149 Rainy day fund use in 2002 results in improved cash and service-level fiscal stress
levels in 2007 to 2009. One explanation for this relationship, suggested by Brinner and Brinner 2002, is that rainy day fund use may allow states to take more thoughtful and
well-planned approaches to cutting spending or raising revenues. Hasty spending cuts can lead to cuts in programs or services that actually save states money in the long-term
Levine et al 1981. As such, rainy day fund use in 2002 may have resulted in lower current liabilities in 2007 to 2009. Rainy day fund use in 2002 may also have resulted in
fewer tax increases, and therefore improve service-level fiscal stress levels.
6.5 Conclusion
This chapter set out to examine three questions regarding state experience and response to fiscal stress. The findings related to the first question – are some states able to
navigate better through periods of fiscal stress than other states? – indicate that some factors make states more and less vulnerable to fiscal stress. Certain institutional
characteristics that some states adopt and others do not appear to assist states in managing their experience of fiscal stress. Certain balanced budget requirements have positive and
relatively strong impacts on state fiscal stress. Other institutional factors, such as limitations on states’ collections of revenues, appear to have a negative impact on state
ability to manage through fiscal stress. The answer to the second question – are certain state responses more effective at
reducing or alleviating fiscal stress? – is less clear. Of the three state responses tested in this analysis, none had a statistically significant relationship to fiscal stress levels. It is
possible that in the short-term, state responses to fiscal stress take a backseat to other factors such as overall economic recovery. However, as indicated by the findings related
to the next question, the real issue may be the time needed to see the impact of state responses. That is, the findings related to the third question – does the type of response a
150 state uses in one period of fiscal stress affect its stress levels in subsequent periods of
fiscal stress? – indicate that the type of response will influence long-term fiscal stress levels. State actions that contribute to a balance between expenditures and revenues
appear to result in less stress during the next episode of widespread fiscal stress among states. Merely using rainy day funds to cover cyclical deficits also appears to impact state
experience of fiscal stress in later years. However, this impact differs depending on the type of fiscal stress experienced. These findings suggest that the sacrifices states take to
address fiscal stress – tax increases, expenditure cuts, and use of rainy day funds – are effective at putting states on a more solid financial condition. On the other hand, the
short-term impacts of these actions are unlikely to yield the quick and decisive results that state budget and policy makers might expect and hope for.
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CHAPTER 7 CONCLUSION
This study examined measures and responses to fiscal stress in the U.S. states. Six questions were addressed:
1 How is state fiscal stress defined and measured in the existing literature? 2 Is there a better measure of fiscal stress? And, if so, why is such a measure
more reliable and valid? 3 Do state characteristics affect their experience of fiscal stress andor influence
their choice of responses? 4 Are some states able to navigate better through periods of fiscal stress than
other states, and if so, why? 5 Are certain state responses more effective at reducing or alleviating fiscal
stress? 6 Does the type of response a state uses in one period of fiscal stress affect its
stress levels in subsequent periods of fiscal stress?
This chapter summarizes the results of this research, the implications, and the contributions of this work to both theoretical and empirical research. Limitations of the
study will be addressed, as well as areas that are fertile ground for future research.
7.1 Review of Main Research Findings
The motivations for this study are several: 1 to contribute substantively to the scholarly work about public fiscal management, and more specifically state government
fiscal health and management, 2 to determine better ways to understand and measure fiscal stress in U.S. state governments, and 3 to inform state government budget and
