Over the past decade, the unpredictability of state revenue increased while spending pressures mounted, further complicating state policymakers’ efforts to craft and execute balanced budgets. To promote evidence-based policies and inform public debate, The Pew Charitable Trusts provides independent, nonpartisan research to inform lawmakers’ understanding of states’ most pressing fiscal and economic challenges, along with the best methods to address them. Our 50-state research compares and contrasts states’ experiences and highlights promising approaches to improve states’ fiscal management and enhance their long-term economic health. Based on this research, we work with leaders in selected states to develop and advance policies that:
We continue to collaborate with policy leaders in states to promote these strategies in a variety of ways. Our work is focused on three areas:
In 2014, Pew responded to a request for assistance from members of the Illinois General Assembly. We provided state-specific recommendations to legislators in both chambers on steps Illinois could take to develop a meaningful reserve fund. Pew’s research informed the debate that culminated in the enactment of the Illinois Revenue Volatility Study Act (Senate Bill 274) on June 30, 2014.1 The law required the state’s Commission on Government Forecasting and Accounting to perform a tax volatility study to guide the development of an evidence-based rainy day fund policy for the state.
Voters in California amended their state’s constitution in November 2014 to improve rainy day fund policies.2 Pew provided the California Legislature with an analysis of a pending proposal and possible alternatives that would enhance the state’s reserve fund. The amendment, which was informed by our research, increased the amount that can be saved, revised the rules for how and when money is set aside, and established new guidelines for suspending deposits and withdrawing funds in difficult budget years.
Legislative fiscal leaders in Minnesota brought their concerns about the state’s rainy day fund and history of volatile revenue to Pew. We worked with legislators and staff in a technical assistance capacity throughout the 2014 legislative session, including testifying before the Minnesota House Taxes Committee on best practices in rainy day fund design and management responses to economic and revenue volatility. The Minnesota Legislature enacted legislation in March 2014 that connected the determination of the size of its rainy day fund to volatility in the taxable portion of the state’s economy.3
Connecticut and Utah also took steps based on Pew’s research toward long-term fiscal stability by enacting legislation to examine their revenue volatility.4 These studies will provide lawmakers with the information necessary to evaluate their reserve fund structures and rules.
We welcome the opportunity to discuss how Pew may assist your state. Please send inquiries to Jeff Thiebert at jthiebert@pewtrusts.org.
Pew’s research on state rainy day fund policy is grounded in the fact that, in just the first year of the Great Recession, states confronted budget shortfalls that outstripped their savings by almost 2 to 1. This occurred because most states’ existing reserve policies do not prioritize savings during times of growth or consider the volatility of state revenue when determining the ideal size of the fund. Additionally, recent evidence suggests that state tax collections have become more volatile over the past decade, creating new challenges for policymakers seeking to manage their states’ budgets over the long term.