5 to cities, effectively passing budget problems from states to cities Cooper 2011. Use of
this balancing technique has grown as federal stimulus dollars have dried up. Cuts in aid to cities – unlike cuts in some state services – are likely to result in visible and stark
reductions in direct services to the public e.g., closed libraries, unfilled potholes, fewer police and firefighters Cooper 2011. While state responses to fiscal stress differ, the
effects on citizens are profound. Besides the practical ramifications of fiscal stress, the non-theoretical and at times
confusing nature of the academic discussion on fiscal stress also motivated this study. Apart from the work of Levine 1978, 1979, 1980 and Levine et al 1981a in
developing the “cutback management” literature, no budget theory explicitly considers how governments budget under constrained resources, how they will respond to fiscal
stress, and why some responses may work better than others.
1.2 Contributions to Literature
Research to date on state fiscal stress involves, predominantly, cross-sectional and case study analyses. Research tends to concentrate on the causes of fiscal stress and state
responses, but not on the effectiveness of state responses Scorsone and Plerhoples 2010. Many of these studies use different definitions and measures of fiscal stress that
compound the difficulty in identifying the effects of state responses to fiscal stress. The present research effort adds to the fiscal stress literature by 1 clarifying the meaning of
fiscal stress in the state context and 2 proposing a new measure of fiscal stress that operationalizes this clarified meaning and is comparable across states and years. This
measure takes advantage of improved cross-state financial reporting. Building on previous work conducted at the municipal level Lewis 1984; Downs
and Rocke 1984; Bartle 1996 and state level Dougherty and Klase 2009, this research delves into how state responses to fiscal stress vary by the severity of fiscal stress through
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
