Revenue Cycles and the Distribution of Shortfalls in U.S. States: Implications for an "Optimal" Rainy Day Fund

Abstract

Slowdowns in economic activity often leave state policymakers facing severe budget shortfalls and the prospects of reducing services. In this paper we apply a Markov switching regression to monthly state-level data to model the distribution of expansions and contractions. This allows us not only to construct distributions of the revenue shortfalls states are likely to confront during recessions, but also to construct savings rate rules that depend on the uncertain duration in both expansions and contractions. Our results have important implications for policymakers who may wish to smooth cyclical fl uctuations in the budget via a rainy day fund.

Building Nonprofit Financial Capacity

“…The public administration and public budgeting literature has tended to view fund balances as a type of rainy-day fund (e.g., Douglas & Gaddie, 1996;Knight & Levinson, 1999;Pollock & Suyderhoud, 1986;Wagner & Elder, 2007). First, revenue concentration is positively associated with a growth in nonprofits' financial capacity, particularly when capacity is measured as total revenues.…”

A Spatial Analysis of Florida County Governments' Unreserved General Fund Balances

“…Local governments have started to accumulate fiscal slack in boom years—most often in the form of general fund balance—to deal with unexpected fiscal stress. The majority of the existing research on subnational fiscal slack focuses on the state level (Douglas and Gaddie ; Hou , ; Sobel and Holcombe ; Wagner and Elder ) and treats individual states as independent entities, ignoring their interactions and spillover effects across geographic boundaries. This paper intends to examine the determinants of local government general fund balance, taking the spatial relationships among local governments into consideration.…”

Budgeting for Fiscal Uncertainty and Bias: A Federal Process Proposal

“…7 A robust finding of research in public budgeting is that state and local budget stabilization funds, in conjunction with other measures such as drawing down general fund balances, are useful in enabling governments to continue service levels during recessions without increasing tax rates or issuing general obligation debt (Bohn and Inman 1996;Sobel and Holcombe 1996;Douglas and Gaddie 2002;Wagner and Elder 2005;Marlowe 2005;Hou 2006;Hou and Moynihan 2008;Hou and Duncombe 2008;Hendrick and Crawford 2014). State budget stabilization funds could be more effective, however, if the amounts reserved were more closely related to the variance of fiscal shocks or revenue volatility and, more generally, if they were larger (Joyce 2001;Wagner and Elder 2007). Hou and Moynihan (2008) also recommend that states allocate more resources to developing a counter cyclical fiscal capacity (CCFC) and further suggest that evidence of such capability might be a useful indicator of management competence.…”