Finance

Have States Reached Their Savings Limit?

After several years of growth, the amount states are socking away in rainy day funds has slowed.
by | January 11, 2017
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Rainy day savings deposits appear to be plateauing.

After six straight years of squirreling away money, budgeted figures for fiscal 2017 show a slight dip in rainy day fund balances across the 50 states. States now have a median 4.9 percent of annual expenditures saved for the fiscal year, down from 5.1 percent the previous year.

What's more, four states -- Illinois, Nevada, New Jersey and North Dakota -- now show no budget reserve funds, up from two states last year. The overall shift is a signal that tighter financial times could be ahead for states as a whole.

The findings are based on Governing's analysis of projected 2017 budget data from the National Association of State Budget Officers. Given that roughly half of states are now expecting budget shortfalls for 2017, budget reserve balances could dip more than projected.

John Hicks, the group's executive director, said governors' fiscal 2018 budgets, many of which will be released in the coming weeks, will shed more light on how states will deal with the current shortfalls. "As governors propose their budgets, a lot of times you'll see whether they [plan to] resolve those issues in 2017 by using rainy day funds," he said.

Some states have had to turn to their rainy day funds in recent years. When oil prices dropped dramatically in 2014, states such as Alaska and North Dakota began depleting their substantial savings. While most other oil states have withdrawn some money from their rainy day funds, Texas and Wyoming have managed to add to theirs.

FY 2017 Rainy Day Fund Appropriated Balance as Percentage of State Expenditures

 
0% or no fund
 
<5%
 
5% to <10%
 
10% to <20%
 
>75%

 
SOURCE: National Association of State Budget Officers Fall 2016 "Fiscal Survey of the States" report

Nationwide, 17 states have not yet replenished their rainy day funds to their previous pre-recession peaks. New Jersey, which has repeatedly struggled with revenue shortfalls, is the furthest behind as its balance has remained at zero since 2009. Closely following New Jersey are Connecticut, Illinois, Nevada and Pennsylvania, most of which have also struggled with balancing -- or in the case of Illinois passing -- a budget. Those state rainy day fund balances range from 80 percent to 100 percent below their peaks.

 

But the good news is, the majority of states have fully replenished their rainy day funds -- and then some -- and 13 states have more than doubled their savings total from before the last recession.

Two of those 13 states actually had no money in rainy day funds at the start of the financial crisis, and Michigan had just $2 million in savings. The Pew Charitable Trusts' Robert Zahradnik says that many of those states implemented rainy day savings policies following the Great Recession, including tying excess tax revenue in boom years to savings deposits and identifying savings targets.

The fact that roughly two out of three states have socked away more than what they had in 2008 is notable considering the slow growth era that has marked the economic recovery. It's an indicator that the recession's tough lessons left their mark. "We're seeing an evolution of those [savings] practices," said Hicks, "and I'd say the experience of the Great Recession was probably the best teacher."

State Rainy Day Fund Balances

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