state fiscal forum david merriman

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Understanding State Government Budget Problems: Insights from the Midwest Region Richard F. Dye Lake Forest College and Institute of Government and Public Affairs, University of Illinois and David F. Merriman Loyola University Chicago and Institute of Government and Public Affairs, University of Illinois For presentation at the State Fiscal Forum: Assessing the Fiscal Environment in the Midwest and the Nation November 12, 2003 The Federal Reserve Bank of Chicago and The National Tax Association

Table 1Relative Importance of Selected State Budget Categories in Fiscal Year 2000(Percent of Total General Revenue) : 

Table 1 Relative Importance of Selected State Budget Categories in Fiscal Year 2000 (Percent of Total General Revenue) Source: U. S. Bureau of the Census (www.census.gov).

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Table 2 Change in Selected State Budget Categories From Fiscal Year 1992 to 2000 (Annualized Percentage Change in Real per Capita Revenue or Expenditure) Source: Calculated with fiscal and population data from the U. S. Bureau of the Census (www.census.gov) and the GDP Chain-type Price Index from the U.S. Department of Commerce, Bureau of Economic Analysis (www.bea.doc.gov).

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Figure 10: End-of-fiscal-year Balances plus Budget Stabilization Funds (as a percent of expenditures)

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Figure 11 Instantaneous and cumulative surplus No growth in FE revenue, no expenditure from surplus, symmetric business cycle

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Figure 12 Instantaneous and cumulative surplus No growth in FE revenue, no expenditure from surplus, asymmetric business cycle

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Figure 13 Instantaneous and Cumulative Surplus: Growth in FE revenue, No expenditure from surplus, symmetric business cycle

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Figure 14 Instantaneous and Cumulative Surplus: Growth in FE revenue, symmetric expenditure from surplus, symmetric business cycle

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Figure 15 Instantaneous and Cumulative Surplus: Growth in FE revenue, asymmetric expenditure from surplus, symmetric business cycle

Poterba’s measure of a state’s fiscal surprise: 

Poterba’s measure of a state’s fiscal surprise Deficit shock= revenue shock + expenditure shock + behavioral response Forecast revenues – actual revenues Actual outlays – forecast outlays Within year tax increase –within year expenditure cut

Figure 16Timing of 1990 and 2001 recessions: 

Figure 16 Timing of 1990 and 2001 recessions

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Figure 17 Deficit Shocks in the Midwest During the Period Around the Recession of 1991 (the 1991 Recession Lasted from July 1990 to March 1991)

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Figure 18 Deficit Shocks in the Midwest During the Period Around the Recession of 2001 (the 2001 Recession Lasted from March to November 2001)

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Table 3 State Responses to Deficit Shocks in Last Two Recessions

Conclusions: 

Conclusions Chicago FED district states similar to each other and nation with respect to fiscal policy and fiscal history. During boom years district states exercised some fiscal restraint and accumulated larger year-end balances. Revenue decline hit district states early and hard. Even in a world of perfect certainty, it would be difficult to maintain fiscal balance over the business cycle. States used combination of quick expenditure cuts and lagged tax increases to cope with fiscal surprises.