89 As a final check on the validity of these indices as measures of fiscal stress, we
correlate each index with the unreserved budget balance as a percent of total expenditures. This variable is one of the most common measures of fiscal stress Rubin
and Willoughby 2009, Chaney et al 2002a and as such if no correlation exists this would throw doubt on these indices and their ability to measure fiscal stress. Table 4.4 shows
the Pearson’s correlations and significance levels between the unreserved budget balance as a percent of total expenditures UUB and each index. The table highlights the
statistically significant relationship between the UUB and the budget index. Only marginally significant correlations are present
Table 4.4: Correlation between Indices and Unreserved Budget Balance
Cash Budget
Long-run Service-level Unreserved Budget Balance
as a of Total Expenditures
-0.0491 0.3282
0.1895 0.0010
0.0898 0.0732
-0.0381 0.4482
Source: NASBO Fiscal Survey of the States and State CAFRs
between the UUB and the long-run index. These findings support the statements made in Chapter 3 that the UUB only measures one aspect of fiscal stress – budget solvency.
4.5 Conclusion
This chapter proposes, constructs, and tests a new measure of fiscal stress and in so doing, answers the question as to whether a more reliable and valid measure of fiscal
stress is available. This new measure, based on financial ratios, divides fiscal stress into four different dimensions: cash, budget, long-run and service-level solvency. These
dimensions express in numerical terms the definition of fiscal stress described in Chapter 3. With tests of measurement reliability and validity, this measure of fiscal stress is
90 shown to be a robust and multi-faceted expression of fiscal stress at the state level. With
this measure of fiscal stress, states may be compared to one another over multiple years with some degree of confidence. This new measure provides the flexibility to categorize
fiscal stress levels and then compare state actions to theoretical models. This measure also provides the ability to assess the short-term and long-term effectiveness of state
responses at reducing different types of fiscal stress.
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CHAPTER 5 TRENDS IN STATE RESPONSES TO FISCAL STRESS
5.1 Introduction
Without consistent and comparable fiscal stress measures, analysis of state responses to fiscal stress has been piecemeal and subjective Dougherty and Klase 2009;
Jimenez 2009. Using the fiscal stress measures described in the previous Chapter allows for a systematic and multi-year analysis of state responses during fiscal stress. In this
Chapter, the relationships between state responses, fiscal stress levels, economic conditions, political dynamics and legal requirements are examined. Incorporating the
passage of time into this analysis also allows for the determination of the temporal order of responses to fiscal stress. Analysis of these issues will provide answers to the third
question posed in the introduction: Do certain characteristics affect states’ experience of fiscal stress andor influence the choice of responses?
States have a range of possible responses to fiscal stress: across-the-board cuts, tax andor fee increases, hiring freezes, employee furloughs, andor layoffs. Although
states receive revenue from a number of sources, including the federal government, taxes and fees are the only sources of revenue mostly under their control Wulf 2002.
Institutional, political and other factors influence a state’s choice of tactics. These factors include local and national economic conditions, legislation governing budget
deficits, and state spending and taxing powers. The combination of these factors results in a wide variety of state responses, the mix of which can indicate either a clear pattern of
decision making or an unstructured decision making process with no clear guiding principles. Despite tools available to state policy makers to smooth revenue volatility and
avoid abrupt shifts in spending and taxation e.g. more accurate revenue estimation techniques, multi-state rainy day funds, diversification of tax structures, states may lack
