The grim outlook for state economies over the next year will be even grimmer if states don’t fully use an important tool: their rainy day funds. Doing so can help lessen COVID-19’s health and economic harm and help states focus their responses on the hardest-hit people and communities — including those facing persistent racial, gender, and economic inequities — and achieve an equitable recovery that extends to all people.
The pandemic and economic downturn have left almost 1 in 4 workers with no or much less income, devastating states’ income and sales tax revenue and straining their unemployment systems. While additional, substantial federal aid would be the best way to help states cover their estimated $615 billion shortfalls over three years, states should tap their rainy day funds (which totaled about $75 billion in fiscal 2019) now to help them respond adequately to the crisis.
Here are three reasons why.
State rainy day funds are at record highs, and tapping them won’t likely harm states’ bond ratings or ability to borrow. Credit rating agencies generally expect states to draw on the funds during a recession or natural disaster. And they likely won’t downgrade states’ credit, assuming that states rebuild those reserves after the recession ends, as most have done since the Great Recession. Forty states tapped their funds from 2008 to 2010 in response to the recession, but only five suffered a credit downgrade from Moody’s Analytics during that time.
Never using a rainy day fund is equivalent to not having one. States risk very little by tapping those funds, which were designed for an emergency like the COVID-19 pandemic. Not doing so risks repeating the mistakes of the Great Recession. States should chart a different path this time.