COVID-19 Prompts States To Start Tapping Financial Reserves

Editor’s note: The text of this webpage was updated on Oct. 23, 2020, to reflect changes to the list of states that withdrew rainy day funds to close budget gaps in fiscal year 2020. Indiana was added and Delaware, whose withdrawal was actually for fiscal 2021, was removed. 

The coronavirus pandemic reversed many states’ plans to infuse more money into their rainy day funds—which, at the start of fiscal year 2020, amounted nationally to the largest fiscal cushion in at least two decades. At least 36 states had signaled plans to make additional deposits; instead, the fiscal and economic whiplash inflicted by the outbreak prompted at least 17 states to make or authorize withdrawals in fiscal 2020. 

States had entered the 2020 budget year, which ended in June for most states, with a record $118.8 billion in total balances—including $75.2 billion in rainy day funds. Greater savings discipline after the Great Recession and widespread budget surpluses in the past two years helped boost many states’ accounts. But even that level of reserves left states unevenly prepared to manage the sudden fiscal fallout from the pandemic, which experts variously project will cost states from at least $125 billion to $200 billion in lost revenue through fiscal 2021—and more if there is a second wave of coronavirus shutdowns.

In the face of steep tax revenue shortfalls and increased spending demands, at least 17 states drew on their rainy day funds in fiscal 2020, according to Pew’s review of recent developments, including state policy actions tracked by the National Conference of State Legislatures and the National Association of State Budget Officers (NASBO). In many cases, the withdrawals were for a small share of total savings, but some states tapped substantial amounts to plug budget holes amid uncertainty over how long the crisis might last and whether additional federal aid was forthcoming. These withdrawals occurred too late to be captured in fiscal 2020 estimates compiled by NASBO, which in nearly all cases reflect states’ pre-pandemic plans.  

Many states may be prompted to turn to their rainy day funds to help balance their budgets in fiscal 2021 as the pandemic continues to spawn budget gaps. Unemployment rates remain historically high, and parts of the economy are still closed or operating at reduced capacity to contain the outbreak’s spread, shrinking state tax collections.

Rainy day funds

States face difficult decisions about how to time their withdrawals because of profound uncertainties regarding how quickly their economies will recover, especially questions about how the pandemic will play out in the months ahead. States such as Ohio have sought to preserve their rainy day funds until the long-term budgetary effects become clearer. Meanwhile, since the pandemic’s onset in March, Nevada and New Jersey have drained their rainy day funds, and California has made withdrawals totaling $9.6 billion, or almost half of its dedicated savings—first in fiscal 2020 for coronavirus-related expenditures, and then to close shortfalls in the fiscal 2021 budget. The withdrawals in Nevada and New Jersey marked a sharp reversal in two states that had made recent progress in replenishing their rainy day funds after emptying them during the previous downturn: In fiscal 2019, New Jersey made its first deposit in a decade, and Nevada surpassed its pre-Great Recession savings level for the first time. 

Before the longest economic recovery in U.S. history came to an abrupt end, at least 33 states had saved enough to cover a greater share of government operating costs than in fiscal 2007, the last full budget year before the Great Recession.

Additional tax revenue enabled states to increase their rainy day funds—also called budget stabilization funds—for the ninth straight year, reaching a record 50-state total of $75.2 billion in fiscal 2019. With these savings alone, states could run government operations for a median of 26.8 days, equal to 7.3% of spending—also a new high—compared with 17.3 days, or 4.7% of spending, just before the recession.

At least 36 states had anticipated boosting their rainy day fund savings in fiscal 2020, according to early state estimates compiled by NASBO, but the pandemic and resulting recession derailed those plans. The deposits would have increased the 50-state total to $80.2 billion, equal to a median of 29 days’ worth—or 7.9%—of spending. Instead, updated estimates to be published by NASBO late this fall will reflect the first withdrawals since the pandemic.  

States used the long recovery to replenish and enlarge their rainy day funds, but until recent years, slow state tax revenue growth had forced policymakers to make hard choices between replenishing savings or using any extra tax dollars to catch up on investments and spending that had been cut or deferred during the downturn. 

Although many factors determine how much each state should set aside, one gauge of states’ progress in building their savings is a comparison with what they had on hand going into the Great Recession. For many states, even 2007 levels were inadequate, with state budget shortfalls outstripping savings nearly 2-to-1 in total dollars in the first year of the downturn alone. California withdrew all of its rainy day funds in fiscal 2008, the same budget year that the recession hit, and by the end of fiscal 2009, another 13 states had either used all of their savings or reduced their levels to less than a week’s worth of spending.

Overall, rainy day funds constitute the largest portion of states’ total balances, which comprise states’ intentional savings as well as dollars left over in what functions as a state’s main checking account—the general fund. Rainy day funds accounted for 63 cents of every dollar in total balances at the end of fiscal 2019, compared with 45 cents just before the recession.

Rainy day fund highlights

The latest developments in the states show:

  • At least 10 states used their rainy day funds to help close budget gaps in fiscal 2020: Alaska, Indiana, Maryland, Michigan, Mississippi, Nevada, New Jersey, New Mexico, Oklahoma, and Rhode Island. Some of these withdrawals amounted to substantial shares of their accounts: Nevada and New Jersey emptied their rainy day funds, and Alaska and Rhode Island used roughly half. A portion of Oklahoma’s withdrawal was from a relatively new fund that functions as dedicated savings but is not reflected in NASBO’s data. Georgia expects to rely on rainy day funds to close a projected year-end budget gap, but the withdrawal has not yet been finalized.
  • At least seven other states made or authorized withdrawals in fiscal 2020 to   ensure sufficient funding to prepare for and respond to the pandemic: Arizona, California, Georgia, Iowa, Maine, Nebraska, and Washington. These withdrawals were generally smaller than those made to close budget shortfalls, ranging from just 6% of dedicated savings in California to 12% in Arizona and Georgia. Other states, such as Arkansas, did not make withdrawals from their rainy day funds but established separate accounts to help manage the virus’s fiscal impacts.
  • Several states included withdrawals from their rainy day funds in their enacted budgets for fiscal 2021, and more are under consideration before this budget year closes next June. Combined with withdrawals made in fiscal 2020, for example, California’s planned withdrawal for fiscal 2021 would reduce its available savings by about half, and New Mexico’s would fall by roughly 60% since the pandemic’s onset. Delaware authorized a withdrawal from a new fund that functions as dedicated savings but is not reflected in NASBO’s data.
  • Several states put additional money into their rainy day funds since the start of the pandemic. West Virginia, for example, put $14 million from a year-end surplus into reserves, Maine added $17.4 million, Connecticut deposited an additional $530 million, and policymakers in Tennessee approved a plan to increase the state’s dedicated savings by $350 million.
  • As the longest economic recovery in history neared its end, Wyoming boasted the nation’s largest rainy day reserves as a share of operating costs in fiscal 2019 (352.7 days). Alaska (170.8 days) was the only state besides Wyoming with more than 100 days’ worth of operating costs stowed away.
  • Five states had less than a week’s worth of operating costs in reserve in fiscal 2019: New Jersey (4.1 days), Kentucky (4), Pennsylvania (0.3), Illinois (less than a tenth of a day), and Kansas, which had yet to make a deposit after creating its account in 2016. New Jersey’s deposit of $421 million in fiscal 2019 was its first since draining its fund during the Great Recession. (The state later emptied this fund to balance its fiscal 2020 budget.) Not reflected here are deposits made soon after the close of fiscal 2019 by Kentucky ($195 million) and Pennsylvania ($317 million).

Total balances

Newly complete data for fiscal 2019 show that states held a record $118.8 billion in total balances by the end of the budget year, further bolstering a collective fiscal cushion that included leftover general fund balances and rainy day funds before the coronavirus struck in early 2020. This record drove up the median number of days that they potentially could run government operations using this fiscal cushion to 49.7, or 13.6% of spending—at least a 20-year high. That is nearly eight-and-a-half days more—and 2.3 percentage points higher—than total balances as a share of spending just before the Great Recession.

For the first time, a majority of states—at least 30—had enough in total balances to cover a greater share of government spending than they could heading into the 2007-09 recession.

Total balances were higher in fiscal 2019 not only because states added to their rainy day funds, but also because many had unanticipated surpluses that swelled leftover funds—known as ending balances—to their largest dollar amounts since fiscal 2007. For much of the past decade, slow tax revenue growth and tight budgets meant fewer dollars left over in ending balances. But tax revenue surged in fiscal 2018 and 2019, fueled by federal and state policy actions, favorable economic conditions, and robust stock market returns.

Prior to the pandemic, states had also projected similarly high ending balances for fiscal 2020, thanks to healthy tax gains during the first eight months of the budget year. Although comprehensive national data are not yet available, early reports suggest these balances were widely diminished or depleted by the end of the last budget year as states absorbed the fiscal shock of simultaneous tax revenue declines and increased spending brought on by the pandemic. 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.

Total balance highlights

The latest developments in the states show:

  • In the final budget year before the new recession, the highest-ranked state for total balances was the same as for rainy day funds: Wyoming (352.7 days). Four other states held more than 100 days’ worth of operating costs in fiscal 2019: Alaska (170.8), Oregon (138.8), Texas (116.6), and West Virginia (100.7).
  • Two states held less than a week’s worth of operating costs in fiscal 2019: Illinois (4.7 days) and Pennsylvania (0.3).
  • Thirty-four states expected their total balances to decrease in fiscal 2020 prior to the coronavirus gripping their budgets.

Download the data.

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 severe 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 health, their levels are tracked closely by bond rating agencies. For example, Moody’s Investors Service upgraded Arizona’s credit rating in November 2019 to the second-highest level. In its rationale for the change, the ratings agency noted the improved reserve size as a key factor.

Building up reserves is a sign of fiscal recovery, but 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.

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 it includes spending from federal Medicaid funds. 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.

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.

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Fiscal 50

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Fiscal 50: State Trends and Analysis, an interactive resource from The Pew Charitable Trusts, allows you to sort and analyze data on key fiscal, economic, and demographic trends in the 50 states and understand their impact on states’ fiscal health.

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Rainy Day Funds

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In a series of reports, The Pew Charitable Trusts has identified several best practices for building better rainy day funds. The reports emphasize 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.

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Video: Rainy Day Funds