State Rainy Day Funds and the State Budget Crisis of 2002-?

Research Report

State Rainy Day Funds and the State Budget Crisis of 2002-?

Abstract

U.S. states entered the 2001 recession better prepared than for any recession in recent decades. Forty-seven states had established "rainy day" funds, which when added to general fund balances amounted to over 12 percent of annual expenditures. Despite this, the National Governors Association has said that "states face the most dire fiscal situation since World War II" (NGA, 2002a). We consider five potential explanations for this discrepancy: (1) state budget crises are exaggerated, (2) state tax bases have changed, (3) state rainy day savings replace existing savings, (4) state savings are dwarfed by state budget cycles, and (5) a late-1990s tax revenue bubble.

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