Fiscal Reserves and State Own-Source Expenditure in Downturn Years

Abstract

This article tests the effects of fiscal reserves on state total own-source expenditure in downturn years. Using a panel data set (fifty states, 1979 to 1999), the article uses the variance-from-trend as the dependent variable to estimate the effects of aggregate reserves as well as budget stabilization funds (BSF) and general fund surpluses (GFS) and obtain their respective coefficients. Two data sources on fiscal reserves are used: the Fiscal Survey of the States and the Comprehensive Annual Financial Report. The article provides evidence that fiscal reserves exert positive effects on state own-source expenditure in downturn years. The effects, however, are mainly from the BSF; the GFS coefficients, even when statistically significant, are only a quarter the size of those for the BSF. Nevertheless, states that do not have a BSF seem still to rely on the GFS. It appears that the BSF has taken over the counter cyclical stabilizing function from the GFS.