How Revenue Volatility Informs State Savings Targets

In a memo, sent March 12, 2021, to Colorado’s Office of State Planning and Budgeting, experts from The Pew Charitable Trusts provide information on how measuring revenue volatility can help state officials determine how much they need to save in reserves.

When economic downturns strike, tax collections often decline while certain spending demands increase—in these situations, reserves are states’ best line of defense. But to determine how much to save, states need informed estimates of the size of the budget shortfalls they are likely to face. The most important factor in calculating such estimates is revenue volatility. States with relatively stable revenue sources require lower reserve levels than states with more volatile revenue sources.