States Broaden the Scope of Rainy Day Funds

By Corina Eckl
(originally published in The Fiscal Letter, Vol. XVII, No. 2, March/April, 1995)

Multiple Funds
Legal Authorization
Methods for Deposits
Methods for Withdrawals
Fund Size
Conclusion
Appendix A: State Budget Stabilization Funds
Appendix B: State Budget Stabilization Funds: 1996 Year End Balances

Budget stabilization funds, or rainy day funds as they often are called, are now common in most states. By early 1995, 45 states and Puerto Rico had created a total of 51 funds. The only jurisdictions without such funds are Arkansas, the District of Columbia, Hawaii, Illinois, Montana, and Oregon.

The original concept of a budget stabilization fund is straightforward: money is saved when state finances are healthy for use when the state's economy takes a downturn. Over time, however, this definition of a stabilization fund has been expanded to encompass other budgetary concerns. For example, Alabama has created an Education Proration Prevention Fund to shore up its education budget, South Carolina recently created a fund to support non-recurring expenditures, and several states have created funds whose use is not limited to addressing budget problems.

This article, and the accompanying table (beginning on page 2) include all such funds, which is a departure from how NCSL traditionally has identified budget stabilization funds. Further, this information does not differentiate between funds that are separate from state general fund budgets and those that are contained within the general fund.

Multiple Funds

Four states have created more than one stabilization fund: Alaska, Florida, Iowa, and South Carolina. In most instances, the nature of the multiple funds varies considerably. Alaska's two funds, for instance, are different in authorization (one is statutory and the other is constitutional), in methods for deposit (by appropriation versus mineral settlements), and in their use (by appropriation or through specific constitutional provisions).

Legal Authorization

Most states have authorized their budget stabilization funds via statute, but a few have sought constitutional authorization. In addition to Alaska, constitutional funds exist in Delaware, Louisiana, Oklahoma, South Carolina, Texas, and Virginia. In three of these states-Alaska, Louisiana, and Texas-deposits to the funds are tied to mineral or oil and gas revenues.

Methods for Deposits

Deposits to stabilization funds typically are based on year-end surpluses, are made by appropriations, or combine both. In states where the deposit is tied to a budget surplus, the deposit usually occurs through a transfer authorized by the executive budget officer or treasurer. In some states, deposits are made by automatic transfer. In five states-Arizona, Indiana, Michigan, Virginia, and Washington-the deposit is based on a formula, generally using personal income growth or some other measure to determine the deposit amount.

Methods for Withdrawals

A majority of states limit the use of their budget stabilization funds to cover revenue shortfalls or some other budget deficiency. Several states also allow the funds to be used for emergencies. But a few states have not placed any specific limitations on how the fund can be spent; funds can be appropriated for any reason the legislature deems necessary.

In almost a dozen states, some or all withdrawals can occur only with a supermajority vote of the legislature. For example, Delaware's provision requires a 3/5 vote to access the fund. In Oklahoma, funds can be appropriated with a simple majority vote if general fund revenue in the forthcoming fiscal year is less than that of the current fiscal year. If the fund is to be used for an emergency declared by the governor, a 2/3 vote is required. If the fund is to be used for an emergency declared by the speaker and president pro tempore, a 3/4 vote is required. In Texas, a 3/5 vote is needed if the fund is used to address specific budgetary problems, but the fund can be tapped for any purpose with a 2/3 vote of members present.

Fund Size

Thirty-two states have capped the size of their budget stabilization funds. In 13 states, the cap is 5 percent of general fund appropriations, expenditures, prior year revenues, or some other similar base. The next most common cap is 10 percent, and applies to five funds, three of which are authorized by state constitutions. Other caps range from 2 percent in New York to 7.5 percent in Mississippi. Two states cap the fund at a specified dollar amount: $75 million in Alabama and $100 million in Nevada. Kentucky determines its cap in its biennial budget act. With a few exceptions, the balances in most budget stabilization funds have not reached their legal caps.

Budget stabilization funds generally are considered to contain insufficient monies to be really useful. Although Wall Street analysts recommend that states maintain budget stabilization funds equal to 3 percent to 5 percent of their general fund budgets, most states fall far below that level. At the end of FY 1994, for example, only 10 funds met or exceeded the recommended level. Eight states had funds with a zero balance and funds in another eight had balances equal to 1 percent or less of FY 1994 general fund appropriations.

Conclusion

The information shown in Table 1 reflects numerous changes that states have made to their budget stabilization funds in recent years. These changes, and the ongoing modifications that states are making, illustrate that state policymakers are continuing to fine-tune their funds to make them more useful. With such efforts underway, stabilization funds may become more effective budget tools in the future.

Go to Appendix A. State Budget Stabilization Funds

Reviewed December 2003.
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