Fiscal Determinants of State Spending: Does a Rainy Day Fund Impact Higher Education Funding?

State higher education funding in the U.S. plays an important role in enabling a state’s residents to access postsecondary education but recessions, competing spending priorities and institutional features of a state’s political system put downward pressure on such funding. On the other hand, states that have significant state savings in the form of a rainy day fund (RDF) are less subject to spending tradeoffs, cuts in government spending or increase in taxes. Using data from Pew Charitable Trust, Urban Institute and the U.S. Bureau of Economic Analysis, this study finds that states that have more fiscal cushion in the form of RDFs spend a higher proportion of their general budget on higher education. The concern that higher RDF balances would benefit other spending areas while negatively or weakly affecting higher education funding is not confirmed. Instead, states with stronger fiscal health appear better equipped to prioritize investments in higher education.