experience higher fiscal stress.
Mostly Supported
H5.1: States with structural deficits will be more likely to engage
punctuated equilibrium responses in periods of high fiscal stress.
Supported
H5.2: States with structural deficits will experience higher fiscal
stress. Partially Supported
H6: The short-term effect of state responses (e.g. tax increases,
expenditure cuts, rainy day fund use) on fiscal stress levels will be minimal.
Supported
H7: The long-term effects of state responses (e.g. tax increases,
expenditure cuts, and rainy day fund use) on fiscal stress will differ.
Supported
H7.1: Tax increases and/or expenditure reductions will, in the long-
term, reduce fiscal stress levels.
Mostly Supported
H7.2: Rainy day fund use will increase fiscal stress in the long-term. Partially
Supported
differed, depending on the type of fiscal stress considered. This resulted in different answers to the question, what is the most effective response to fiscal stress? A summary of these findings is presented in Table 7.1.
155 7.2 Implications
These findings suggest that states have some control over their experience of fiscal stress. They may exert this control through their responses to fiscal stress, their decision to match revenues with expenditures, and either their adoption of balanced budget rules and TELs or their interpretation of these rules. However, state ability to control their experience of fiscal stress does not mean that they can expect immediate results. Results regarding the impact of longer-term responses indicate that the timing of state action matters. Working to reduce vulnerability to economic downturns before a downturn occurs is more likely to yield positive results than actions taken in the midst of recession and deepening fiscal stress. This enhanced understanding of how institutional requirements and state actions influence the experience of fiscal stress may assist researchers when attempting to predict which states are more likely to end up in fiscal stress in subsequent recessions. In terms of what this research means to state policy and budget makers, the findings underscore the importance of preparing for the inevitable bad times during the good times. Budget restraint – both in terms of not haphazardly cutting taxes and increasing spending – is crucial to states performing better during the next economic downturn.
7.3 Limitations and Future Research
Despite the contributions of this study, there are some important limitations and multiple opportunities for further research. For example, this dataset only covers two episodes of national recession. Annually updating the data set using state CAFRs from 2009 forward would provide the opportunity to expand the data set coverage and produce more robust results.
Also, the GASB 34, which allows for the creation of the fiscal stress measures used in this analysis, was fully implemented in 2002. As additional years are added to this dataset, we may find that certain relationships between the explanatory variables and
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fiscal stress change and either strengthen or weaken the findings here. The manner in which the three response variables are modeled in this analysis does not allow for deeper investigation of across-the-board vs. targeted cuts or furloughs vs. layoffs and their affects on state experiences of fiscal stress. Similarly, understanding the effect of an increase of personal income taxes as opposed to fees or sales taxes would deepen our understanding of how state tax choices in particular affect their fiscal stress levels. Also not reported here is the effect of the size of state responses on fiscal stress levels. The scope of this analysis did not include these types of investigations, but future research in this area may be fruitful.
The difficulties in defining and measuring structural balance are similar in many ways to those related to understanding fiscal stress. This is an important concept, often discussed in empirical literature. As modeled in this analysis, structural balance appears to play a large role in state financial condition (level of fiscal stress experienced). However, a more robust measure of structural balance may yield more precise findings about its’ effect on fiscal stress. Future research that examines defining and measuring structural balance that supports reliable and valid comparison across states is warranted.
Finally, quantitative research such as this does not provide substantive focus on specific states, their cultures and traditions and context that would better explain any experience of fiscal stress and their responses to it. This research does not answer questions like, why did Alabama weather the current national recession better than Kentucky? or Why did Louisiana and Arizona experience different levels of fiscal stress, when both of these states have similar balanced budget rules? The current research provides a framework for better understanding patterns; case studies of the individual states can provide further texture to this framework. Essentially, this research provides the starting point for state analysts and scholars to evaluate the robustness or vulnerability of state institutional, political, and economic systems to fiscal stress.
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7.4 Contributions to Theoretical and Empirical Research
This study contributes to both theoretical literature and empirical research on fiscal stress. In this study, three theoretical frameworks – incrementalism, punctuated equilibrium, and cutback management theory – are compared in their ability to explain how states manage declining resources and fiscal stress. Most prior research comparing these theories was conducted at the local level (Pammer 1990; Bartle 1996; Jordan 2003; Levine et al 1981b; Lewis 1994; Rickards 1984). And, most research conducted at the state level does not review state responses in the 50 American states, rather must work uses a selection of case study states (Dougherty and Klase 2009). In this analysis, the comparison of state actions includes all U.S. states and covers eight years, using a standardized measure of fiscal stress and a single data source for state responses. As a result of this comparison, results are able to answer whether one theoretical framework is better than others at explaining patterns of state responses to stress. In fact, findings from this research indicate that no single theoretical framework of public budgeting explains how states respond to fiscal stress. Instead, it appears that states respond to particular and immediate needs, without engaging any specific strategy, similar to the findings of Pammer (1990) and Bartle (1996) conducted at the local level.
To the existing empirical research on fiscal stress, this study makes several contributions. This paper adds to the literature by (1) clarifying the meaning of fiscal stress and developing a measure of fiscal stress that can be duplicated from publically available data, (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 by using a panel dataset over eight years. While there are multiple avenues for additional research on state fiscal stress, this analysis provides a basis for future research about government fiscal stress by providing a robust measure of the concept.
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