Rainy Day Fund

How It Works

Also called a budget stabilization fund or BSA, the rainy day fund provides an additional layer of financial resilience beyond committed and unassigned general fund balance. Strong rainy day fund policies include three elements: a formal reserve target (GFOA recommends at least 16.7% of operating expenditures, and credit agencies reward reserves above 25%), rules-based deposits triggered during revenue-surplus years, and restricted withdrawal conditions requiring supermajority council votes or defined economic triggers. Under GASB 54, rainy day funds are typically classified as "committed" fund balance when established by ordinance or "restricted" when set by charter or state law. Well-managed rainy day funds helped cities weather the 2008 Great Recession and the 2020 COVID-19 pandemic with fewer service cuts and layoffs. Pew Charitable Trusts research shows states with well-designed rainy day funds recovered from downturns 18-24 months faster than peers. Cities like Houston and Seattle built reserves exceeding 15% of annual revenue before the pandemic and avoided the layoffs seen in cities with thinner cushions. Conversely, cities that used the American Rescue Plan Act (ARPA) relief to backfill structural deficits rather than build reserves face fiscal cliffs in 2024-2026 as the one-time federal funds exhaust. Reserves are a core component of the 25% budget balance weighting in the CitySpend Fiscal Health Score, with bonus points for formal written reserve policies.

Related Terms

• Fund Balance, The accumulated surplus (or deficit) in a government fund, essentially a city's savings account. A healthy fund balance provides a cushion against revenue shortfalls.
• General Fund, The primary operating fund for a city government, covering most day-to-day services like police, fire, parks, and administration.
• Structural Deficit, A persistent gap where a city's recurring expenses exceed its recurring revenue, meaning the budget is fundamentally unbalanced even in a normal economy.