstered recent growth unwind. Policymakers are now navigating several looming challenges, including declining tax revenue growth amid slower economic growth and historically tight monetary policy, still-elevated inflation, and a tapering of federal pandemic aid. When states close out the current budget year, rainy day fund balances are projected to decline again compared with the previous year, and most states plan to spend down at least a portion of their ending balances, according to enacted budget figures reported to NASBO.

Rainy day funds

With an estimated aggregate $160.1 billion in savings at the end of fiscal 2023, states could run government operations on rainy day funds alone for a median of 46 days, equal to 12.6% of spending. The strength of total rainy day funds remained approximately 60% greater than in fiscal 2019, just before the pandemic-induced recession started in March 2020. Still, the strength of states’ rainy day funds ranged widely—from 306.6 days’ worth of spending in Wyoming to just more than a week’s worth that was set aside in Washington.

In fiscal 2020, the first budget year affected by the COVID-19 pandemic, states’ rainy day funds collectively fell for the first time since the Great Recession in 2007-09. Some states withdrew only a small share of their savings, but others tapped substantial amounts to help plug budget holes and maintain essential services.

Among the 14 states that withdrew a combined total of $8.2 billion from their rainy day funds in fiscal 2020, all had fully replenished the savings at the end of fiscal 2023. For example, Nevada fully replenished the $332 million it drained from its rainy day fund in fiscal 2020 when lawmakers voted to empty the account. Hawaii and New Jersey are estimated to have been the last two states to have fully replenished their withdrawals after increases of $647 million and $1.6 billion, respectively, at the end of fiscal 2023. Alaska replenished its balances in fiscal 2022 but then reported a decline to below pre-pandemic levels in fiscal 2023.

Rainy day fund highlights

States’ results for fiscal 2023 show:

• Wyoming recorded the nation’s largest rainy day reserve as a share of operating costs (306.6 days), an effort to manage the state’s heavy reliance on volatile severance tax revenue. Three other states had more than 100 days’ worth of operating costs set aside: Alaska (133.1), Nebraska (120.2), and New Mexico (103.2).
• For the first time in at least 23 years, no state reported less than a week’s worth of operating costs in reserve. Washington recorded the smallest rainy day reserve as a share of operating costs (7.6 days), followed by Montana (8.6), New Jersey (10.8), and Illinois (13.8). (The funds reported by Illinois and Colorado do not meet The Pew Charitable Trusts’ standard criteria for a rainy day fund.)
• Twenty-nine states had increased the length of time they could run government operations on rainy day funds alone compared with a year earlier. The largest gains were in Kentucky (+62.4 days), Nebraska (+47.7), Nevada (+24.6), New Hampshire (+21), and Hawaii (+19.9). The largest declines were in California (-52.6), Alaska (-43.6), Wyoming (-43), New Mexico (-35.3), and South Dakota (-19.5).
• All but 11 states also increased their balances compared with fiscal 2022 levels. The states that reported declines were Alaska, California, New Mexico, North Dakota, Rhode Island, and South Dakota. Georgia, Maine, Montana, Utah, and Wisconsin’s balances were estimated to remain the same. California, which maintains the nation’s largest rainy day reserves, withdrew $28.5 billion, or 37.4%. The state’s withdrawal alone accounted for roughly six times the size of the overall, 50-state decline.
• Most states (38) hit record-high rainy day fund balances. Among these states, however, savings fell short of the national median of 46 days’ worth of general fund spending in 19: Arizona, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Maryland, Michigan, Mississippi, Missouri, Montana, New York, Ohio, Pennsylvania, Tennessee, Utah, Virginia, and Wisconsin.

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Total balances

States’ total balances—the combination of rainy day fund balances and leftover budget dollars known as ending balances—are estimated to have totaled $349.6 billion at the end of fiscal 2023, a decline of nearly $50 billion from the record-setting amount a year earlier. Together, those funds would be enough to run state government operations for a median of 112.9 days, equivalent to 30.9% of spending. The total is about one month less than a year earlier. Total balances in most states also fell in absolute dollars and in relation to general fund spending compared with the year before, contributing to the national decline. Unlike rainy day funds, which function as dedicated savings, ending balances fluctuate from year to year based on a range of factors and provide a less stable safeguard against future budget uncertainty.

Although both rainy day fund levels and ending balances reached record amounts in the wake of the pandemic, states’ leftover budget dollars were especially high due to higher-than-forecasted tax collections and the availability of flexible federal pandemic aid, which helped produce widespread budget surpluses. Early in the pandemic, states’ collective ending balances increased more than eightfold, from $33 billion at the end of fiscal 2020 to $234 billion at the end of fiscal 2022.

Total 50-state ending balances are estimated to have declined by 17% at the end of fiscal 2023 from the year prior and are projected to decline by an additional 40% at the end of the current budget year, according to data collected by NASBO. Declining revenue and growing spending demands are increasing pressures on state budgets. According to NASBO, states have largely directed these remaining funds in recent years to one-time investments—such as paying off debt, boosting supplemental pension payments, and investing in economic development—as well as transfers to other state funds.

In the first budget year affected by the pandemic, states relied more on ending balances than on rainy day funds to balance their budgets. Total ending balances fell by nearly $10 billion in fiscal 2020, while rainy day funds declined by $1.8 billion. Both types of funds increased in fiscal 2021 and 2022.

Total balance highlights

States’ results for fiscal 2023 show:

• The highest-ranked state for total balances as a share of operating costs was the same as for rainy day funds: Wyoming (306.6 days). Twenty-nine other states had total balances that could cover more than 100 days’ worth of operating costs.
• For the third consecutive year, no state had fewer than a week’s worth of funds in its total balances. The state with the fewest days was Illinois, with 15.1. The next lowest were Mississippi (33.6) and South Dakota (36.5) with slightly more than a month’s worth of funds.
• Fourteen states increased their total fiscal cushions as a share of operating costs from a year earlier, with the largest gains in North Dakota (80.6 days), Alabama (57.7), and Kentucky (56.2). The largest declines were in Montana (-217.1 days), Michigan (-189.4), and Florida (-150).

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 spending cuts or tax increases when states need to balance their budgets in response to temporary shocks, though these actions can be necessary to address longer-term structural imbalances.

Because reserves and balances are vital to managing unexpected changes and maintaining fiscal stability, their levels are tracked closely by bond rating agencies. For example, Fitch Ratings upgraded Michigan’s credit rating in July 2022, 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. Policymakers in states with a history of significant economic or revenue volatility may desire larger cushions. Pew’s research shows the optimal savings target of state rainy day funds depends on several factors: the defined purpose of funds, the volatility of a state’s tax revenue, the potential increase in spending demands during economic downturns, and the level of coverage that the state seeks to provide for its budget. Budget stress tests—which estimate the size of temporary budget shortfalls that could result from recessions or other adverse economic events—can help states better understand and prepare for potential fiscal challenges, such as by refining their savings targets.

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.

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

Justin Theal is an officer and Page Forrest is a senior associate with The Pew Charitable Trusts’ state fiscal policy project.