Rainy Day Funds: Best Practices to Mitigate Revenue Volatility

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.

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.

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.

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.