State Rainy Day Funds and Fiscal Crises: Rainy Day Funds and the 1990-1991 Recession Revisited

Abstract

The recession of the early 1980s prompted many states to establish budget stabilization (rainy day) funds. Initial examinations of rainy day funds find a limited impact by the funds in alleviating fiscal stress. In this article, we propose an enhanced model of rainy day fund impact. Using data from 48 states for the 1990-1991 recession, our analysis indicates that the presence of a number of structural factors and the maintenance of generally large balances in other funds entering recession helps to alleviate fiscal stress when a state's economy is in recession.