Rainy Day Funds: Best Practices to Mitigate Revenue Volatility

Rainy day funds are an essential fiscal tool to help states weather the ups and downs of the business cycle. If properly managed, money set aside in these funds can be used to bolster state budgets during economic downturns or other unforeseen events. As state leaders continue to navigate uncertain fiscal and economic conditions, they can adopt policies to make these funds more effective.

The Pew Charitable Trusts has identified several best practices for building better rainy day funds. Pew’s research emphasizes that states should study how sensitive their tax systems are to economic volatility; identify concrete objectives and an appropriate savings target; link deposits to economic or revenue growth; and establish withdrawal conditions that encourage use during periods of fiscal stress. These reports, briefs, fact sheets, and other resources can help state leaders better understand, predict, and manage revenue volatility.