Mass. rainy day fund hits highest level ever
State has $4.6b, equal to 13% of state expenditures
LOTS OF ATTENTION has been paid to Massachusetts’ unprecedented spending, made possible by once-in-a-lifetime federal largesse to pay for COVID-19-related needs. Behind the scenes, Massachusetts has also been saving.
The comptroller’s annual report for fiscal 2021, which ended June 30, reveals that Massachusetts’ stabilization fund is the largest it has ever been since the fund was established in 1986. The rainy day fund clocked in at $4.6 billion in fiscal 2021, a huge jump from $3.5 billion the prior year.
Until the last few years, the fund’s previous high was a little over $2 billion in the mid-2000s. But when the 2008 recession hit, Massachusetts had to draw down the money, and the fund only reached $2 billion again in fiscal 2018. It has been climbing ever since.
Massachusetts’ rainy day fund is now equivalent to 13.3 percent of state expenditures, higher than the 8.7 percent median across the United States. In absolute terms, Massachusetts’ savings account is the third largest in the country, according to the National Association of State Budget Officers.
The size of the rainy day fund is particularly significant because no one would have predicted it back in the early days of the pandemic in the spring and fall of 2020. At that point, experts were predicting massive budget shortfalls, which would require withdrawing money from the rainy day fund. In September 2020, Gov. Charlie Baker said Massachusetts finished the fiscal year with a $700 million budget gap.
“The net difference between where we thought we were going to be and where we are is literally billions of dollars,” said Doug Howgate, executive vice president of the Massachusetts Taxpayers Foundation.
Howgate said early in the pandemic, policymakers were looking back at the 2008 recession and predicting another rainy day fund drawdown. There was also uncertainty about how long businesses would be closed.
Both Howgate and Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, said the main reason earlier predictions were so wrong was that no one was counting on such a large infusion of federal cash.Horowitz said after the 2008 recession, there was a protracted downturn with not enough federal support, and experts expected the same thing to happen. However, the federal government this time injected substantially more money into the economy. That included personal stimulus checks, unemployment benefit hikes, business loans, reimbursements for COVID-related public health spending, and billions of dollars in direct government aid. All of that directly boosted state tax revenue and state government coffers, so the state never had to draw from the rainy day fund.
Having a substantial rainy day fund is important for several reasons. First, it makes the state appear more stable to ratings agencies, and a strong rating means the state can borrow money for building projects at lower rates. Second, it gives the state a cushion to fall back on in the next economic downturn. During recessions, people generally rely on government services more. Because states, unlike the federal government, are prohibited from running deficits, they need reserves to rely on.