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

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  • Richard H. Mattoon

Abstract

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.

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  • Richard H. Mattoon, 2003. "Creating a national state rainy day fund: a modest proposal to improve future state fiscal performance," Working Paper Series WP-03-20, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-03-20
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    1. Knight, Brian & Levinson, Arik, 1999. "Rainy Day Funds and State Government Savings," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 459-72, September.
    2. Donald Bruce & William F. Fox & M.H. Tuttle, 2006. "Tax Base Elasticities: A Multi-State Analysis of Long-Run and Short-Run Dynamics," Southern Economic Journal, John Wiley & Sons, vol. 73(2), pages 315-341, October.
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    1. Taft Foster & Vanessa Haleco-Meyer & Richard H. Mattoon, 2010. "Improving the impact of federal aid to the states," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 34(Q III), pages 66-82.
    2. Zhao, Bo, 2016. "Saving for a rainy day: Estimating the needed size of U.S. state budget stabilization funds," Regional Science and Urban Economics, Elsevier, vol. 61(C), pages 130-152.

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    Keywords

    Funds availability; Fiscal policy;

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