SLIDE 1
Preparing for economic downturns
Best practices for managing the business cycle
Presentation by Stephen Bailey, Manager, State Fiscal Health August 22, 2019
SLIDE 2 About The Pew Charitable Trusts
- Conducts research and analysis to improve
policy, inform the public, and invigorate civic life.
- Established expertise on fiscal management of
states, supported by research and experience providing hands-on assistance.
- Committed to identifying fiscal best practices
and focused on non-partisan, data-driven solutions.
SLIDE 3
Pew’s research on rainy day funds
SLIDE 4
48 States Have Formal Rainy Day Funds in Law
Constitution Statute + Constitution None Statute
SLIDE 5 Benefits of a sound rainy day fund policy
- Prevents unsustainable budget practices
- Lessens the need for program cuts and/or tax increases
- Creates predictable levels of available revenue each year
- Allows state to focus on important one-time priorities
when appropriate
- Enhances state credit ratings
SLIDE 6 Link between rainy day funds and credit rating
Rainy day fund size as a percentage of spending
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
50-State Median AAA-States Lower Rated States
Source: Pew analysis of data from National Association of State Budget Officers
SLIDE 7 State rules for depositing into rainy day funds
- Surplus rule: a certain percentage of the end of fiscal year surplus
is deposited to the rainy day fund
- Forecast error rule: a certain percentage of revenue that exceeds
the certified forecast is set aside to the rainy day fund
- Static rule: the rainy day fund balance must maintain a certain
percentage each year or be repaid within a specified window
- Volatility rule (best practice): a certain percentage of revenue
growth above a threshold is set aside to the rainy day fund
SLIDE 8 Rainy day funds are designed to offset volatility
0% 2% 4% 6% 8% 10% 12% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Pew analysis of data from PA Department of Revenue
Annual percentage change of Pennsylvania’s general fund revenue
SLIDE 9 Rainy day funds are designed to offset volatility
Source: Pew analysis of data from PA Department of Revenue
Annual percentage change of Pennsylvania’s general fund revenue
0% 2% 4% 6% 8% 10% 12% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total General Fund Change 6 year MA
6-year moving average rule modeled
SLIDE 10 Rainy day funds are designed to offset volatility
Source: Pew analysis of data from PA Department of Revenue
Annual percentage change of Pennsylvania’s general fund revenue 4% growth threshold modeled
0% 2% 4% 6% 8% 10% 12% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total General Fund Change Idaho Rule - 4% Threshold
SLIDE 11 Each revenue source has its own volatility
Source: Pew analysis of data from PA Department of Revenue
Percentage change in select general fund tax sources
0% 2% 4% 6% 8% 10% 12% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Total Corporation Taxes Selective Business Total Sales and Use - Total Personal Income - Total
SLIDE 12 There are volatile components within sources
Source: Pew analysis of data from PA Department of Revenue
Percentage change in withholding and non-withholding taxes, personal income tax components
0% 5% 10% 15% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Personal Income-withholding Personal Income non-witholding
SLIDE 13
9 states saved based on revenue growth prior to Great Recession
Savings tied to volatility
Volatility based rule in 2007
SLIDE 14
21 states now save based on revenue volatility
Savings tied to volatility
Volatility based rules prior to 2007 Added volatility based rule since 2007
SLIDE 15 Using volatility rules for more than saving
- Creating a framework for identifying non-recurring/one-time revenue is
important first step
- Vital to deposit some non-recurring revenue into rainy day fund in order
to properly manage business cycle
- Once reserves are adequate – best practice to place non-recurring
revenue toward one-time spending ✓ Capital projects/infrastructure costs ✓ Pay down unfunded liability of pension system ✓ Reduce or refinance state debt ✓ Temporary tax reduction measures or program enhancements
SLIDE 16
Pew’s technical assistance in states
Helping inform rainy day fund policy since Great Recession
Pew-supported deposit rule change
SLIDE 17
Pew’s technical assistance in states
Helping inform rainy day fund policy since Great Recession
Pew-supported change to fund governance, size, or withdrawal rules Pew-supported deposit rule change
SLIDE 18
Stephen Bailey The Pew Charitable Trusts sbailey@pewtrusts.org 202-540-6650
