Why state rainy day funds are rebounding

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WASHINGTON – States increased their cumulative rainy day funds for a seventh straight year to a record $54.7 billion in fiscal year 2017, enough to run government operations for a median of 20.5 days, Pew Charitable Trusts said Tuesday.

The National Association of State Budget Officers expects that 2017 figure to be surpassed when final fiscal 2018 data becomes available.

Most states ended their fiscal years on June 30, but Texas does not close its fiscal year until Aug. 31 while Alabama and Michigan end theirs on Sept. 30.

NASBO Executive Director John Hicks said that deposits made to rainy days funds from budget surpluses will likely bring the total to more than $58 billion for fiscal 2018.

Two of the three states that Pew reported to have nothing in their rainy day accounts at the end of fiscal 2017 – Kansas and Montana – recently created rainy day funds, Hicks said.

That leaves New Jersey as the only state with the dubious distinction of not having any money stashed away to weather an economic downturn.

“I can say from observing state reports of ending fiscal year 2018, that at least 15 states said they would be adding to their rainy day funds above their earlier estimates,” Hicks said in an email.

One example of the upturn is Oklahoma, which announced it would deposit $381.6 million into its rainy day fund, its first deposit in four years. The fund previously had $93 million.

Rebuilding rainy days funds has been an excruciatingly slow process for many states since the end of the Great Recession in June 2009.

Nationally, total state tax revenue recovered in mid-2013 from its plunge during the recession but has rebounded more slowly than after the three previous downturns, Pew said. But only 34 states were taking in more revenue at the end of fiscal 2017 on an inflation-adjusted basis than they did for the Great Recession.

Rainy days funds are important factor in determining credit ratings.

“Credit rating analysts from all three agencies agree that well-managed states administer rainy day funds in a way that reinforces structural balance, or a budget that is financially sustainable over several years,” Pew Charitable Trusts said in a May 2017 report. “This means that policymakers make deposits into reserves during times of economic expansion and revenue growth, while they make withdrawals during times of distress when revenue falls.”

Rainy day funds have heightened importance in states with the greatest revenue volatility.

The boom-and-bust cycles of the oil and gas sector have given Alaska, North Dakota and Wyoming the highest revenue volatility.

Pew said that severance tax was “the most volatile revenue source in eight of the nine states where it accounted for enough revenue over the past decade to be considered a major tax.”

Broad-based personal income tax and statewide sales taxes were found to be less volatile. Forty-one states levy broad-based income taxes and 45 have statewide sales taxes.

Kentucky and South Dakota have the lowest revenue volatility, according to Pew. “Both states rely on relatively stable tax streams for over half of their revenue — sales for South Dakota and sales and personal income for Kentucky,” Pew said.

In 18 of the 22 states where the corporate income is a major tax, it was the most volatile source of revenue, Pew found.

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State budgets State taxes State tax revenues State and local finance Government finance Washington DC New Jersey Montana Oklahoma Kansas
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