Budget gaps and balanced-budget proposals in Third District states
The Great Recession has severely tested the strength of state finances and the soundness of state budget practices. Quarterly state tax revenues have declined year-over-year for a record five quarters, from the fourth quarter of 2008 through the fourth quarter of 2009. The depth of decline is also unprecedented, with a 16.5 percent drop in the second quarter of 2009. An immediate consequence is that states are facing massive fiscal shortfalls, triggering rounds of tax increases and service cuts, plus reliance on federal stimulus money, reserves, one-off actions, and borrowing against the future. The Third District states (Delaware, New Jersey, and Pennsylvania) have been similarly affected. Examining how each state is coping with the worst fiscal crisis of the last half-century sheds light on their respective fiscal practices and raises questions for further research. This report describes the scope of each state’s fiscal problems, including current and projected budget gaps, the effect of stimulus funding, and anticipated state-level policy responses. Key findings from this report include:  Budget gap estimates for Third District states vary significantly on a percentage-of-budget basis. The District’s aggregate gap is virtually identical to the national aggregate in FY 2009 and FY 2010, and somewhat smaller in FY 2011 than nationally.  Federal stimulus funding has reduced, but not eliminated, state budget gaps.  Delaware has avoided persistent structural budget problems and has been able to address this budget crisis with a balance of revenue increases, expenditure cuts, and federal stimulus aid, rather than deferring pension payments or employing other one-off strategies.  New Jersey has faced annual structural deficits since at least FY 1994 and will close its FY 2011 $10 billion budget gap in a technical sense. However, by relying on deferred payments and oneoff policies, New Jersey will fail to balance its budget from a long-term perspective.  Revenue declines were smaller for Pennsylvania, but the state has been heavily reliant on stimulus funds, it faces mounting long-term pension obligations, and it is responsible for an unusually large number of distressed cities and municipalities.
Rainy day fund adoption in U.S. states: a case of learning or emulation
What factors influenced a state’s timeline in its adoption of a rainy day fund (RDF)? This paper utilizes event history analysis to determine the characteristics associated with the probability of state adoption of a rainy day fund between 1970 through 1995. We find that a state was more likely to adopt a RDF when its nearest largest neighbor had already adopted one. However, contrary to earlier studies, we found no association between the presence of a TEL or the amount of long-term outstanding debt on RDF adoption. As expected, states experiencing high revenue volatility were more likely to adopt a RDF.
Legal Process and the Discovery of Better Policies for Fostering Innovation and Growth
Our chapter concerns how legal process can lead to efficient policies for fostering innovation and growth. Future innovation will depend at least as much on how laws are made as on a priori analyses of the optimal content of those laws. Of particular importance is whether U.S. choice of law and choice of forum rules promote an efficient market for law. Our analysis supports three suggestions for improving the law to support growth. First, the rules governing the selection of the jurisdiction whose law governs productive activity can significantly affect growth and innovation. Second, any proposal aimed at increasing growth through a change in law or legal institutions should take account of the existence of multiple jurisdictions and parties’ ability to choose the jurisdiction whose law controls their transactions. Third, we suggest harnessing the power of jurisdictional competition among the states through a federal law enforcing contracting parties’ choice of law except to the extent states legislatively override the choice of law and regulate local transactions. We apply this analysis to several areas of the law that are critical to growth and innovation: non-competition clauses, business associations, the legal profession, internet law, insurance, property law, products liability, and franchise regulation.