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Subnational Government Tools for Budget Stabilization

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State Government Budget Stabilization

Part of the book series: Studies in Public Choice ((SIPC,volume 8))

Abstract

The two major policy tools for budget stabilization at the subnational level are general fund surplus (GFS) and budget stabilization funds (BSF); this chapter elaborates on these two tools with regard to their definitions, working mechanisms, data sources, and changing patterns over their evolution in the past half century. The chapter starts with general fund surplus as the informal policy tool, then treats budget stabilization funds as the formal policy tool. The chapter pays more attention to BSF, providing details on their enabling legislation, structural features, and diffusion across US states over time. Early research of subnational budget stabilization did not provide concise definitions of concepts used nor paid due attention to the enabling legislations of BSFs; the couplet of the two aspects partly contributed to confusion and difficulty in data mining. This chapter clearly defines GFS and BSF and offers detailed analyses of state BSF legislations and reliable data sources using a unique data source and collection method. BSF structural features are classified into purposes, funding sources, balance caps, and use-approval procedures. This chapter also analyzes the trends of GFS and BSF balances from 1979 to 1999, thereby laying a solid foundation for empirical work in the rest of the book.

Subsection 3.3.3 and Section 3.4 draw from data and analysis in Hou Y (2004) Budget stabilization fund: structural features of the enabling legislation and balance level. Public Budgeting and Finance 24(3): 38–64, published by John Wiley & Sons Ltd.

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Notes

  1. 1.

    This author interviewed seven state budget directors and budget analysts in the spring of 2001 during NASBO’s annual conference in Scottsdale, Arizona. State officials held this opinion.

  2. 2.

    Author’s correspondence in 2001 with an Arkansas budget officer.

  3. 3.

    See U.S. Congress (1985). This is a comment by Mr. Ted Weiss who in the early 1980s was chairman of the House Subcommittee on Intergovernmental Relations and Human Resources. Mr. Weiss was on the New York City Council in the early 1960s.

  4. 4.

    The Alabama Education Trust Fund for Proration Prevention is treated as a BSF in the Fiscal Survey of States series compiled by NASBO and in documents published by the National Conference of State Legislature (NCSL), for example Eckl (1993). A common feature of these publications by professional organizations is their reliance on self-report by the states.

  5. 5.

    For example, Eckl (1993) counts 45 states as having a BSF; NASBO (1999) also counts 45, and Sobel & Holcombe counts 44 (1996, 30). New Mexico and Wisconsin did establish budget stabilization funds in 1978 and 1985 respectively, but they never put any money in the funds. Kansas did set up a BSF in 1992 using $70 million of a “disproportionate share of money through the Title XIX Medicaid Program”, but the fund went into disuse soon after the money was drawn up. In this sense, it was never a real BSF. Colorado, Kansas, New Mexico and Wisconsin keep a within-fiscal-year general fund reserve which will not be able to serve the full role of BSFs. Arkansas adopts a unique “no reserve no surplus” policy because the state intends to deal with recessions solely with expenditure cuts. Louisiana and Hawaii had their first balances only in 1999 and 2000. We are not able to test their effects for the recent recessions, so these two are excluded from this study.

  6. 6.

    Revised Code of Washington, Title 43: State Government – Executive, Chapter 43.135 State Expenditure Limitations (formerly: Tax Revenue Limitations), 43.135.045 Emergency reserve fund. This legislation was adopted in 1981.

  7. 7.

    New York State Consolidated Laws, Chapter 56 State Finance Law, Article VI: Funds of the State, Section 92.

  8. 8.

    Pennsylvania Consolidated Statutes, Title 72, Section 3741.201-05.

  9. 9.

    Delaware Constitution, Article VIII, Section 6(d).

  10. 10.

    Florida Statutes, Title XIV: Taxation and Finance, Chapter 215 Financial Matters: General Provisions, Section 215.32.

  11. 11.

    South Carolina Constitution, Article III, Section 36 (B); South Carolina Code of Laws, Section 11-11-310.

  12. 12.

    Florida created a separate budget stabilization fund in 1965; later, the two funds were combined.

  13. 13.

    General Laws of Massachusetts, Part I: Administration of the Government, Title III: Laws Relating to State Offices, Chapter 29: State Finance, Section 2H.

  14. 14.

    Idaho Statutes, Title 57: Public Funds in General, Chapter 8: Fund consolidation Act, Section 14.

  15. 15.

    Alaska Constitution, Article IX, Section 17.

  16. 16.

    Missouri Revised Statutes, Chapter 33: State Financial Administration, Section 33.285 BSF created.

  17. 17.

    Michigan Compiled Laws, Chapter 18: Department of Management and Budget, Section 351–359.

  18. 18.

    Indiana Code 4-10-18.

  19. 19.

    Arizona Revised Statutes, 35–144, 2B.

  20. 20.

    “The General Assembly shall make deposits to the Fund equal at least fifty percent of the product of the certified tax revenues collected in the most recently ended fiscal year times the difference between the annual percentage increase in the certified tax revenues collected for the most recently ended fiscal year and the average annual percentage increase in the certified tax revenues collected in the six fiscal years immediately preceding the most recently ended fiscal year.” Virginia Constitution, Article X, Section 8: Limit of Tax and Revenue, paragraph 2.

  21. 21.

    Hawaii Revised Statutes, Section 328 L-3.

  22. 22.

    In an interview, Robert H. Muller, then assistant vice president of the Standard & Poor’s Corporation, described a certain percentage of general fund unobligated balances as a ratio to expenditures as “a key financial number, one of the first things you ask for,” and said that he considered 5% is “a good solid number for a state surplus, unless you have a cyclical economy” (National Governor’s Association 1978, 12). Then in a presentation at NCSL’s Fiscal Chairmen’s Seminar on Jan. 6, 1984 in Denver, Mr. Muller, then Vice President of Morgan Guaranty Trust, used again the 5% as a guideline (Gold and Eckl 1984).

  23. 23.

    See NASBO, Fiscal Survey of States, Washington, D.C., 1975–1999; NCSL (1998); and GFOA (1999, 17).

  24. 24.

    Vermont Statutes, Title 32: Taxation and Finance, Chapter 5: Budget, Section 308.

  25. 25.

    Mississippi Code, Section 27-103-203: Working Cash-Stabilization Reserve Fund established; use of funds; notice of transfers. And Minnesota Statutes 1999, 16A.152: Budget Reserve and Cash Flow Account.

  26. 26.

    Connecticut Statute, Section 4-30a.

  27. 27.

    Federal and State Roles in Economic Stabilization. United States House of Representatives, 99th Congress, 1st Session, report 99–460, December 31, 1985, 3 and 14.

  28. 28.

    Author’s correspondence in year 2000 with a Connecticut budget official.

  29. 29.

    Tools used are (a) three waves of e-mail letters, for most states; (b) two extra waves of faxes, for non-responding states; and (c) frequent phone calls with Comptrollers’ Offices.

  30. 30.

    Though we do not know the exact relation between variance of GSP and total reserves, we do know by intuition that a higher GSP variance indicates a more volatile economy, which hence needs more reserves.

  31. 31.

    This section draws heavily from data and analysis earlier published in Hou (2004).

  32. 32.

    Vermont is widely said to be a state with no such requirements, which is not true. Its “governor is statutorily required to submit recommendation to alleviate deficits from previous fiscal years in the budget request” (ACIR 1987).

  33. 33.

    More states require balanced starts of the fiscal year. In 1979, only 23 states required their Governors to submit a balanced budget; after the 1980 and 1982 recessions, this number rose to 43, and further to 45 in 1992. In 1979, only 21 states required their legislatures to pass a balanced budget. After the recession, this number rose to 39 in 1983. Back in 1979, Governors in 29 states were required to sign into law a balanced budget, but in 1999 the number of states increased to 37. The change, however, is not just toward stringency. Consideration was given to the smooth operation of the government and stable provision of public services, instead of cutting expenditures or increasing taxes. The number of states that allow carry-over of deficits from one budgetary cycle into the next increased, from 11 in 1979 to 21 in the early 1980s, after the recessions. When the economy became strong, this number declined to nine in 1987. After the 1991 recession, it rose to 14, only to come down again to nine in 1999, after the continued boom in the 1990s. The different requirements and changes in them may have exerted influence on state spending, especially during downturns.

  34. 34.

    Some related studies include Poterba (1994), Alt and Lowry (1994, 2000).

  35. 35.

    Rivlin (1987) touches upon the same topic in discussing the federal case: The divided power between the two branches creates a hurdle to the making and implementation of fiscal policies. The hurdle is low when the two branches agree; the hurdle turns medium or even high when the two branches disagree.

  36. 36.

    For detailed explanation of the model, see Prais and Winsten (1954).

  37. 37.

    There is at least anecdotal evidence to this finding. In my spring 2001 interview of state budget directors and officers (see note 3), some state officials complained to me that when the executive branch urgently needs money from BSF, the appropriation often takes far too long to be ­“practically effective.”

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Authors and Affiliations

  1. University of Georgia, Athens, GA, USA

    Yilin Hou

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Hou, Y. (2013). Subnational Government Tools for Budget Stabilization. In: State Government Budget Stabilization. Studies in Public Choice, vol 8. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-6061-9_3

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