State Rainy Day Funds

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States use rainy day funds (RDFs), or budget stabilization funds, as a cushion against financial shocks. Every state except Vermont has some sort of balanced budget requirement so that, unlike the federal government, they must balance expenditures and revenues in any given budget cycle (typically one year). States can have RDFs that allow money to be carried over from good years to lean years. Five states — Arkansas, Colorado, Illinois, Kansas, and Montana — do not have RDFs.

All states with RDFs regulate deposits into and withdrawals out of those funds. Most states build RDFs through the deposit of year-end surpluses. Withdrawal rules generally specify that funds may only be used to cover budget shortfalls or emergencies when authorized by the governor or legislature. Thirty-one states have fund caps, usually limiting the size of RDFs to 2 percent through 10 percent of general fund revenue, which may be inadequate in times of fiscal stress. Six states, Alabama, Florida, Missouri, New York, Rhode Island, and South Carolina, require that withdrawn funds be replenished quickly, even though economic conditions may not have improved. That creates a disincentive to use the funds.

Note: This report is available in its entirety in the Portable Document Format (PDF).

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