State Tax Trends: Insufficient Rainy Day Funds

Recession Has Exhausted Reserves of Many States

Washington, D.C., June 6, 2012—Most states have created budget stabilization, or “rainy day,” funds to draw upon when economic conditions create a sudden drop in tax revenues. These cash reserves, however, were for the most part inadequate in coping with the recent economic downturn. Only Alaska and Texas currently have sizable rainy day fund amounts remaining, according to a new analysis by the Tax Foundation.

Generally, U.S. states are required by their constitutions or by statute to contribute to their rainy day funds according to a formula and up to a preset limit. At a minimum, most are required to deposit some portion of year-end surpluses into their rainy day funds during good years.

“Having a well-funded rainy day fund may not eliminate the need to make difficult cuts during an economic downturn, but it can cushion the fiscal system in the short-term,” said Tax Foundation Vice President for Legal & State Projects Joseph Henchman.

In Idaho, for example, lawmakers must deposit any revenue in excess of 4 percent growth over the previous year’s revenues, while in Louisiana officials must set aside 25 percent of any non-recurring revenue, plus all surpluses in excess of $750 million.

Well-designed rainy day funds should have set rules for filling and withdrawing the funds, a targeted amount to save that takes into account the state’s historical revenue volatility, and sufficient transparency to ensure that citizens are informed about how the fund is used.

Tax Foundation Fiscal Fact No. 306, “Trend #8: Insufficient Rainy Day Funds” by Joseph Henchman is available online.

Read about all of the Top 10 State Tax Trends in the Recession and Recovery here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.