States Build Their Reserves Amid Growing Uncertainties

Editor’s note: This article was updated on Nov. 28, 2022 to correct a typo regarding the number of states with 100 days’ worth of operating costs in reserve.

Rainy day funds in most states and collectively are projected to have reached new highs by the end of fiscal year 2022, building on record gains the year before. Over the last two fiscal years, higher-than-forecasted revenue and other temporary factors have helped spur widespread growth in rainy day funds, which are an essential fiscal tool that helps states weather the ups and downs of the business cycle. Still, mounting economic threats are expected to weaken budget conditions in fiscal 2023, raising the possibility of budget gaps. 

After an early pandemic decline in rainy day fund balances, states estimated that their combined savings would reach a record $136.5 billion by the close of fiscal 2022, according to preliminary figures reported to the National Association of State Budget Officers (NASBO) between March and May of this year. With these savings alone, states could have run government operations for a median of 42.5 days—also a new high—compared with 28.9 days in fiscal 2019, just before the pandemic recession. Estimates for fiscal 2022 and related rankings are subject to revision. Actual balances are expected to come in higher than reported estimates in many cases.

The estimates show that 41 states expected their rainy day funds, also known as budget stabilization funds, to grow by the end of fiscal 2022 compared with the previous year. However, a smaller number of states (31) projected increases in the number of days they could run government operations using rainy day funds alone, due largely to a historic spike in annual spending in many states. Because the size of state budgets varies widely, it is fairer to compare the strength of rainy day funds by measuring how many days’ worth of spending each state’s savings could cover rather than by ranking funds by dollar amounts. Days’ worth of spending can fluctuate because of changes in state balances, changes in spending levels, or both.

In addition to policymaker actions, deposit rules tied to volatility in some states have directed at least some of the above-normal revenue growth or one-time influxes of dollars over the past two budget years into state rainy day funds. For example, Tennessee adds 10% of its year-over-year additional revenue to its rainy day fund, which is estimated to have reached a record $1.6 billion by the end of fiscal 2022, or $675 million more than just before the pandemic. Maryland dedicates at least a portion of its nonwitholding income tax revenue that exceeds the 10-year average to its savings, which nearly doubled to an estimated $1.2 billion by the end of fiscal 2022 compared with a year earlier. Louisiana deposits 25% of higher-than-forecasted revenues, which helped add at least $175 million to its rainy day fund by the end of fiscal 2022.

Budget surpluses and related gains in states’ rainy day funds during fiscal years 2021 and 2022 are not expected to continue to the same degree in fiscal 2023. Higher-than-forecasted tax revenue growth, historic federal aid, and record financial reserves have buttressed states’ fiscal positions over the past two budget years. However, policymakers now face an inflection point as they reckon with several looming challenges, including weakening economic growth amid tightening monetary policy and historically high inflation, and a tapering of federal aid.

Rainy day funds

With a record $136.5 billion in savings by the end of fiscal 2022, according to preliminary estimates from NASBO, states could run government operations on rainy day funds alone for a median of 42.5 days, equal to 11.6% of spending—an increase from a year earlier. Still, the strength of states’ rainy day funds ranged widely—from 349.6 days’ worth of spending in Wyoming to 4.2 days in Washington.

In fiscal 2020, the first budget year affected by the pandemic, states’ rainy day funds collectively fell for the first time since the Great Recession in 2007-09. Some states withdrew only a small share of their savings, but others tapped substantial amounts to help plug budget holes.

Initially, most states were cautious using their dedicated savings accounts because of uncertainty about how the pandemic and resulting recession would unfold and about the availability and extent of federal aid. Instead of first drawing down reserves, many states managed fiscal 2020 budget gaps through a combination of spending cuts, federal aid, and a historically high cache of leftover general fund budget dollars, known as ending balances, that had built up over two previous years of widespread revenue surpluses. 

Among the 15 states that withdrew a combined total of $8.2 billion from their rainy day funds in fiscal 2020, all but two are projected to have fully replenished their savings by the end of fiscal 2022. For example, after nearly emptying its reserves in fiscal 2020, New Jersey grew its savings to $2.4 billion by the end of fiscal 2021—its largest annual increase in more than 20 years. The state projected an additional $2 billion increase by the end of fiscal 2022. Nevada is expected to have fully replenished the $332 million it emptied from its rainy day fund in fiscal 2020. Texas and Alaska are the only two states that made withdrawals in fiscal 2020 and have yet to fully replenish their reserves, though both projected to have refilled more than three-quarters of their funds by the end of fiscal 2022.

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Rainy day fund highlights

States’ estimates for fiscal 2022, the second full budget year affected by the pandemic, show that:  

• Wyoming projected the nation’s largest rainy day reserves as a share of operating costs (349.6 days). Four other states had more than 100 days’ worth of operating costs set aside: Alaska (150.7 days), North Dakota (112.1), New Mexico (100.8), and Connecticut (100).
• Two states reported less than a week’s worth of operating costs in reserve: Illinois (4.9 days) and Washington (4.2). (Illinois does not have a rainy day fund as defined by The Pew Charitable Trusts.)
• Thirty-three states projected increases in 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 (+58.9 days), Hawaii (+48.2), and Nebraska (+42.4). The largest declines were in California (-32.9 days), followed by South Carolina (-31.6) and Vermont (-18.5).
• At least three states—Connecticut, Iowa, and Oklahoma—are projected to have filled their rainy day funds to their maximum balances, meaning that additional dollars that would ordinarily have been directed to those fund balances were redirected to other uses.

Total balances

States’ total balances—the combination of rainy day fund balances and leftover budget dollars known as ending balances—are expected to reach $262.3 billion by the end of fiscal year 2022, up nearly $28 billion from the previous high in fiscal 2021. Together, those funds would be enough to run state government operations for a median of 88.9 days, equivalent to 24.4% of spending—approximately 10 days fewer than a year earlier. By the end of fiscal 2022, total balances in 24 states could cover more days’ worth of general fund spending than a year earlier.

Although both rainy day fund levels and ending balances reached record levels in the past two years, states’ leftover budget dollars were especially high due to larger-than-forecasted tax collections, among other temporary factors, which helped explain widespread budget surpluses. But ending balances fluctuate from year to year, so policymakers cannot count on them as cushions against future budget uncertainty to the degree that they can with rainy day funds, which are saved until policymakers decide to draw them down.

In the first budget year affected by the pandemic, states relied more on ending balances than on rainy day funds to balance their budgets. In net dollars, a calculation that accounts for totals falling in some states while rising in others, ending balances fell by nearly $10 billion in fiscal 2020, while rainy day funds declined by $1.9 billion. Conversely, both types of funds increased in fiscal 2021 and 2022. By the start of this budget year, states’ collective ending balances are estimated to have nearly quadrupled, from $33 billion by the end of fiscal 2020 to $127.4 billion by the end of fiscal 2022.

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Total balance highlights

States’ estimates for fiscal 2022 show:

• The highest-ranked state for total balances was the same as for rainy day funds: Wyoming (349.6 days). Twenty-two states—the largest count on record—expected to have more than 100 days’ worth of operating costs on hand.
• For the second consecutive year, no state had fewer than a week’s worth of operating costs in total balances. The state with the fewest days was Illinois, with 12.3 days. No other state had less than a month’s worth of days.
• Twenty-four states projected increases in their total fiscal cushions as a share of operating costs from a year earlier, with the largest gains in New York (+84.1 days) and Pennsylvania (+57.4) driven by higher-than-expected revenues in both states. The largest declines were in Michigan (-95.5 days) and Idaho and Texas (-52.8).
• Most states (28) expected their ending balances to decline from fiscal 2021 levels. Nationally, states’ total balances would have declined if not for substantial increases in New York and Pennsylvania.

Why reserves matter

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.

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. States with a history of significant economic or revenue volatility may desire larger cushions. According to a report by The Pew Charitable Trusts, the optimal savings target of state rainy day funds depends on three factors: the defined purpose of funds, the volatility of a state’s tax revenue, and the level of coverage—similar to an insurance policy—that the state seeks to provide for its budget.

Similarly, two forward-looking fiscal management tools—long-term budget projections, which help states identify challenges that can build over time, and budget stress tests, which help determine a state’s risk from adverse events—can help states better understand and prepare for fiscal challenges, such as by refining a savings target.

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.

General fund reserves and balances may not reflect a state’s complete fiscal cushion. States may have additional resources to soften downturns, such as dedicated reserves outside of their general funds or rainy day accounts. In addition, the scope of each state’s general fund expenditures can differ, so comparisons across states should be made with caution. For example, some states—such as Michigan—spend considerable amounts outside of their general fund, and Ohio is unusual because its general fund includes spending from federal Medicaid dollars. One way to standardize the size of reserves and balances is to calculate how many days a state could run solely on those funds, even though the scenario is highly unlikely.

Colorado and Illinois do not have a rainy day fund as defined by The Pew Charitable Trusts, despite balances reported within NASBO’s surveys. Colorado maintains mandatory general fund balances, but these reserves do not respond in any way to changing economic or fiscal conditions. Illinois’ Budget Stabilization Fund has a stringent repayment provision that requires all withdrawals from the fund to be repaid in full within the fiscal year, making it, in effect, a working-cash fund rather than a rainy day fund.

Download the data to see individual state trends. Visit Pew’s interactive resource, Fiscal 50: State Trends and Analysis, to sort and analyze data for other indicators of state fiscal health.