States Prioritize Reserves as Fiscal Flexibility Declines

The strength of rainy day funds in half of the states and nationwide increased during fiscal year 2024—according to states’ own estimates collected by the National Association of State Budget Officers (NASBO)—continuing a trend that began over a decade ago and accelerated during the pandemic. States could operate on their rainy day funds alone for a median of 48.1 days, up from 44.9 days in fiscal 2023.

However, the pace of reserve growth is slowing. The median rainy day fund balance increase was 5.7% in fiscal 2024, down from 15.8% the previous year. Overall, 33 states increased their rainy day fund balances in fiscal 2024, the fewest in eight years. Further, this new reserve growth materialized as states spent down their leftover budget dollars, known as ending balances, at the fastest rate since the Great Recession, leading to a decline in overall fiscal flexibility.

By the end of fiscal 2024, rainy day fund increases had pushed balances to all-time highs in 38 states. However, just 13 states reached record numbers of days that they could run government operations using rainy day funds alone 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 four 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 nonwithholding income tax revenue that exceeds the 10-year average, and Louisiana deposits 25% of higher-than-forecast revenues.

Although abundant federal pandemic aid and higher-than-forecast 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. The waning of those short-term boosts continued to ripple through state coffers in fiscal 2024, with policymakers facing several looming challenges, including declining tax revenue growth and increased spending pressures.

Looking ahead, one open question is whether the recurring budgetary commitments adopted by states in response to pandemic highs—such as tax cuts and public employee pay raises—will remain affordable over the long term or will spur new fiscal stress.

Rainy day funds

With an estimated aggregate $155.7 billion in savings at the end of fiscal 2024, states could run government operations on rainy day funds alone for a median of 48.1 days, equal to 13.2% of spending—a record high. The strength of state rainy day funds remained approximately 66% 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 254.9 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 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 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. As of the end of fiscal 2024, the state reported having an estimated $306 million in reserve.

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 (254.9 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 (176.3), Arkansas (148), New Mexico (132.5), and North Dakota (109.5).
• 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 (14.9), Delaware (18.9), Washington (19.9), and Missouri (21.3).
• 25 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 Arkansas (+55.3 days), Alabama (+24.6), Nevada (+17.1), Hawaii (+16.2), and Montana (+14.7). The largest declines were in California (-71.2 days), Nebraska (-46.8), Texas (-18.7), Minnesota (-14.4), and New Mexico (-12.2).
• 33 states increased their rainy day fund balances compared with fiscal 2023. Ten states maintained steady balance levels, and just seven states reported declines: Alaska, California, Indiana, Maryland, Minnesota, Nebraska, and Washington. California, which maintains the nation’s largest rainy day reserves, reported a $35.4 billion decline, or 56.5% of its prior year balance.
• Most states (38) hit record-high rainy day fund balances. Among these states, however, savings fell short of the national median of 48.1 days’ worth of general fund spending in 16 of them: Arizona, Delaware, Florida, Illinois, Iowa, Louisiana, Michigan, Mississippi, Missouri, New York, Ohio, Rhode Island, 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 $303.7 billion at the end of fiscal 2024, a sharp decline from $428 billion the previous year. These funds could sustain state government operations for a median of 87.9 days, equivalent to 24.1% of annual spending and about a month’s 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, 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 $251 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 a turning point for state fiscal flexibility. By the close of the budget year, states had collectively spent down their ending balances by an estimated $102 billion—a 41% decline from the previous year. And although this reduction partly reflects weakening revenue and growing spending demands and may signal rising fiscal stress for some states, spending down unusually high ending balances to pay down debt or fund one-time projects is a common practice and so for many states may simply reflect standard budgeting practices. Nevertheless, the reduction in total 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 North Dakota (274.2 days). Another 21 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 Illinois, with 28.1 days. The next lowest were Tennessee (30.3 days) and Mississippi (34.7).
• 12 states increased their total fiscal cushions as a share of operating costs from a year earlier, with the largest gains in Kentucky (43.2 days), Nevada (27.3), and Montana (26.3). The largest declines were in Texas (-235.9 days), Tennessee (-158.6), and Oregon (-147.3).

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