Why It Matters
North Carolina and states across the country are facing growing pressure on their fiscal reserves, with a new national analysis warning that state rainy day funds are weakening at a time when budget challenges are intensifying. The findings carry significant implications for North Carolina’s ability to maintain public services, respond to economic downturns, and absorb potential cuts to federal funding without raising taxes or slashing spending.
Lower reserve levels mean states have fewer options when revenue falls short or unexpected costs arise. For residents, that translates into a higher risk of service reductions in areas ranging from education and infrastructure to public health and social programs.
What Happened
Researchers at The Pew Charitable Trusts released a new analysis finding that state reserve funds declined in fiscal year 2025 — the first such decline since the Great Recession. The report, which drew on survey data from the National Association of State Budget Officers, examined the financial cushions states maintain to cover unexpected expenses and short-term budget gaps.
The analysis identified three converging pressures driving the decline: increased operational costs, lower-than-projected tax revenues, and reductions in federal funding. Together, these forces are straining state budgets at a scale not seen since at least 2020, according to the researchers.
The report noted that the current period of weakening reserves follows several years of historically strong savings, which were bolstered by federal pandemic relief dollars and higher-than-expected tax collections in the post-pandemic economic surge. As those tailwinds fade, states are left navigating a more difficult fiscal environment.
Pew researchers also flagged a deeper concern beyond short-term reserve levels: structural imbalances in many state budgets, where long-term spending growth is outpacing revenue growth. Reserves, the analysts noted, can paper over near-term gaps but cannot solve fundamental mismatches between what governments collect and what they spend.
By the Numbers
The Pew analysis provided a detailed statistical picture of how state reserves have shifted over the past year.
- The median state in fiscal year 2025 could fund operations for 47.8 days using reserve funds alone — down from a record high of 54.5 days in fiscal year 2024.
- States collectively held $174 billion in savings in fiscal year 2025, though that total was spread unevenly across the country.
- 26 states saw their rainy day fund capacity decrease in 2025, meaning reserves would cover fewer days of operations than the prior year.
- In 14 of those 26 states, officials actively drew down reserves to cover current expenses.
- Wyoming held the strongest reserve position, with enough cash on hand to fund state operations for approximately 320 days. New Jersey ranked last, with reserves insufficient to cover even a single day of operations.
Zoom Out
The national trend reflects a broader fiscal reckoning playing out in statehouses across the country. The pandemic era produced an unusual period of budgetary abundance, driven by massive federal aid packages and a swift economic rebound that generated robust tax revenues. Many states used that window to build reserves to historically high levels, pay down debt, and make one-time investments in infrastructure and services.
That era appears to be ending. Federal pandemic assistance has largely expired, and revenue growth in many states has slowed as consumer spending moderates and economic uncertainty increases. At the same time, federal budget discussions in Washington have raised the prospect of reduced funding for programs that states rely on, including Medicaid, education grants, and infrastructure support.
North Carolina has recently received relatively positive revenue news — a recent state forecast showed continued revenue growth, prompting optimism from Republican legislative leaders while Democratic lawmakers urged caution. That cautious note aligns with the Pew findings, which suggest that even states with adequate near-term revenues face longer-term structural challenges.
States with the weakest reserve positions heading into the current period — including New Jersey, Washington, Illinois, Delaware, and Rhode Island — face the most acute near-term risk if revenues disappoint or federal funding is reduced.
What’s Next
State budget writers in North Carolina and across the country will need to weigh the Pew findings as they craft fiscal year 2026 spending plans. Legislators in many states are currently in the middle of budget negotiations, and the analysis is likely to inform debates over how aggressively to spend current revenue versus rebuilding reserves as a hedge against future uncertainty.
Pew researchers indicated they will continue monitoring reserve levels and structural budget conditions as federal policy decisions unfold in Washington. Further reporting on North Carolina’s specific reserve position and budget outlook is expected as the state legislature advances its appropriations process in the coming months.