Evaluating states’ rainy day funds and other fiscal reserves, as well as any policies governing their use and replenishment
Budget stabilization funds—commonly called rainy day funds—are an essential tool to help states weather the ups and downs of the fiscal cycle. Like positive general fund balances at the beginning of each fiscal year, rainy day funds contain cash purposefully set aside for states to turn to in fiscal or other emergencies.
The existence of a rainy day fund isn’t enough to ensure that it will be available to use when necessary, though. Setting conditions for withdrawals helps prevent elected officials from using these dollars to finance the politically popular program of the moment. Statutes or policies about replenishing rainy day funds help ensure that they are refilled after they are tapped and that they keep growing until needed again.
It’s also helpful for states to tie rainy day fund deposits and balances to measures of revenue volatility. States that see wild swings in income are somewhat more likely to find themselves requiring extra dollars to help them when they are hit by nearly inevitable downturns in revenues.
Reserve funds should be required and should be adequate to meet any reasonably anticipated eventuality. States should enact clear policies for rainy day fund deposits and withdrawals and adjust fund levels for the historical volatility of their revenues.