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.
The Use of Qualitative Information in Macro-Economic Policy Analysis
The majority of macro-economic policy models takes for granted that conflicts among objectives can be assessed by means of a tradeoff analysis. Such tradeoffs imply that sacrifices and benefits of various impacts of decisions can be measured on a cardinal scale, so that a conventional macro-economic utility or welfare analysis can be applied.