A Rainy Day That Never Came

by David Bloom Published November 2016

One mechanism many states use to guard against excessive tax volatility is the so-called "rainy day fund." Fiscal Notes recently spoke with Rick Mattoon, an economist at the Federal Reserve Bank of Chicago, who in 2003 floated what he termed "a modest proposal to improve future state fiscal performance."

His novel suggestion — that the U.S. consider creating a national rainy day fund for states — didn't gain traction. But 13 years later, in the wake of the Great Recession, might it be worth another look?

Mattoon had seen wrangling over rainy day fund mechanics while working for Washington state. "I had spent a good amount of time working for a pretty fiscally conservative governor," says Mattoon. "And one of the problems we kept coming up against was that to get something that would really be protective against a serious downturn, you'd have to have significantly higher savings."

As Mattoon recalls, both sides of the aisle resisted efforts to stash more cash away in the state's coffers. "Conservatives viewed larger rainy day fund balances as over-saving — that we were essentially taking money out of taxpayers' pockets and just letting it sit idle. And on the left side, they felt the money should be flowing into government programs. So they also weren't happy about the idea of larger rainy day fund balances."

What was needed, the economist believed, was "something that would perhaps create a bit of a cover for states to save appropriately."

If every U.S. state were required to adhere to a single formula for savings, their dollars could be pooled into a national rainy day fund states could draw upon, based on their specific needs as well as general criteria, during times of financial crisis.

Mattoon considered the role states play in economic downturns, which generally call for increased state spending precisely when state revenues are falling. Community college enrollment often soars during recessions, for example, as more citizens seek new skills and retraining to enhance their job opportunities.

"Given that the functions state governments carry out during a downturn are so critical, this would help protect them from having to make [politically] harmful but necessary budgetary adjustments at the bottom of a recession," he says. "The objective was to get better public policy outcomes."

The idea, however, failed to gain much attention, the economist acknowledges. Mattoon presented the proposal to the National Association of State Budget Officers and the U.S. General Accounting Office. Both found it intriguing, but said "it was unclear why, if you were a state that was doing a good job saving money, you would want to be a part of this," he says. "I thought it was a good idea, but it was also an idea in search of an audience." While a national rainy day fund hasn't found that audience, states continue to utilize available tools to manage their tax revenue volatility. FN

To read Mattoon's 2003 proposal, visit the Chicago Federal Reserve's website.