Making Budget Stabilization Funds Work

This dissertation examined the impact of Budget Stabilization Fund (BSF) rule stringency on fiscal slack levels within state governments. Across the United States, states have implemented BSFs to stabilize their budgets during economic downturns. However, there is considerable variation in the stringency of rules governing BSF deposits and withdrawals among states. Drawing on insights from New Institutional Economics (NIE), the study sought to elucidate how the stringency of these rules influences states' saving and spending patterns. Using Fixed Effects and Generalized Synthetic Control Method (GSCM) models, the research provides significant insights into state fiscal behaviors. The findings underscore a crucial policy implication concerning the efficacy of strict BSF regulations. Specifically, stringent deposit rules, such as imposing high caps, tying deposits to revenue volatility, and depositing surplus revenue into the BSF, positively influence BSF levels. This highlights the importance of establishing clearly defined saving obligations within BSF frameworks to enhance their size and resilience, serving as invaluable tools for state governments to prepare for economic downturns and alleviate fiscal stress. Fixed Effects models reveal that stringent withdrawal rules impact General Fund Balance (GFB) levels, whereas stringent deposit rules do not. States that link withdrawals to revenue volatility and impose withdrawal limits tend to maintain higher GFB levels, suggesting that multiple stringent regulations encourage states to keep funds in the GFB for more accessible use than the BSF. The study highlights the importance of stringent deposit rules in enhancing BSF levels for fiscal stabilization and reveals that stringent withdrawal rules significantly impact GFB levels. This suggests that strict withdrawal regulations complicate slack resources and have nuanced policy implications for effective fiscal management strategies in state governments. The findings contribute to understanding how institutional arrangements influence fiscal behaviors and provide practical insights for policymakers to refine BSF policies, enhancing their effectiveness in stabilizing budgets during economic downturns.