When the doors were shuttered at Moraine, Ohio’s General Motors plant in 2008, 10,000 people immediately lost their jobs. The Ohio economy, along with the rest of the country’s economy, was reeling, struggling to make ends meet under the economic strain. The Great Recession humbled the state of Ohio as then-governor Ted Strickland drained all but 89 cents from the $1 billion fund.
Ohio’s manufacturing industry was hit hard by the Great Recession. Instability in the sector led to mass layoffs, business closures, and declining wages. This created a problem for the state of Ohio because of its reliance on income tax, sales tax, and corporate tax revenues — the recipe for a budget deficit.
The budget stabilization fund was the duct tape holding the state of Ohio’s budget together as it stared down a yawning budget deficit. To close that deficit, Ohio could raise taxes, lower spending, or dip into the budget stabilization fund. Without that fund, the pain would have been a lot worse for the state as a whole.
Unlike the federal budget, which can (and almost always does) finance a deficit through borrowing, nearly all state budgets must be balanced at the end of each fiscal year due to clauses in their state constitutions. There is no room for debt, so budget stabilization funds (often colloquially referred to as “rainy day funds”) provide lawmakers with a tool to balance the state budget. Ohio was not alone drawing from its budget stabilization in 2008 and beyond. Many other states in financial straits have similarly benefited from their budget stabilization funds.
Alaska’s reliance on oil revenue hit a breaking point in the mid-2010s when oil prices crashed. To cover the deficits, Alaska withdrew $14 billion from its budget stabilization fund.
In addition to economic recessions, environmental disasters are frequently cited as reasons for drawing on the fund. Florida withdrew money from its budget stabilization fund repeatedly throughout the 21st century to help the state recover from hurricane damage.
Nearly every state tapped into its rainy day fund during the COVID-19 pandemic. Between 2020 and 2021, California withdrew $9.6 billion to cover the cost of rising unemployment benefits. In 2020, Texas withdrew $1.2 billion to pay for the state’s increased healthcare costs during the COVID-19 pandemic.
The recent budget cuts announced by President Donald Trump pushed Governor Lamont, of Connecticut, to consider alternative funding options for the state’s critical services. Cuts to Medicaid could eventually create a deficit that would require a draw from the state’s $4 billion budget stabilization fund.
How do states replenish their budget stabilization funds after they are spent down? Ohio faced a steep climb, from 89 cents in its budget stabilization fund in 2011 to a record-breaking $3.5 billion by 2023. By holding taxes steady and cutting education spending while piggybacking off a slow economic recovery after the Great Recession, Governor Kasich’s administration was able to close the budget deficit.
After the Great Recession pummeled Ohio’s manufacturing industry, the state’s healthcare, logistics, and finance sectors grew. A more diverse economy will help Ohio avoid a steep economic downturn based on any one sector.
There are currently debates across the country about whether or not states should spend some of their budget stabilization funds on pressing issues like affordable housing and healthcare. Leaders at the Children’s Defense Fund of Ohio, for example, have made the case that the $3.5 billion could be used to supplement social services like funding a child tax credit and free school meals. Others argue that large reserves are the only thing that saved the country from chaos during crises like the Great Recession and the Covid-19 Pandemic. With recession risk on the rise, we might end up hearing more about budget stabilization funds sooner rather than later.