What's So Magical about Five Percent? A Nationwide Look at Factors That Influence the Optimal Size of State Rainy Day Funds

Abstract

State rainy day funds have increased in popularity as countercyclical planning devices over the past 15 years. The view is widely held that all states need a rainy day fund balance of five percent in order to guard themselves against the threat of budgetary dislocation. This article compares the actual balances in state rainy day funds in 1997 to several factors affecting budgetary volatility. Little relationship is found between rainy day fund balances and the actual level of volatility in a given state. The article finds no justification for a “one size fits all” approach; each state should design policies based on its own peculiar needs.