States often depend on their rainy day funds, more formally known as budget stabilization funds, to help them weather economic downturns and uncertainty. These funds act as savings accounts that allow states to set aside above-normal revenue growth when the economy is strong so it can be used in times of recession when revenues drop sharply. With significant reserves, states can rely less on program reductions or tax increases to close a budget gap when their residents can least afford it.
For many states, the Great Recession, which ran from late 2008 through the middle of 2010, served as a wake-up call to re-evaluate their savings policies. In total dollars, state budget shortfalls outstripped savings nearly 2 to 1 in the first year of the downturn alone. A decade later, many states have improved their reserve policies, but more remains to be done as governments prepare for the next recession. For example, a September 2018 analysis by Moody’s Analytics found that 32 states fell short of having enough reserves to offset even a moderate recession.
As states work to balance saving for future needs against funding other important priorities, an increasing number are using evidence-based approaches to determine how much they want to have on hand to navigate the next recession. ….