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State Government Rainy Day Funds and the COVID-19 Crisis: A Preliminary Assessment

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Stephen R. Rolandi
November 20, 2020

When I was a student in elementary/high school and college, I remember my parents telling me and my two younger brothers to always put some money aside earned from summer jobs, tips, etc. for a “rainy day,” as a form of protection against unforeseen emergencies or occurrences requiring quick outlays of cash.

Looking back, that was good advice from my parents, who were members of the radio or “greatest generation,” and who grew up quickly during the height of the Great Depression of the 1930s and World War II. They knew how to save money for those unforeseen moments in life.

 The same concept is to be found in the finances and budgets of state and local government.  A rainy day or rainy day fund (sometimes referred to as a revenue stabilization fund) is a reserved amount of monies to be utilized in times when regular budgetary income is disrupted or decreased in order for standard business operations of government to continue. In the United States, this term is usually used to apply to funds maintained by most state and local governments to deal with budget shortfalls, when revenues do not line up to match expenditures. In general, there are constitutional and legal limitations on how and when such funds are to be utilized, and how and when such funds are to be replenished.

Such funds are critical to the operations of state and local governments, where there are restrictions on how much debt they can legally incur. Since the time of the Great Recession of 2008, rainy day funds represent a  valuable tool in the budget kits of state and local governments, when these governments face severe economic contractions caused by natural disasters, such as the current COVID-19 pandemic gripping the United States and the nations of the world.

Today’s article will look at how state are generally meeting the budgetary challenges presented by COVID-19, how successful they have been thus far and what more needs to be done going forward.

At the start of Fiscal Year 2020 (which would be July 2019 for most of the states), the total amount of state government rainy day fund balances were approximately $77.5 billion, according to a study prepared in April 2020 by Jared Walczak and Janelle Cammenga of The Tax Foundation.

According to this study, the total median rainy day fund’s balance was 8.0% of state general fund expenditures at the start of Fiscal Year 2020, which was significantly better than the 4.8% balance that the states had posted at the beginning of Fiscal Year 2008, prior to the Great Recession. It should be noted that some states have multiple rainy day funds with different provisions and purposes.

Some states enjoy strong fund balances, such as California ($19.2 billion); Texas ($7.8 billion); Massachusetts ($3.3 billion); Alaska ($2.3 billion) and Connecticut ($2.9 billion). Other states, such as Illinois and Kansas, have almost completely empty reserve funds. Another two states—New Jersey and Pennsylvania—both have rainy day fund balances that are alarmingly low—only 1% of these states expenditures. Similar concerns have been expressed for New York State—with a beginning fund FY 2020 fund balance (pre-Covid) of $2.4 billion (3.2%)—given the intensity of the pandemic in New York. 

States frequently limit the circumstances under which rainy day funds can be used, as they are intended to provide a buffer for a state during an economic downturn or when facing unforeseen expenses (and do not exist as an un-appropriated fund balance to be used for new spending). There are three types of “withdrawal” conditions or situations when a rainy day fund can be utilized:

  • Existence of a budget gap (a state budget is unbalanced between estimated revenues and expenditures).
  • Revenue or economic volatility (some examples: revenue declines, or a contraction in a state’s economy).
  • Error in revenue forecasting (cost overruns do not constitute a revenue forecasting error).

State responses to the budget and economic dislocation caused by the COVID-19 pandemic have been varied to date. Ohio, Nevada and New Jersey have already completely drained their rainy days funds, according to an October 2020 study done by The Pew Charitable Trusts. In Ohio, the state legislature has decided to preserve their rainy day funds until they can better assess the long-term budgetary effects of the COVID-19 pandemic in that state. The states of Alaska, Rhode Island and California have withdrawn nearly 50% of the funds in their rainy day accounts. Another 10 states have already used their rainy day funds to close budget gaps for Fiscal Year 2020.

A preliminary conclusion would be that some states have been able to respond better than others in this pandemic crisis. But the present need should be a reminder of the importance of funding these reserve accounts again once the current crisis is over. Those states with minimal reserves should heed the advice my parents gave me a long time ago, and prepare for future rainy days. The taxpayers will be forever grateful if they do so.

Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and past National Council Representative; he has also served on many other association boards in New York State and Washington, DC. You can reach him at: [email protected] or [email protected] or at 914.536.5942.

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