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. As state leaders continue to navigate uncertain fiscal and economic conditions, they can adopt policies to make these funds more effective.

The Pew Charitable Trusts has identified several best practices for building better rainy day funds. Pew’s research emphasizes 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. These reports, briefs, fact sheets, and other resources can help state leaders better understand, predict, and manage revenue volatility.

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.

Report

When to Use State Rainy Day Funds

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Report

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.

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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Speeches & Testimony

How Revenue Volatility Informs State Savings Targets

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Speeches & Testimony

In a memo, sent March 12, 2021, to Colorado’s Office of State Planning and Budgeting, experts from The Pew Charitable Trusts provide information on how measuring revenue volatility can help state officials determine how much they need to save in reserves.

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