You probably have some “rainy day” money saved somewhere – your savings account, your investments, under your mattress – to help you get through the unexpected bad times. This cash would help you pay the mortgage if you were laid off, for example.

What does government do to save for a rainy day? What should it do?

When economic times are bad, governments take in less revenue. Laid-off workers don’t pay as much in personal income taxes, and struggling corporations pay less in corporate taxes. Citizens make fewer purchases, so sales tax revenue is down.

Because of the way the government budget process works [link to budget page], the government commits to spending for an upcoming fiscal year based on estimated revenue for that year. If revenue collections fall below estimates, the government either has to (1) create additional revenue, (2) cut spending, or (3) rely on savings.

Most states have created so-called “rainy day funds,” savings accounts that help cushion the impact of down economic times. This allows these states to alleviate budget shortfalls without having to raise taxes or cut services. A rainy day fund is no panacea, however. In the recent economic crisis, even states with rainy day funds have had to raise taxes and/or cut spending.

Colorado is one of seven states without a rainy day fund.
Should we have one?

Some in Colorado are calling for the creation of a rainy day fund. But there are many questions to be answered. How should a rainy day fund be funded? How large should it be? Under what conditions can the money in it be used? How would a rainy day fund in Colorado interact with our existing revenue and spending limits?

Read the Bighorn Center for Public Policy’s report on state rainy day funds and implications for Colorado.[link to full report]

Find out who is calling for a rainy day fund in Colorado.

Link to other resources on state rainy day funds.