6 explicitly comparing three budget frameworks: incrementalism, punctuated equilibrium,
and cutback management theory. Case study and cross-sectional analyses provide only limited insight into which
responses, if any, help advance a state out of fiscal stress. Even less is known about how state responses to one period of economic decline impact the fiscal stress experienced in a
subsequent period. To better understand the effects of state budget and fiscal management on fiscal stress, this study uses an eight-year panel data set. This section
adds to the literature by 1 deepening our understanding of the effectiveness of responses to fiscal stress, 2 using the state Coincident Index developed by the Philadelphia
Federal Reserve to capture the effect of state economic conditions on responses to fiscal stress and 3 assessing the longer-term impacts of responses to fiscal stress. Results from
this research may inform state policy makers, budget and finance officers and managers of effective short-term and long-term solutions to fiscal stress.
1.3 Scope and Limitations
The scope of this dissertation is to construct a valid and comparable 50-state fiscal stress measure following the methodology of Wang et al 2007; and to then use this
measure to test the effectiveness of state responses. State comprehensive annual financial reports CAFRs from 2002 to 2009 will be used to create four indices, each measuring a
dimension of fiscal stress: budget solvency, cash solvency, long-term solvency, and service-level solvency. Next, cluster analysis will be used to group states into low,
medium, and high categories of fiscal stress. Descriptive analysis will be used to assess patterns in fiscal stress responses, assess the validity of theoretical propositions on state
responses at different levels of fiscal stress severity as well as the relationship between state demographic and institutional characteristics and fiscal stress levels. Regression
analysis will be used to analyze the effectiveness of fiscal stress responses in lowering fiscal stress levels.
7 This analysis is limited by several factors. The period of study, eight years, is due
to the availability of government-wide state data that began to be collected in fiscal year 2002. For the purposes of this study, the range of economic conditions both at the state
and national level minimize the effects of the limited time frame.
1.4 Organization
The rest of the dissertation is organized as follows. Chapter 2 outlines the theoretical and empirical framework for understanding how states respond to fiscal stress
as well as the responses available to them. Chapter 3 covers the range of meanings assigned to fiscal stress in the literature and synthesizes a meaning that will be used
throughout this research. In addition, this chapter covers the range of fiscal stress measures and the strengths and weaknesses of the most common state fiscal stress
measures. In Chapter 4, the fiscal stress measure to be used in this analysis is constructed and tested against existing measures and coincident economic trends. Chapter 5 contains
a descriptive analysis of state responses in light of fiscal stress severity, assesses the usefulness of the theoretical frameworks discussed in Chapter 2, and also looks for
relationships between state institutional characteristics and the severity of fiscal stress. In this chapter states are divided into three categories of fiscal stress severity using cluster
analysis. Chapter 6 details the data and methodology used to analyze the effectiveness of fiscal stress measures both within the short term and long-term. Chapter 7 discusses
analytical findings, offers policy implications from this work and presents considerations for future research.
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CHAPTER 2 THEORETICAL AND EMPIRICAL FRAMEWORK OF
