State savings weaken as budget pressures increase, analysis warns

By Kevin Hardy
Iowa Capital Dispatch

State rainy day funds — money reserved to cover unexpected expenses and patch short-term budget holes — are declining nationally as states face increased costs, lower tax revenue and federal budget cuts, a new analysis found. 

The decline follows a period of strong reserves bolstered by federal pandemic aid and higher-than-expected tax collections, the report said.

Researchers at The Pew Charitable Trusts found that the number of days that state reserves could cover state operations fell in fiscal year 2025 — the first decline since the Great Recession. 

State reserve funds will play a critical role in stabilizing state finances as they confront the most widespread budgetary pressures since at least 2020, the researchers said. Like household savings accounts, state reserves help fund major one-time investments or provide a cushion in times of disrupted tax revenues, including economic downturns. Lower reserves means states could be quicker to cut state services or raise taxes in times of tight budgets.

Examining data from a survey conducted by the National Association of State Budget Officers, Pew researchers concluded that the median state in 2025 could fund its operations on reserve funds for 47.8 days — down from a record 54.5 days in fiscal 2024. 

States last fiscal year held a collective $174 billion in savings, though reserves varied widely. Wyoming, for example, held enough cash on hand to operate for 320 days. But New Jersey’s reserve didn’t hold enough to cover a single day of state operations. The other states with the smallest share of rainy day reserves were Washington, Illinois, Delaware and Rhode Island. 

The Pew analysis found that 26 states in 2025 had less capacity in their rainy day funds — meaning they would cover fewer days of state operations. In 14 of those states, officials drew on reserves, while 10 grew their balances but did so more slowly than they increased state spending. Two states maintained flat reserve levels as expenses grew.

While helpful in the short term, reserves won’t provide a long-term solution for states as many are confronting structural imbalances, meaning revenue streams are not keeping up with government spending. 

“Although reserves exist to provide relief during times of fiscal stress, they are not a sustainable solution for persistent budget shortfalls,” the analysis said. 

Budget pressures are expected to increase as states grapple with major federal policy changes that cut state funding and increase state administrative costs for federal safety net programs including Medicaid and food assistance. 

In its most recent survey of state budgets, the National Association of State Budget Officers found that general fund spending was projected to be “nearly flat” in fiscal year 2026 budgets. More states last year began enacting spending cuts and hiring freezes to balance budgets, the survey found, and slow revenue growth was projected for a fourth consecutive year. 

The survey showed 23 states expected spending to stay flat or decline in 2026, while 14 expected spending to grow by less than 5%. Seven states projected growth between 5% and 10%, while five expected spending to grow by more than 10%. 

Stateline reporter Kevin Hardy can be reached at khardy@stateline.org.

Iowa dips into rainy-day funds

From Iowa Capital Dispatch