States Replenishing Rainy Day Funds, but Total Balances Smaller Than Before Recession

States have made progress in rebuilding their rainy day funds since the recession. However, most of them still have smaller total balances than they did before the downturn, according to findings from The Pew Charitable Trusts’ “States Fiscal Health” initiative.

At the end of fiscal year 2016, total balances in states’ general fund budgets — including rainy day funds — could run government operations for a median of 36.2 days, less than the median of 41.3 days in fiscal 2007. The trend is worsening, with estimated results for fiscal 2017 showing the median declining to 27.5 days.

More than half of the states — 26 — ended fiscal 2016 with larger rainy day funds as a share of operating costs than before the recession. But most states’ budgets still had a smaller financial cushion, the report said. After tax revenue tumbled in the 2007 to 2009 downturn, states used savings and ending balances to help plug huge budget gaps. As state revenue has recovered, so have reserves and balances as most states have tried to rebuild their rainy day funds to take advantage of the economic recovery.

Only 18 states could cover more days’ worth of operating costs than in fiscal 2007 with their total balances, counting money saved in rainy day reserves plus general fund ending balances. These are the amounts remaining at the end of the budget year.

Reserves in rainy day funds were the largest portion of states’ financial cushions in fiscal 2016, accounting for nearly $2 of every $3 of total balances. Slow and uneven tax revenue growth has restrained most states’ ability to match their large ending balances in the year before the downturn. Rainy day funds typically provide a stable cushion from year to year, while ending balances are more volatile and harder to predict, the report said.

Nationally, rainy day funds held $51.9 billion in fiscal 2016, more than before the recession in both nominal dollars and as a share of government expenditures, according to data collected by the National Association of State Budget Officers (NASBO). States had set aside enough in these funds to run operations for a median of 19.1 days in fiscal 2016, or 5.2% of general fund spending — more than a median of 16.6 days, or 4.6% of spending in fiscal 2007. Early estimates indicate a slight decline in the median amount held by states in fiscal 2017, to 18.6 days, or 5.1% of expenditures.

Since the recession, most states have been rebuilding rainy day funds. However, some have struggled to save given sluggish tax revenue growth. For example, New Jersey drained its rainy day fund in fiscal 2009 to help ease the budget crunch it faced and has not managed to replenish it since then.

Other states have had to make more recent withdrawals. Nine states tapped their rainy day funds in fiscal 2016, according to NASBO. Alaska, which has one of the largest rainy day funds in the country, made the biggest withdrawal in fiscal 2016. The state depends on revenue from oil production to fund much of its operations and drew down almost a third of its savings to cover a significant budget gap caused by a decline in oil prices.

States’ total balances stood at $80.8 billion in fiscal 2016, and they held enough funds to cover operating expenditures for a median of 36.2 days. This amounted to 9.9% of spending, less than the fiscal 2007 median of 41.3 days, or 11.3%.

Although just 18 states’ total balances provided a larger financial cushion than before the recession, reserves and balances continued to grow nationally as the median number of days that states could operate on these balances reached the highest level since 2007. Growth in rainy day funds helped spur the increase as ending balances in most states were lower than in previous years. For example, Texas has one of the largest rainy day funds but experienced especially large declines in ending balances amid a revenue slowdown as the state’s economy was hurt by the drop in oil prices.

States’ results for fiscal 2016 show:

  • Alaska could cover the most days’ worth of spending (477.8 days) despite drawing down more than $3.3 billion in fiscal 2016 to cover ongoing budget shortfalls stemming from a decline in oil-related revenue.
  • Wyoming was the only other state with more than a year’s worth (400.5 days) of operating costs in its rainy day fund. Although the state has added to its savings in recent years, its reserves show a substantial increase since 2014 largely because it updated how it reports its data to NASBO.
  • Two states had nothing in their savings accounts: Nevada and New Jersey.

According to NASBO, the nine states that tapped their rainy day funds to manage their budgets in fiscal 2016 were Alaska, Connecticut, Louisiana, Mississippi, New Mexico, Oklahoma, South Dakota, Washington and West Virginia.

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