The great recession of 2008 was a vivid reminder of how vulnerable state governments are to economic downturns. The federal government can use deficit spending to deal with recessions and local governments are aided by the relative stability of their property taxes, but states must balance their budgets despite heavy reliance on economically sensitive income and sales taxes. The federal government has been helpful with its countercyclical spending on income assistance programs and its stimulus spending including aid to states, but New York and other states still experienced severe fiscal stress. From the first quarter of fiscal year 2008‐09 to the first quarter of fiscal year 2010‐11, New York State’s total tax collections fell 20.3 percent; partially as a result, the budget gap for the fiscal year beginning April 1, 2011 was $10 billion.

One mechanism often suggested to help states cope with recessions is a rainy day fund. Although New York has a rainy day fund (in fact, it has two), the funds have not been used in the latest recession. For reasons explored below New York has not developed an effective rainy day fund. This report presents four guidelines for how New York State can create a more useful rainy day fund:

1. Mandate prudent uses of surplus funds, including rainy day fund deposits.

2. Raise the cap on the size of the rainy day funds to reflect likely needs in times of recession.

3. Set uniform conditions for withdrawal from both funds, with those conditions based on declining economic indicators.

4. Set uniform repayment rules for both funds, with those rules allowing adequate time for economic and fiscal recovery before payments must begin.