Creating a national state rainy day fund: a modest proposal to improve future state fiscal performance

Throughout the 1990s states created budget stabilization (rainy day) funds to help provide counter-cyclical support in their budgeting process. Despite the sweeping popularity of such funds, many states have failed to adopt either contribution or expenditure rules that would create significant balances in their rainy day accounts.> This paper ask the question; what would happen if a national rainy day fund were established for the states with specific contribution and expenditure rules? The proposed fund would borrow from the unemployment compensation trust fund model by creating experience ratings for each state that would trigger differential fund contributions. Simulations on fund performance under differing rules are provided.> By constructing a national fund, local state pressure to spend reserve balances whenever they reach significant levels, could be avoided. In addition, a more tightly constructed fund might improve state credit ratings and reduce capital financing costs for states.