However, this resource can vary: 22 states increased rainy day fund capacity in fiscal 2025. Of those, 18 increased reserve balances, while four had flat reserves but decreased their expenses. States are also depleting their leftover budget dollars, or ending balances, at the fastest rate since the Great Recession. As a result, the overall fiscal cushions—reserves plus ending balances—in states are rapidly declining, leaving them with fewer resources to address widespread budget imbalances, both current and projected.
At the same time, demands are growing on reserve balances. Another layer of risk for state budgets is created by increased uncertainty around the availability of federal funding—including aid in the event of a recession and perennial support for health care, transportation, education, and other key public services. While reserves cannot permanently replace such federal support, they can act as a temporary bridge that provides policymakers with time to assess their options. Further, elevated recession risk means that states may also need reserves for their traditional purpose of helping to close shortfalls during economic downturns. “States should use fiscal management tools to navigate these competing demands, especially long-term budget assessments and stress tests, to ensure that their savings levels are adequate,” says Justin Theal, who works on Pew’s Fiscal 50 project. “And states should regularly update these analyses to adapt to the rapidly evolving fiscal landscape.”
As policymakers navigate today’s fiscal pressures—the greatest since at least 2020—budget reserves will be a crucial tool that can help stabilize state finances. But leaders need to be careful about relying on rainy day funds to close deficits because many states’ budget gaps stem from structural imbalances—when recurring revenue cannot support recurring expenditures—rather than short-term shocks. While reserves can help during times of need, they’re not a sustainable solution for persistent shortfalls.
