When the Great Recession hit in 2008, it put enormous pressure on state budgets. Tax revenue dropped precipitously and mandatory costs—particularly for health and human services—rose. Delaware, for example, entered fiscal year 2010 facing a $750 million budget shortfall because of declining revenue from personal and corporate income taxes.
One tool the state had to balance its budget was the Budget Reserve Account, a rainy day fund dedicated to helping address unanticipated deficits. At the time, the fund’s balance totaled $186 million—equivalent to 5 percent of general fund revenue, the statutory maximum level. But policymakers did not tap it. Instead they relied on a combination of budget cuts and tax increases to make up for the deficit, reducing state employees’ salaries by 2.5 percent and raising the top individual income tax rate from 5.95 percent to 6.95 percent. In fact, since creating the account in 1977, the state has never made a single withdrawal.
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