Rainy Day Funds: Opportunities for Reform

Publication Date: April 2007

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Elizabeth McNichol; Brian Filipowich

Research Area: Economics; Government

Keywords: Economic projections; State budgets; Fiscal future

Type: Report


States are in considerably better fiscal shape than they have been since 2001. State revenues have grown rapidly over the last few years, in marked contrast to the sluggish growth or declines in revenues between 2001 and 2004. This is good news. However, a return to budget deficits is inevitable at some point. In general, states have used the better times to prepare for this eventuality by rebuilding their reserves. But many states could do more. Both the level of reserves and the policies states use to manage rainy day funds determine the effectiveness of these budget “cushions.” In addition to increasing the level of their reserves, state policymakers can adopt some critical policy changes to improve their reserve policies so that they are better prepared for the next fiscal crisis.