A rainy day fund is one tool that helps state policymakers smooth out the ups and downs of the economic cycle. Rainy day funds allow states to set money aside when revenues are strong and/or demands are relatively low. States can then tap those reserves when revenues are weak and/or demands increase.
The Reserve for Revenue Fluctuations and the TennCare Reserve are important tools in Tennessee’s ability to respond to a downturn. The former is specifically for unexpected changes in state tax revenue collections. The latter is a separate fund of excess TennCare dollars. In dire situations, the legislature can make any available funds in the TennCare Reserve not already obligated for a specific purpose to shore up both TennCare and the larger General Fund.
Key Features
Here are some key features of Tennessee’s rainy day fund (“the Reserve”): (1)
- The statutory purpose of Tennessee’s fund is “to meet unexpected shortfalls of revenue or to meet expenditure requirements in excess of budgeted appropriations levels.”
- When state tax revenues fall short in Tennessee, the administration may tap the Reserve for existing appropriations. The law requires legislative notification and a committee hearing, but the law does not require a vote of the General Assembly.
- When expenses exceed line-item appropriations, state law limits the use of the Reserve to the greater of $100 million or half of the balance. This additional spending, however, requires approved from the General Assembly in an appropriations act.
- In both scenarios, the law expresses legislative intent that spending should be cut before using the reserve.
- State law sets a target Reserve balance of about 8% of state tax revenues but does not explicitly cap it. The FY 2026 balance of $2.2 billion represents about 9.2%—exceeding the statutory target by about $295 million.
References:
- State of Tennessee. Tenn. Code Ann. § 9-4-211. [Online] Accessed via Lexis.
This is a modified excerpt from the 3rd edition of the Tennessee State Budget Primer. To find sources and learn more about the state budget process, purchase a physical copy or download a free digital copy here.
