The Effect of State Savings on State Expenditure Cuts, Employment Changes, and Revenue Actions from 1997 to 2010

Abstract

Nearly all American states face some form of a Balanced Budget Requirement (BBR) limiting their control over fiscal policy by requiring that expenditures must not exceed revenues. During recessions, BBRs place significant fiscal pressure on state budgets as they struggle to cope with significantly reduced revenues and the automatic increase in some safety net spending programs. This thesis examines the role that state savings play in reducing the fiscal pressure faced by states through the three main avenues that states use to control their budgets: expenditure changes, net revenue actions (tax increases or decreases), and employment changes. State savings are expected to exert a significant positive relationship: as state savings increase, expenditure reductions, tax increases, and layoffs are expected to decrease, especially during periods of fiscal stress; savings act as a form of counter-cyclical fiscal capacity. To quantitatively examine this relationship, a series of multivariate OLS regressions with state and year fixed effects are performed using data from the National Association of State Budget Officers (NASBO). The results show that state savings do exert a statistically significant positive effect on expenditures, net revenue actions, and employment, although the results do not hold for employment during moderate or severe fiscal crises.