More than a decade after the Great Recession began, Minnesota can now cover a bigger share of spending with dedicated savings in its rainy day fund than it could before the 2007-09 recession, according to updated data from The Pew Charitable Trusts’ “Fiscal 50” interactive report.
By the end of fiscal 2018, Minnesota’s $2 billion rainy day fund, enough to cover 32.1 days worth of operating costs, was greater than the 50-state median of 23.2 days.
During the same time period, Minnesota’s tax revenue was 25.5 percent above the peak level it recorded in 2008 before dropping during the recession, after adjusting for inflation.
Minnesota was one of only 12 states that posted tax revenue rebounds of 15 percent or more.
“Balancing how to prioritize saving against other important priorities is a challenge for states,” Stephen Bailey, who manages Pew’s policy work to help states apply best practices to their rainy day fund planning, told Watchdog.org. “... each dollar saved is a dollar that cannot be immediately spent on an important program or given back to the taxpayers, but failure to save enough means the prospect of program cuts or tax increases at a time when residents can least afford it – during a recession.”
Minnesota is one of the leaders in managing this trade-off, Bailey added.
With only the money in their rainy day funds, states could collectively run their government operations for a median of 23.2 days by the end of fiscal year 2018, compared to 16.6 days before the Great Recession, according to the Pew analysis.
States saved more “thanks to a jump in tax revenue collections,” the report’s authors explain. Additional revenue enabled states to increase their rainy day funds for the eighth consecutive year, reaching a record 50-state total of $59.9 billion. Overall, rainy day funds constitute the largest portion of states’ total reserves and balances, Pew notes.
“States use savings to manage budgetary uncertainty much like taxpayers do with their finances,” Justin Theal, an officer at The Pew Charitable Trusts, said.
“A state’s rainy day fund and leftover general fund dollars may be tapped to cover – for example – revenue shortfalls during economic downturns and other unforeseen emergencies, such as natural disasters,” Theal added. “This financial cushion can help soften or avoid the need for spending cuts or tax increases when states need to balance their budgets.”
More than half of U.S. states – 26 – saved enough in their rainy day funds to cover a greater share of spending in fiscal 2018 than in fiscal 2007. According to data collected by the National Association of State Budget Officers, 32 states saved a combined $9.8 billion toward their rainy day funds in fiscal 2018.
Wyoming had the most savings in its rainy day fund, equivalent to 366.9 days of operating costs, surpassing Alaska to take the top spot for the first time. States with no money in their rainy day funds at the end of the 2018 budget year were Kansas, Montana and New Jersey.
Every year, the Minnesota Management and Budget office analyzes the state’s revenue volatility to determine the amount of reserves it would need to offset all but the most severe recession, Baily told Watchdog.org.
“This calculation helps inform the cap – or maximum level – of the state’s rainy day fund,” Baily said.
Rainy day funds are not the only source of funding available to state leaders in times of financial crisis, Pew notes. “States also softened the blow to their budgets after tax revenue plunged in the last downturn by turning to ending balances, which are the dollars left over in what functions as a state’s main checking account – the general fund.”
Rainy day funds and ending balances make up a state’s total balances, which help measure a state’s available funds.
“As states regain fiscal ground lost in the recession, policymakers face competing pressures to catch up on investments and spending postponed because of the economic downturn, as well as replenishing their rainy day funds to prepare for the next inevitable slowdown,” Theal said.