Rainy-day Fund Research Articles

How Prepared Are US States for a Recession: An Update

Rainy day funds are a common tool that most US states use to help mitigate the fiscal stress caused by economic slowdowns that reduce state government revenue. Except for a very brief (but very severe) recession in 2020 caused by the pandemic, most states have generally experienced an economic expansion since the end of the Great Recession in 2009 giving them well over a decade to accumulate savings in a Rainy-Day Fund (RDF) to help weather an economic downturn. This paper examines how state RDF’s have changed over the past decade and how these changes have affected each state’s ability to weather an economic downturn.

Sexual Orientation and Financial Well-Being in the United States

We study the relationship between financial well-being and sexual orientation in the United States using Survey of Household Economics and Decisionmaking (SHED) data for 2019-2022. We document that people who are lesbian, gay, and bisexual (or LGB) have significantly more difficulty managing financially than similarly situated heterosexual individuals—and this pre-dated the COVID-19 pandemic. Differences are found across a broad array of current and future financial well-being outcomes, including retirement savings, rainy-day funds, credit card and schooling debts, and the use of alternative financial services such as payday loans. Differences in partnership, financial assistance from parents, financial knowledge, and risk preferences cannot explain these differences. Instead, we document that some social vulnerabilities such as exposure to discriminatory behavior and violence are differentially experienced by LGB people, which may play a role. Our results demonstrate that people who are lesbian, gay, and bisexual experience significantly more financial insecurity than previously understood.

Fiscal and political determinants of local government maintenance

ABSTRACT Taking advantage of a novel data set on maintenance in Norwegian local governments, a comparison was made between norms for good maintenance and actual maintenance spending. Although a sizeable minority complies with the norm, the average maintenance spending is well below the norm. A theoretical model is developed to guide the empirical analysis of the determinants of maintenance. It emphasizes the roles of fiscal capacity, fiscal distress, and political fragmentation. The empirical analysis reveals that high fiscal capacity (measured by local government revenue) and little fiscal distress (measured by rainy-day funds) are associated with a high priority of maintenance spending. However, political fragmentation that reflects myopic behaviour is associated with low maintenance priorities. The results are robust and become stronger when outliers and small local governments are omitted.

Defaults and Consumer Response to Rainy-Day Funds: Evidence from 401(k) Participants during the COVID-19 Pandemic

Defaults improve outcomes for passive savers but may also reduce the effectiveness of policies such as rainy-day emergency savings funds that require active choice. We investigate whether active and passive retirement savers responded to a policy change in the 2020 CARES Act that allowed workers to access retirement savings without penalty to meet COVID-19-related spending needs. Using a large database of 401(k) plan participants, we find that workers in occupations with high subsequent unemployment who actively invest were more likely to call about withdrawing funds from their account than workers in default investment options. Evidence that passive savers are less likely to respond to a policy change suggests a possible negative consequence of defaults that can limit the effectiveness of traditional policy solutions that require active choice. Some form of active choice may be needed to increase engagement in a range of employer-provided services such as financial wellness and participant education among passive savers.

Don’t Go Chasing Windfalls: California’s 2021-2022 Budget

Amidst a global pandemic, a gubernatorial recall election, and a shaky economy, California had one of its best budget years in recent memory. Flush with cash, the state was able to make unprecedented investments in education, health, and social welfare programs, provide direct stimulus payments to many California residents, and still set aside money in its rainy-day fund. Governor Newsom handily defeated the recall effort, and the budget outlook for 2022 looks bright. 2021 was a tumultuous year, but California is proving that it’s once again the “Golden State”.

Disaster Experience and Governments’ Savings: The Moderating Role of Organizational Capacity

Abstract The increasing risk of natural and human-induced disasters has caused considerable costs to governments. Governments’ savings can function as a mechanism to mitigate such revenue or expenditure shocks due to disasters. While past studies have examined how recessions affect government reserves, to date, few studies have tested how a government’s past experiences of natural disasters affect the level of its savings. In this study, we use organizational learning theory as a framework to explain this relationship. We empirically parse out the effect of previous disaster experience on reserve funds (i.e., rainy-day funds) and general savings (i.e., unassigned general fund balance). We further test whether organizational capacity serves as a moderator of the relationship between past disaster experience and savings. For the analysis, this study employs a Generalized Method of Moments (GMM) to examine a sample of US states for the years from 2002 to 2017. We find that an increase in cumulative damage from prior disasters is associated with an increase in rainy-day funds and this relationship is stronger in governments with a high organizational capacity. The results remain robust to estimations with alternative measures. These findings support the organizational learning theory, which suggests that governments learn from their past experiences to increase preparedness for future disasters. We also point out the importance of financial capacity in the process of organizational learning.

Socio-Economic Development of Russia: Through the Waves of a Pandemic and a Systemic Crisis

In the article, the authors express their opinion on the outcomes of social and economic development of Russia in 2020 and give a forecast of expected results for 2021 and 2022. The state and possible directions for overcoming stagnation are considered, primarily by closing the technology gap in production and ensuring the growth of labor productivity, business, investment and consumer activity, increasing the efficiency of capital investments as key factors in the recovery of the real sector and the knowledge economy, including industrial production, agriculture, capital construction.The drawbacks of the current management system are noted, and measures to overcome the structural crisis are proposed. The need for changing the state socio-economic policy is substantiated. Its main goal should be to ensure the health of the nation.The authors compare trends in the Russian and world economies by main development indicators, such as gross domestic product, industrial production, investments, foreign trade.The article examines the shortcomings of the current state financial policy, which should become an instrument of financial support for sustainable socio-economic development and countering external and internal risks and threats. The problems of execution of the federal budget for 2020 are analyzed. Using case examples, the authors prove the necessity for priority use of financial resources of the «rainy-day fund» to accelerate the development of sectors of the national economy.Given the slowdown in global economic growth in 2020 and problems associated with its full recovery in 2021, the expected expansion of trade wars and sanctions lead to a conclusion that there is a growing negative trend in the Russian economy as well with the potential of stagnation escalating into recession.

Contingency Public Funds for Emergencies: The Lessons from the International Experience

Should societies (governments) save during economic expansions in order to cover the costs of extraordinary situations, such as natural or biological catastrophes or, more generally, economic crises? This question has been raised once again by the economic and social crisis linked to the confinement measures implemented to control the spread of the COVID-19 pandemic and the enormous public spending required to mitigate its impact. There are two general approaches in the economic literature to this debate, which are not mutually exclusive. First, the more standard approach indicates that governments, in these situations, should resort to borrowing. This allows the impact of shocks to be smoothed over time, as long as governments are sufficiently disciplined to rebuild the necessary room for manoeuvre during upswings. However, the evidence available shows that debt tends to decline only very gradually in post-crisis periods. Under the second approach, governments build up contingency funds or rainy-day funds during economic booms. International experience has numerous examples of national and regional funds of this type. This paper reviews the experience of such funds, with a view to drawing lessons as to their potential usefulness as an instrument of support in crisis situations and fiscal emergencies. Although the international evidence on their use is highly heterogeneous, it shows that when these funds are appropriately structured and sufficiently large they contribute to mitigating the impact of shocks and improving fiscal discipline.

Do Defaults Limit Consumer Response to Rainy-Day Funds? Evidence from 401(k) Participants During the COVID-19 Pandemic

Defaults are effective because they harness an employee’s inertia to increase savings. The CARES Act gave workers access to retirement savings without penalty to meet COVID-19 related liquidity needs. Accessing these savings requires an active response among passive investors. We hypothesize that employees who delegate investment through target-date funds and managed accounts will be less aware of their ability to use retirement savings as a rainy-day fund. Using a large database of 401(k) plan participants, we estimate the probability that a worker will contact a recordkeeper about initiating a distribution from their retirement account following passage of the Act. Self-directed workers in occupations with high subsequent unemployment were more likely to call about withdrawing funds from their account than workers in delegated investment accounts. Workers defaulted into target-date funds and those who chose to delegate investments through a managed account were both less likely to contact the recordkeeper about making a post-CARES Act distribution.

The Negative Association between Alternative Financial Services Usage and Financial Well-Being: Variations by Income

Abstract As reliance on alternative financial services (AFS) usage continues its exponential expansion among American families, policy debates over banking regulation perdure with limited empirical understanding of how usage affects individuals’ financial lives. Using data from the 2014 Survey of Household Economics and Decisionmaking, this study explored the association between AFS use and financial well-being using a nationally representative sample (N = 5,896). It also examined the role of household income in AFS use and its relation to financial well-being. Results from regression analyses indicated that AFS use was negatively associated with present financial security measured by credit score, making ends meet, subjective financial well-being, and credit card payment, and that future financial security was measured by having an emergency fund and a rainy-day fund. Moreover, the interaction models showed that lower-income groups had the most negative associations between AFS and most financial well-being indicators, suggesting a substantive role of income in exacerbating the negative relationships. This was the first known study linking use of AFS and household financial well-being with a focus on the role of income. The article concludes with a discussion of implications for policy and social work practice.

Generous to a Fault? The Effect of Generosity of Employers’ Retirement Plan Contributions on Leakage from Cashing Out at Job Separation

The US government imposes a 10% penalty to discourage pre-retirement leakage—cash withdrawal from 401(k) retirement savings before the age of 59.5. In our unique data set with 162,360 terminated employees covered by 28 retirement plans, 41.4% of employees leaked by cashing out 401(k) savings at job separation. We investigate the impact of employer matching contributions on leakage at job termination. Increasing the generosity of the employer/employee match rate increases retirement balances, reducing leakage. It also increases the proportion of one’s balance contributed by the employer, increasing leakage. We interpret the latter effect as showing that employees are more likely to frame their retirement accounts as a rainy-day fund rather than a lockbox of untouchable retirement savings when their employer contributes a greater proportion of the balance. We estimate that a 50% increase in employer/employee match rate increases leakage probability by 6.3% at job termination. However, there could be a 35.3% reduction in leakage probability if employees ignore the perceived incentive generated by the framing effect. Approximately 60% of accumulated assets from a 50% increase in match rate leak out of the system due to framing bias attributable to the percentage of assets contributed by the employer.

Isn't a Flood a “Rainy Day?” Does the Political Nature of Disasters Impact the Use of States’ Rainy Day Funds?

ObjectivesTo determine if state governments utilize rainy day funds (RDFs) for political purposes in the aftermath of disasters rather than their intended purpose of combating state cyclical economic downturns.MethodsThis research draws from multiple state‐level data sources to construct a panel data set from 1992 to 2010.ResultsDisaster damage, relief funds, and politics all influence the usage of states’ RDFs. We also find that the RDF balance is lower when disaster damages increase, when it is an election year, and the same party holds party control of the governor and legislature.ConclusionThe findings of this empirical research are consistent with the literature about the importance state‐level politics plays in the use of state stabilization funds intended for cyclical economic downturns as opposed to providing more politically expedient disaster relief.

State Rainy Day Funds and Government General Fund Expenditures: Revisiting the Stabilization Effect

This study explores the stabilization effect of state rainy day funds (RDFs) on government general fund expenditures (GFEs). We discuss and explicitly illustrate the concept of stabilization effect. Moreover, we utilize the current year’s actual RDF usage as the explanatory variable of interest rather than the previous year’s RDF balance, which most existing studies focus on. A panel data set of states for fiscal years 1998 to 2014 is used in the empirical analysis. Due to the pro-cyclicality of the defined GFE gap and the countercyclicality of RDF usage, their positive correlation revealed in the empirical results demonstrates that the actual RDF usage helps to stabilize state government GFEs in both economic recessions and expansions. We also verify that the previous year’s RDF balance, when interacted with RDF deposit and withdrawal rules, can influence government GFEs, thus demonstrating the importance of RDF rules.

Just Round the Corner? Pros, Cons, and Implementation Issues of a Fiscal Union for the Euro Area

The experience of a number of successful monetary unions and economic theory suggest that the euro area would benefit from the establishment of a supranational fiscal capacity, provided its design keeps the risk of moral hazard at bay. Institutional reforms prompted by the crisis (e.g., the European Stability Mechanism and the banking union) are introducing - though to a limited extent - elements of crosscountry risk sharing. Nevertheless, among European institutions there is a broad consensus that further steps are needed. Proposals to create a sort of rainy-day fund present major practical difficulties - associated, inter alia, with the uncertainty characterising the identification of shocks in real time. A more appropriate solution, consistent with how risk sharing operates in existing federations, may be to centralize specific public functions. One often-discussed possibility is the introduction of a common unemployment benefit scheme. We argue that consideration could also be given to the creation of a euro-wide, notional defined-contribution pension scheme.

A Study on the Direction of Financial Stability for Korean Local Finance: Focusing on the Rainy Day Fund(RDF) in the U.S.

A Study on the Direction of Financial Stability for Korean Local Finance: Focusing on the Rainy Day Fund(RDF) in the U.S.

California’s 2016-17 Budget: Preparing for Gloom with a Rainy-Day Fund

Author(s): DiSarro, Brian; Hussey, Wesley | Abstract: California was in a better position during the 2016-2017 budget cycle than it had been in previous years. Rather than arguing over budget cuts, the majority Democrats spent their time debating spending priorities. In the end, legislative Democrats and Governor Jerry Brown both claimed victory, which left the state on a solid financial footing. As Governor Brown entered the second half of his second term, the Democratic Party continued to strengthen its hold on the state. November 2016 Election Day victories provided the party with a two-thirds majority in the legislature, ensuring state government in the coming years would remain an exclusively intraparty affair.

California’s 2015-16 Budget: Fiscal Surpluses and Water Deficits

California’s budget politics were temporarily sidetracked by an increasingly severe statewide drought, forcing the state to take action. Democratic lawmakers elected new leadership, who, like their predecessors, argued the state should increase social spending. The major budget clash centered on California’s booming economy and what to do with a large projected tax surplus. The legislature wanted to spend the revenue, while Governor Jerry Brown downplayed the fiscal estimates and wanted to squirrel away the extra money in the state’s new rainy-day fund. Brown sparred with the University of California over UC’s increasing reliance on out-of-state students to fund the university, limiting the number of spots for California students.

Saving for a rainy day: Estimating the needed size of U.S. state budget stabilization funds

Rainy day funds (RDFs) are potentially an important countercyclical tool for states to stabilize their budgets and the overall economy during economic downturns. However, how much each state needs to save in its RDF has become an increasingly important yet unresolved policy question. To address this issue, this paper develops some potential target RDF levels for each U.S. state, based on both the estimated short-term revenue component associated with business cycles and the extent of states’ preferences for stable tax rates and expenditure. The analysis shows that, in the last 25 years, at least 21 states never saved enough in their RDFs to offset revenue shortfalls from trend for each downturn period. The paper also provides policy recommendations on reforming the RDF caps.

Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union

In this paper we investigate the interplay between national rainy-day funds and supra-national transfers in a fiscal union. Given that the EU has established rules limiting deficits, national rainy-day funds could in theory provide a way for countries to obey the rules and use fiscal policy, yet avoid using austerity measures during a recession. The rainy-day fund is self-insurance and we examine the funding of a national rainy-day fund for a country in isolation. We then introduce a fiscal union while allowing member countries to retain some fiscal policy control. We find that moral hazard leads to lower contributions to a rainy day fund with a fiscal union present, and further that the higher the fiscal transfer, the lower will be the contributions to the rainy-day fund. The optimal size of the fiscal union trades-off the ex-post insurance provided by the union and the moral hazard which reduces national ex-ante preparation for stabilization policies. Optimally, the insurance provided by the fiscal union should be lower (1) the more effective is own-fiscal policy; (2) the more the presence of the fiscal union reduces rainy-day fund savings; (3) the lower is the relative probability of recession; and (4) the lower is the utility gain of redistribution in the union. We also find that commitment to a transfer policy is essential. A fiscal union that is prone to break the rules on transfers negatively impacts the ex-ante contributions to individual members’ rainy day funds.

Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union

In this paper we investigate the interplay between national rainy-day funds and supra-national transfers in a fiscal union. Given that the EU has established rules limiting deficits, national rainy-day funds could in theory provide a way for countries to obey the rules and use fiscal policy, yet avoid using austerity measures during a recession. The rainy-day fund is self-insurance and we examine the funding of a national rainy-day fund for a country in isolation. We then introduce a fiscal union while allowing member countries to retain some fiscal policy control. We find that moral hazard leads to lower contributions to a rainy day fund with a fiscal union present, and further that the higher the fiscal transfer, the lower will be the contributions to the rainy-day fund. The optimal size of the fiscal union trades-off the ex-post insurance provided by the union and the moral hazard which reduces national ex-ante preparation for stabilization policies. Optimally, the insurance provided by the fiscal union should be lower (1) the more effective is own-fiscal policy; (2) the more the presence of the fiscal union reduces rainy-day fund savings; (3) the lower is the relative probability of recession; and (4) the lower is the utility gain of redistribution in the union. We also find that commitment to a transfer policy is essential. A fiscal union that is prone to break the rules on transfers negatively impacts the ex-ante contributions to individual members’ rainy day funds.