As Revenue Collections Weaken, State Reserves Growth Slows

Editor's note: The analysis was updated Aug. 23, 2024, to correct the size of the increase in ending balances from fiscal 2020 to fiscal 2022.

By the end of fiscal year 2023, almost half of states’ rainy day funds could cover a record number of days’ worth of annual spending. But even as the capacity of state reserves continued to grow, new pressures on state budgets slowed that growth, with most states reporting smaller increases in fiscal 2023 than a year earlier. Looking ahead to the close of the current budget year, states expect their reserves to weaken from recent highs as some previous gains reverse.

Following back-to-back years of dramatic deposit levels, total rainy day fund balances saw a small decrease of less than a billion dollars nationwide, according to estimates collected by the National Association of State Budget Officers (NASBO) between September and November 2023. Although marginal, the decrease coincides with the end of historic revenue surpluses for states, and rainy day fund balances are projected to continue declining through the end of fiscal 2024. Forty-one states increased their reserves in fiscal 2023, but at a much lower rate than in the prior year.

Rainy day funds hit all-time highs in 38 states at the end of fiscal 2023. And 22 states reached record numbers of days that they could run government operations using rainy day funds alone, even as annual spending increased over the previous fiscal year. Days’ worth of spending available in rainy day funds can fluctuate because of changes in state balances, 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 since fiscal 2021, states’ fiscal conditions passed an inflection point in fiscal 2023 as many of the temporary factors that had bolstered recent growth began to unwind. Policymakers are now facing several looming challenges, including declining tax revenue growth, historically tight monetary policy, above-normal inflation rates, and a tapering of federal pandemic aid. When the current budget year closes in June, most states project that rainy day fund balances will have declined at an even sharper rate than in fiscal 2023, and most also plan to spend down at least a portion of their ending balances, according to enacted budget figures reported to NASBO.

Rainy day funds

With a preliminary actual aggregate $166.9 billion in savings at the end of fiscal 2023, states could run government operations on rainy day funds alone for a median of 44.9 days, equal to 12.3% of spending—a record high. The strength of total rainy day funds remained approximately 55% 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 day’s worth that was set aside in New Jersey.

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. Fourteen states withdrew a combined total of $8.2 billion from rainy day funds, with some taking only a small share of their savings and others tapping substantial amounts to help plug budget holes and maintain essential services. Among states that made withdrawals in fiscal 2020, all had at least temporarily replenished their savings by the end of fiscal 2023. For example, by fiscal 2022, Nevada had replenished all $332 million that it had drained from its rainy day fund when lawmakers voted to empty the account at the start of the pandemic. Hawaii is the most recent state to have fully replenished its rainy day fund, depositing $648 million in fiscal 2023.

New Jersey temporarily replenished its rainy day fund in fiscal 2021 but drained it again in fiscal 2022. The state now reports that it has only 53% of its fiscal 2019 balance set aside and no plans in its enacted budget to contribute to the fund in the current fiscal year.

Rainy day fund highlights

States’ results for fiscal 2023 show that:

• Wyoming recorded the nation’s largest rainy day reserve as a share of operating costs (306.6 days), a balance the state reached in an effort to manage its heavy reliance on volatile severance tax revenue. Four other states had more than 100 days’ worth of operating costs set aside: New Mexico (159), Alaska (117.3), Nebraska (109.6), and North Dakota (103).
• New Jersey (1.6) reported just over a day’s worth of operating costs in reserve. After New Jersey, the states with the smallest recorded rainy day reserves as a share of operating costs are: Washington (7.6), Illinois (14.1), Rhode Island (19.4), and Delaware (19.7).
• 30 states 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 (+65 days), Nevada (+40.1), Nebraska (+37.2), Kansas (+24.2), and Montana (+21.4). The largest declines were in Alaska (-108.1), California (-52.6), South Carolina (-44.1), Wyoming (-43), and South Dakota (-15.7).
• All but nine states also increased their rainy day fund balances compared with fiscal 2022. The states that reported declines were Alaska, California, Minnesota, Rhode Island, South Carolina, South Dakota, and West Virginia. Maine and Utah’s balances were estimated to remain the same. California, which maintains the nation’s largest rainy day reserves, withdrew $27.1 billion, or 33.3%.

Most states (38) hit record-high rainy day fund balances. Among these states, however, savings fell short of the national median of 44.9 days’ worth of general fund spending in 18: Arizona, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, New York, Tennessee, Utah, Virginia, and Wisconsin.

Total balances

States’ combined total balances—the combination of rainy day fund balances and leftover budget dollars, known as ending balances—were $406.9 billion at the end of fiscal 2023, representing a dramatic slowdown of growth from $401.2 billion at the end of the prior year, even as the amount set a new record. Together, those funds would be enough to run state government operations for a median of 119.1 days, equivalent to 32.6% of spending. Despite the small increase in dollars, the total capacity is about a month’s worth of spending less than a year earlier, reflecting an almost 8% decrease in total balance dollars as a portion of spending.   

Compared with 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.

In fiscal 2020, the first budget year affected by the pandemic, total ending balances fell by nearly $10 billion as states relied more on those leftover dollars than on rainy day funds to balance their budgets. Ending balance amounts bounced back dramatically in fiscal 2021 and sustained their fast growth the following year, collectively increasing more than sevenfold, from $33 billion at the end of fiscal 2020 to $237.7 billion two years later. This rapid growth was the result of greater-than-forecasted tax collections and the availability of flexible federal pandemic aid, which helped produce widespread budget surpluses.

By fiscal 2023, however, the trend began to change: Median state ending balance remained relatively flat, increasing only 1% from the prior year, and looking ahead, states project that their collective ending balances will decline by 45% in fiscal 2024. Declining revenue and growing spending demands are increasing the pressure on state budgets. In recent years, states have largely directed their leftover funds into one-time expenditures—such as paying off debt, boosting supplemental pension payments, and investing in economic development—as well as transfers to other state funds.

Total balance highlights

States’ results for fiscal 2023 show that:

• 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). Another 32 states had total balances that could cover more than 100 days’ worth of operating costs.
• For the first time since 2000, no state had fewer than a month’s worth of funds in its total balances. The state with the fewest days was Illinois, with 28 days. The next lowest were Louisiana (30.2 days) and Mississippi (33.8).
• 19 states increased their total fiscal cushions as a share of operating costs from a year earlier, with the largest gains in Texas (70.7 days), Oregon (55.1), and Pennsylvania (48.2). The largest declines were in Michigan (-185.8 days), Montana (-158.4), and Alaska (-108).

Why Pew assesses reserves and balances

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.

Justin Theal is an officer and Page Forrest is a senior associate with The Pew Charitable Trusts’ Fiscal 50 project.