127
CHAPTER 6 EFFECTIVENESS OF STATE RESPONSES TO FISCAL STRESS
6.1 Introduction
Fiscal stress – due to balanced budget rules and budget deficits – compels state action Gold 1995; Scorsone and Plerhoples 2010. State responses to fiscal stress can
have profound effects on state residents as the actions of three states with high budget fiscal stress in 2009 demonstrate. State spending cuts in Arizona resulted in one million
low-income residents losing access to state funded Medicaid services as well as layoffs, furloughs and pay cuts for state employees Johnson et al 2011. In California, state aid to
local school districts for K-12 classes was reduced by billions of dollars Johnson et al 2011. In Nevada, spending cuts have resulted in furloughs and pay cuts to state
employees as well as elimination in funding for local schools’ gifted and talented programs Johnson et al 2011; Johnson et al 2009.
Although the effect of state tax levels on business location and job creation is uncertain Buss 2001; Fisher 2002; Chirinko and Wilson 2008, governors and
legislators typically abhor the political consequences of tax increases Gold 1995; Poterba 1994. Given the social and political impact of state responses to fiscal stress,
their effectiveness at reducing fiscal stress is an important and salient question. If certain state responses to fiscal stress are more effective at reducing fiscal stress, either in the
short-term or long-term, this is information state budget and policy makers could use in response to future fiscal stress. To broaden our understanding of the effectiveness of state
responses to fiscal stress, this chapter addresses three questions: 1 Are some states able to navigate better through periods of fiscal stress than other states, and if so, why?; 2 Are
certain state responses more effective at reducing or alleviating fiscal stress?; and 3 Does the type of response a state uses in one period of fiscal stress affect its stress levels in
128 subsequent periods of fiscal stress? In answering these questions, this analysis tests
hypotheses on the effect of institutional factors on fiscal stress as well as the short-term and long-term effectiveness of state responses to fiscal stress as outlined in Chapter 2.
As discussed in Chapter 2, research on responses to state government response to fiscal stress tends to use case studies and concentrate around recessionary periods
Willoughby and Lauth 2003; Grizzle and Trojan 1994; Gold 1995; Finegold et al 2003; Dougherty and Klase 2009. The current research attempts to categorize and explain state
responses to stress across periods that include economic growth and decline. Largely missing from the literature is an investigation of state response strategies over time and
with a focus on the effectiveness of responses Scorsone and Plerhoples 2010. To address these gaps in the literature on responses to fiscal stress, this analysis
adds several elements. First, the use of a panel data set as opposed to a cross-sectional data set is a step forward in deepening our understanding of states and their experience of
fiscal stress. The panel data set also allows investigation of the impact of responses and budget institutions across more than one national recession. Second, this analysis takes a
quantitative approach to the effectiveness of the three most common fiscal stress responses. While some quantitative analysis on the effectiveness of rainy day funds in
plugging budget gaps has been conducted, the effectiveness of tax increases and expenditure cuts to address stress has not been adequately addressed in the literature.
Third, in this analysis, state responses are modeled to measure actions actually taken by states. The three responses – tax increases, expenditure cuts, and rainy day fund use – are
modeled to capture state-initiated change.
21
Fourth, this analysis uses measures of fiscal
21
States may maintain high rainy day fund balances but still not use them to address budget shortfalls. The debate in Texas over the fiscal year 2011 4.3 billion dollar shortfall illustrates this point. Despite having a
rainy day fund of 9.4 billion, the Governor and Legislature decided to use a combination of expenditure cuts 853.6 million and rainy day funds 3.1 billion to close the budget shortfall Watts 2011.
Similarly, only using the change in tax collections is not an accurate measure of policy changes regarding
129 stress that comprise a broader and more comparable definition of fiscal stress. By
assessing the factors that affect these fiscal stress indices, the analysis allows us to assess the sensitivity of state budget, cash, long-run, and service-level imbalances to typical
state responses. For example, the use of rainy day funds may assist in reducing budget fiscal stress but not prove useful in alleviating cash or long-run fiscal stress.
6.2 Data and Methodology 6.2.1 Data and Sources
Kategori