Weathering the Next Recession: How Prepared Are US States?

Abstract

Rainy day funds are one tool that most US states use to help mitigate the fiscal stress caused by economic slowdowns that reduce state government revenue. Past research by Wagner and Elder (2007b) uses a switching regression to estimate parameters in order to form a distribution of potential budget shortfalls for each state. This paper updates those results to include post–Great Recession data. A comparison of this distribution to the actual amount of savings that states have accumulated allows an assessment of how prepared each state is for an economic downturn and the resulting decline in tax revenues.a