Strength of State Rainy Day Funds Declines as Budgets Tighten
After years of record highs, states’ rainy day fund capacity—the number of days that reserve balances could cover state operations—fell in fiscal year 2025, the first decline since the 2007-09 Great Recession. As of the end of fiscal 2025, the median state could run on its rainy day fund balances alone for 47.8 days, down from a record 54.5 days in fiscal 2024, according to state data reported to the National Association of State Budget Officers. Although the decrease signals a shift from the post-pandemic period of budgetary strength, most states still have stronger rainy day funds than they did just before the COVID-19 pandemic.
Yet, beneath that overall trend lies considerable state-by-state variation. Rainy day fund capacity increased in 24 states in fiscal 2025, with all but one of those states raising their balances; Utah’s capacity grew despite flat reserves because the state decreased expenses. Of the 26 states where rainy day fund capacity decreased, 14 drew on their reserves, 10 grew their balances—but did so more slowly than they increased expenditures—and two maintained flat reserves as expenditures grew.
And as their rainy day capacity falls, states are also depleting their leftover budget dollars, known as ending balances, at a rapid rate. As a result, states’ overall fiscal cushions—reserves plus ending balances—are quickly eroding, leaving states with fewer resources to address widespread current and projected budget imbalances.
By the end of fiscal 2025, rainy day fund balances had reached all-time highs in 32 states. However, just 12 states reached a record in the number of days that they could operate using only their rainy day funds as annual spending increased over the previous fiscal year in 39 states. Days’ worth of spending available in rainy day funds can fluctuate because of changes in state balances, spending levels, or both.
Although abundant federal pandemic aid and higher-than-forecasted tax collections helped bolster states’ financial cushions in fiscal 2021 and fiscal 2022, those temporary factors began to unwind in the ensuing two years. And as policymakers navigate the ripple effects of those waning short-term boosts, they also face several other challenges, including sluggish tax collections, growing spending pressures, and decreased aid from the federal government.
Moving forward, budget reserves will play a critical role in stabilizing state finances as policymakers confront the most widespread fiscal pressures since at least 2020. But state leaders should be cautious about relying on rainy day funds to close deficits, because many states’ reported budget gaps stem from structural imbalances—when recurring revenue is insufficient to support recurring expenditures—rather than from short-term shocks. Although reserves exist to provide relief during times of fiscal stress, they are not a sustainable solution for persistent budget shortfalls.
Additionally, demands on reserve balances are growing. New federal Medicaid and SNAP policies are expected to increase states’ administrative costs and the share of program expenses that states must cover, and to constrain key revenue sources over the coming years. And states are also awaiting guidance on possible changes to FEMA, which may increase their costs for disaster relief, creating further demand on reserves.
Although reserves cannot permanently offset these new and growing costs or replace federal support, they can serve as a temporary bridge, giving policymakers time to assess their options and adjust long-term plans. Further, elevated recession risk means states may also need to use reserves for the traditional purpose of helping to close shortfalls during economic downturns.
To navigate these competing demands and ensure that their savings levels are adequate, states should use fiscal management tools, especially long-term budget assessments and stress tests, and they should regularly update these analyses to adapt to the rapidly evolving fiscal landscape.
Rainy day funds
With an aggregate $174.2 billion in savings at the end of fiscal 2025, states could run government operations on rainy day funds alone for a median of 47.8 days, equal to 13.1% of annual spending. Although the strength of state rainy day funds remained approximately 65% greater than in fiscal 2019, just before the pandemic-induced recession started in February 2020, it also varied widely by state, ranging from 320.2 days’ worth of spending in Wyoming to zero in New Jersey.
After the Great Recession, states’ rainy day fund balances and capacity steadily climbed. Reserve balances eventually declined, first in fiscal 2020, as a result of states’ initial response to the pandemic, and then again in fiscal 2024 and fiscal 2025 as substantial rainy day fund withdrawals, especially in California, drove down the national total. But capacity continued to grow through the 2010s and into the early 2020s until rising expenditures eventually outstripped growth in fiscal 2025, decreasing the median number of days states could run on their rainy day funds alone.
Rainy day fund state highlights
States’ results for fiscal 2025 show that:
- Wyoming recorded the nation’s largest rainy day reserve as a share of operating costs (320.2 days), a balance the state reached in an effort to manage its heavy reliance on volatile severance tax revenue. Five other states had more than 100 days’ worth of operating costs set aside: Alaska (154.7), Idaho (148.2), North Dakota (137.9), Kentucky (110.7), and Arkansas (105).
- New Jersey reported zero days’ worth of operating costs in reserve after draining its reserve for the second time since the pandemic-induced recession. The other states with the smallest rainy day reserves as a share of operating costs are Washington (12.8), Illinois (15.6), Delaware (18.4), and Rhode Island (23).
- 24 states increased the length of time that they could run government operations on rainy day funds alone compared with a year earlier. The largest gains were in North Dakota (+36.4 days), Wyoming (+18), South Dakota (+10.9), Alaska (+10.3), and West Virginia (+10). Of the 26 states that had declines, those with the largest drops were Minnesota (-30.2 days), California (-29.4), Kentucky (-22.8), Colorado (-22), and North Carolina (-17.1). Although the largest gains were smaller than in the previous year, so were the largest declines, which narrowed the overall swings in rainy day fund capacity.
- 33 states increased their rainy day fund balances compared with fiscal 2024. Three states maintained steady balance levels, and 14 states reported declines: California, Colorado, Indiana, Iowa, Kentucky, Maryland, Massachusetts, Minnesota, Nebraska, New Hampshire, New Jersey, North Carolina, Oklahoma, and Washington. California, which maintains the nation’s largest rainy day reserves, reported a $12.3 billion, or 25.5%, decline from the prior year.
- Among the 32 states that recorded record-high balances in fiscal 2025, capacity fell short of the national median of 47.8 days in 15: Arizona, Delaware, Florida, Illinois, Louisiana, Mississippi, Missouri, New York, Ohio, Rhode Island, Tennessee, Utah, Vermont, Virginia, and Wisconsin.
Total balances
States’ combined total balances—made up of rainy day fund balances and ending balances—continued their downward trend in fiscal 2025. States reported an estimated $346.9 billion at the end of fiscal 2025, an acceleration of the previous year’s decline. These funds could sustain state government operations for a median of 91.6 days, equivalent to 25.1% of annual spending—about two weeks’ less than a year earlier.
Compared with rainy day funds, which function as dedicated savings, ending balances fluctuate from year to year based on a range of factors and provide a less stable safeguard against future budget uncertainty.
In fiscal 2020, total ending balances fell by nearly $10 billion as states relied more on those leftover dollars than on rainy day funds to balance their budgets amid the pandemic-induced recession. Ending balance amounts bounced back dramatically in fiscal 2021 and sustained their fast growth the following year, collectively increasing more than sevenfold, from $33 billion at the end of fiscal 2020 to $254.4 billion three years later. This rapid growth was the result of greater-than-forecast tax collections and the availability of flexible federal pandemic aid, which helped produce widespread budget surpluses. In recent years, states have largely directed their ending balances into one-time expenditures—such as paying off debt, boosting supplemental pension payments, and investing in economic development—as well as transfers to other state funds.
The pandemic-era revenue surge, however, proved temporary. Beginning in fiscal 2023, states started to face tighter budgets and shrinking fiscal flexibility. Fiscal 2025 marked the third straight year of declining ending balances, with the median state drawing down its ending balance by 17.4%. Of the 36 states that reported lower ending balances, three—Louisiana, New Hampshire, and Virginia—spent almost their entire ending balances, and another nine states spent more than half. These declines partly reflect weakening revenue and growing spending demands—potential signals of rising fiscal stress. But tapping unusually high ending balances to pay down debt or fund one-time projects is a common practice and may simply reflect standard budgeting activity. Nevertheless, the sharp reduction in ending balances leaves states with less flexibility to fund policy priorities.
Total balance state highlights
States’ results for fiscal 2025 show that:
- The highest-ranked state for total balances as a share of operating costs was North Dakota (336.3 days). Almost half of states had total balances that could cover more than 100 days’ worth of operating costs.
- The state with the fewest days was Washington, at 27.7, followed by Maryland (32.5), Louisiana (34.4), Mississippi (35.3), and Illinois (36).
- 12 states increased their total fiscal cushions as a share of operating costs from a year earlier, with the largest gains in North Dakota (+100.7 days), New York (+25), and South Dakota (+23.7). The largest declines were in Texas (-95.3 days), Nebraska (-78), and Nevada (-49).
Looking ahead
Based on enacted budgets for fiscal 2026, median rainy day fund capacity is expected to rebound to 53.6 days, the second-highest on record. Although 33 states project higher reserve balances, expenditures are also expected to continue to grow in more than half of states, limiting gains in rainy day fund capacity in those states. Meanwhile, ending balances are expected to fall rapidly for the fourth year in a row, with the median rate of decline projected to increase to 28.8% by the close of fiscal 2026, up 11 percentage points from the prior year.
Whether elevated rainy day fund levels will persist through fiscal 2026 and beyond remains uncertain. Federal funding cuts and other budget stressors may lead states to either rely more on their rainy day funds than in recent years or to forgo planned deposits to those funds in the absence of surplus revenue. For instance, although Colorado’s fiscal 2026 budget projected an increase in the state’s rainy day fund balance, during a special session in August 2025, lawmakers instead authorized a withdrawal of up to $300 million to help close a deficit tied to federal policy changes.
Looking ahead to fiscal 2027, several governors—including of Alaska, Maryland, and Pennsylvania—have proposed tapping reserves to help address projected fiscal 2027 shortfalls, citing mounting budget pressures and federal and economic uncertainty.
Why Pew assesses reserves and balances
States use reserves and balances to manage budgetary uncertainty, including revenue forecasting errors, budget gaps during economic downturns, and other unforeseen emergencies, such as natural disasters. This financial cushion can soften the need for spending cuts or tax increases when states need to balance their budgets in response to temporary shocks, though these actions can be necessary to address longer-term structural imbalances.
Because reserves and balances are vital to managing unexpected changes and maintaining fiscal stability, their levels are tracked closely by bond rating agencies. For example, Moody’s Ratings upgraded Pennsylvania’s credit rating in October 2024, citing the state’s increased reserve levels as part of its rationale. And notably, rating agencies do not penalize states for responsible withdrawals from their reserves, which analysts have suggested demonstrates a commitment to long-term fiscal sustainability when coupled with other prudent fiscal measures such as spending reductions, revenue adjustments, and a plan to replenish savings when conditions improve.
There is no one-size-fits-all rule on when, how, and how much to save. Policymakers in states with a history of significant economic or revenue volatility may desire larger cushions. Pew’s research shows the optimal savings target of state rainy day funds depends on several factors: the defined purpose of funds, the volatility of a state’s tax revenue, the potential increase in spending demands during economic downturns, and the level of coverage that the state seeks to provide for its budget.
In addition to deposits initiated by policymakers over time, specific “deposit rules” tied to revenue volatility that direct a portion of above-normal revenue growth or one-time influxes of dollars into savings play an important role in shoring up rainy day funds in some states. For example, Tennessee saves 10% of its year-over-year additional revenue; Maryland saves all or a portion of its nonwithholding income tax revenue that exceeds the 10-year average; and Louisiana deposits 25% of higher-than-forecast revenue.
Budget stress tests—which estimate the size of temporary budget shortfalls that could result from recessions or other adverse economic events—can also help states better understand and prepare for potential fiscal challenges, such as by refining their savings targets.
Reserves and balances represent funds available to states to fill budget gaps, although there may be varied levels of restriction on their use, such as under what fiscal or economic conditions they can be used. In addition, limits are often set on how much states may deposit into rainy day accounts in a given year when seeking to replenish their reserves.
Justin Theal is a senior officer and Page Forrest is an associate manager with The Pew Charitable Trusts’ Fiscal 50 project.
