State Rainy Day Fund Growth Slowed in Fiscal 2024

After years of rapid expansion, growth in state rainy day funds slowed in fiscal year 2024. Although the median rainy day fund balance increased by 7% in fiscal 2024, that still marked a steep drop from the 31% rise recorded the previous year, according to state data reported to the National Association of State Budget Officers (NASBO). This slowdown represents a return to growth rates that are more in line with prepandemic trends and reflects the end of the revenue wave that fueled record increases from fiscal 2021 to 2023.

Despite this moderation in the reserves growth rate, the capacity of rainy day funds—that is, the number of days they could cover state operations—increased in 22 states and nationwide, extending a decade-long trend that accelerated during the pandemic. Collectively, states could now operate on their reserves alone for a median of 49.1 days, up from 46.2 days in fiscal 2023. However, this growth comes as states are depleting their leftover budget dollars, known as ending balances, at the fastest rate since 2017. As a result, states’ overall fiscal cushion is declining, leaving states with fewer resources to address widespread current and projected budget imbalances in the years ahead.

By the end of fiscal 2024, rainy day fund balances had reached all-time highs in 36 states. However, just 13 states reached an all-time record in the number of days they could operate using only their rainy day funds because 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.

Although abundant federal pandemic aid and higher-than-forecast tax collections helped spur widespread gains in states’ total financial cushions in fiscal 2021 and 2022, just a year later, as many of the temporary factors that had bolstered recent growth began to unwind, states’ fiscal conditions passed an inflection point. And the waning of those short-term boosts continues to ripple through state coffers, with policymakers facing several looming challenges, including declining tax collections and growing spending pressures.

Moving forward, budget reserves will be a crucial tool available to help stabilize state finances as policymakers navigate the most widespread fiscal pressures since at least 2020. But state leaders should be cautious about relying on rainy day funds to close deficits since many states’ budget gaps stem from structural imbalances—when recurring revenue is insufficient to support recurring expenditures—rather than short-term shocks. Although reserves exist to provide fiscal relief during times of need, they are not a sustainable solution for persistent budget shortfalls. Seven states reported to NASBO that they plan to use their rainy day funds to balance their budgets this fiscal year, including California, Florida, and Maryland, which are already facing structural imbalances that could continue beyond the current budget cycle.

At the same time, however, the demands on reserve balances may be growing. Increasing uncertainty around federal funding—including aid in the event of a recession and perennial support for health care, transportation, education, and other key public services—adds another layer of risk for state budgets. Reserves cannot permanently replace potential cuts to such federal funding, but they can serve as a temporary bridge, giving policymakers time to assess their options. And with recession risks rising, states may also need reserves for their traditional purpose of helping to close shortfalls during economic downturns. To navigate these competing demands, states should use fiscal management tools, especially long-term budget assessments and stress tests, to ensure that their savings levels are adequate and should regularly update these analyses to adapt to the rapidly evolving fiscal landscape.

Rainy day funds

With an aggregate $155.5 billion in savings at the end of fiscal 2024, states could run government operations on rainy day funds alone for a median of 49.1 days, equal to 13.5% of spending—a record high. The strength of state rainy day funds remained approximately 70% greater than in fiscal 2019, just before the pandemic-induced recession started in February 2020. Still, the strength of states’ rainy day funds ranged widely in fiscal 2024—from 302.2 days’ worth of spending in Wyoming to just two days’ worth 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 2007-09 Great Recession. 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 2024. 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. Similarly, by the end of fiscal 2021, New Jersey had replenished all $414 million that it withdrew from its rainy day fund, but then it drained the fund again by the end of fiscal 2022. At the end of fiscal 2024, the state reported having an estimated $306 million in reserve.

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

Rainy day fund state highlights

States’ results for fiscal 2024 show that:

• Wyoming recorded the nation’s largest rainy day reserve as a share of operating costs (302.2 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: Alaska (144.4), Kentucky (133.4), Arkansas (106.8), and North Dakota (101.4).
• New Jersey reported just two days’ 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 Illinois (14.4), Rhode Island (18.8), Delaware (19.3), and Washington (20).
• 22 states increased the length of time that they could run government operations on rainy day funds alone compared with a year earlier. The largest gains were in Kentucky (+39.7 days), Alaska (+27.1), Alabama (+19.2), Hawaii (+17.8), and Montana (+17.2). The largest declines were in California (-83.3 days), New Mexico (-60), Nebraska (-53.3), Washington (-12.4), and Minnesota (-11.5).
• 35 states increased their rainy day fund balances compared with fiscal 2023. Seven states maintained steady balance levels, and eight states reported declines: California, Colorado, Indiana, Maryland, Nebraska, New Mexico, Rhode Island, and Washington. California, which maintains the nation’s largest rainy day reserves, reported a $41.2 billion decline, or 61% of its prior year balance.
• Most states (36) hit record-high rainy day fund balances. Among these states, however, savings fell short of the national median of 49 days’ worth of general fund spending in 16 of them: Arizona, Delaware, Florida, Illinois, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Missouri, New York, Ohio, Tennessee, Utah, Vermont, and Wisconsin.

Total balances

States’ combined total balances—made up of rainy day fund balances and ending balances—declined in fiscal 2024 for the first time since the start of the pandemic. States reported an estimated $349.9 billion at the end of fiscal 2024, a sharp decline from $437 billion the previous year. These funds could sustain state government operations for a median of 103.7 days, equivalent to 28.4% of annual spending and about three weeks’ worth of spending less than a year earlier.

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, 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 amid the pandemic-induced recession. 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 $254.4 billion three years later. This rapid growth was the result of greater-than-forecast tax collections and the availability of flexible federal pandemic aid, which helped produce widespread budget surpluses. In recent years, states have largely directed their ending balances 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.

But fiscal 2024 marked another turning point in the decline of states’ fiscal flexibility. By the close of the budget year, states had collectively drawn down their ending balances by $59.6 billion—a 23% drop from the previous year. Among the 37 states that reported lower ending balances, 14 had reductions of more than 50%, including five over 75%. These declines partly reflect weakening revenue and growing spending demands—potential signals of rising fiscal stress. However, spending down unusually high ending balances to pay down debt or fund one-time projects is a common practice and, for many states, may simply reflect standard budgeting activity. Nevertheless, the reduction in ending balances leaves states with less flexibility to fund policy priorities.

Total balance state highlights

States’ results for fiscal 2024 show that:

• The highest-ranked state for total balances as a share of operating costs was Wyoming (302.2 days). More than half of states had total balances that could cover more than 100 days’ worth of operating costs.
• For the first time since 2000, no state had less than a month’s worth of funds in its total balances. The state with the fewest days was Louisiana, with 31.3 days. The next lowest were Illinois (32.1 days) and Tennessee (33.8 days).
• 11 states increased their total fiscal cushions as a share of operating costs from a year earlier, with the largest gains in Montana (+64.6 days), Virginia (+32.8), and Kentucky (+30.8). The largest declines were in Tennessee (-155 days), Minnesota (-139.7), and Oregon (-119.7).

Looking ahead

Enacted budgets for the current fiscal year project that median state rainy day fund capacity will increase by 7% to 53.1 days’ worth of spending. More than half of states expect their rainy day fund balances to grow by the end of fiscal 2025, while 10 states anticipate making a withdrawal, including seven that already reported using their rainy day fund to help balance their budget.

Looking ahead to fiscal 2026, a growing number of states are projecting recurring shortfalls. As budgets continue to tighten, rainy day fund growth may further slow and, if more states rely on reserves to close budget gaps, potentially even reverse.

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, Moody’s Ratings upgraded Pennsylvania’s credit rating in October 2024, citing the state’s increased reserve levels as part of its rationale. And notably, rating agencies do not penalize states for responsible withdrawals from their reserves, which analysts have suggested demonstrates a commitment to long-term fiscal sustainability when coupled with other prudent fiscal measures such as spending reductions, revenue adjustments, and a plan to replenish savings when conditions improve.

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