The Impact of State Rainy Day Funds in Easing State Fiscal Crises During the 1990–1991 Recession

Abstract

This article examines the degree to which rainy day funds eased the fiscal stress experienced by states during the 1990–1991 recession. In the first section, a state fiscal policy of neutrality over the business cycle is used as a benchmark for evaluating the use of budget stabilization funds. The next section looks at data from the last three recessions to see how recessions have affected the taxes and expenditures of states. A measure of degree of fiscal stress experienced by each state during the 1990–1991 recession is then calculated. These results are used to empirically investigate the impact of explicit state rainy day funds in easing state fiscal stress. Next, the article examines whether states that had rainy day funds in 1989 were more likely to have less fiscal stress, and whether the specific deposit and withdrawal provisions of these funds made a difference.

Capacity, Management, and Performance

“…In the past, economic stability had long been assumed to be the sole responsibility of the central/national government (Oates, 1972); more recent trends of economic thinking extend such responsibility to subnational governments (Gramlich, 1987). Empirical studies have proved the positive effects of countercyclical policies at the state level (Knight & Levinson, 1999;Sobel & Holcombe, 1996), and professional organizations such as Government Finance Officers Association (GFOA) and National Association of State Budget Officers (NASBO) have recognized the importance of such measures (GFOA, 1999); even credit-rating agencies have listed these among their lists of criteria (Larkin, 2000).…”

A Sub-national Perspective on Financing Investment for Growth II - Creating Fiscal Space for Public Investment

“…Tight rules regulate the accumulation of funds: in most states, total funds accumulated must remain below 5% of a state's budget; in other, the limit is 10%, and a few states have no limits. Academic research confirms that stabilisation funds allow for a reduction in the volatility of SNG expenditures (see, for example, Sobel and Holcombe, 1996, Gonzalez and Paqueo, 2003, or Wagner and Elder, 2005.…”

Saving for a Rainy Day: Estimating the Appropriate Size of U.S. State Budget Stabilization Funds

“…Previous research used a linear model of time to decompose state revenue into the longterm component (the so-called "trend") and the short-term component associated with business cycles (for example, Pollock and Suyderhoud 1986, Sobel and Holcombe 1996b, Navin and Navin 1997, Gonzalez and Levinson 2003. For instance, the article by Navin and Navin (1997)-…”

“…3 RDFs allow states to make timely and rational budget decisions, rather than shortsighted decisions in response to fiscal crises (Cornia and Nelson 2003). They have been shown to promote state savings and help to ease states' fiscal stress during past recessions, although often not completely eliminating states' fiscal stress (for example, Knight and Levinson 1999, Sobel and Holcombe 1996b, Douglas and Gaddie 2002, Wagner and Elder 2005, Hou 2005. 4 Various policy groups, regardless of their political affiliations, recommend establishing an RDF as a sound financial management technique (Henchman 2012, McNichol and Boadi 2011, NASBO 2013, Pew Charitable Trusts 2014.…”