Yilin Hou

A Framework for Understanding State Balanced Budget Requirement Systems: Reexamining Distinctive Features and an Operational Definition

Studies of state fiscal and budgetary policies often use balanced budget requirements (BBRs) as explanatory variables. While current measures laid the crucial groundwork for a basic understanding of state BBRs, their lack of comprehensiveness threatens the validity of empirical work. Based on comprehensive legal research, this article offers a framework for analyzing state requirements: each states BBRs form a coherent system for achieving budget balance through budget cycles; a fully developed BBR system offers a three-line construct against imbalance; and the more complete, developed, and explicit a BBR system is, the more stringent it will be in achieving budgetary balance.

What Stabilizes State General Fund Expenditures in Downturn Years—Budget Stabilization Fund or General Fund Unreserved Undesignated Balance?

This article strictly defines the budget stabilization fund (BSF) as a counter-cyclical reserve, and with a panel data set examines the effects of BSF and general fund unreserved undesignated balances (UUB) on stabilizing state general fund expenditure during downturns. The article finds that BSFs bolster spending in lean years: each percentage point increase of BSF balance as a percent of general fund expenditure can minimize negative expenditure gap by a quarter percentage point. But the article does not find evidence that UUB is a counter-cyclical fiscal tool, indicating that wide adoption of BSF may have changed the nature and use of UUB.

Using Fuzzy Rule–Based Systems to Evaluate Overall Financial Performance of Governments: An Enhancement to the Bond Rating Process

Credit ratings remain a key feature of municipal debt management. The primary objective of this article is to develop a new methodology for evaluating the financial performance and creditworthiness of governments and to illustrate this approach for a sample of large American cities. Specifically, we develop a fuzzy rule–based system (FRBS) that uses economic, debt, and other financial information as well as a measure of financial management to produce rankings of city financial performance. The FRBS credit ratings are highly correlated with actual Moody’s ratings for these cities. FRBS have the potential of enhancing the rating process by standardizing the information used and encouraging consistent rules about what combinations of inputs result in good, fair, or poor performance.

Do Local Governments Save and Spend Across Budget Cycles? Evidence from North Carolina

The fiscal crisis encountered by state-local governments since 2008 has again made prominent the issue of how to better prepare for and stabilize expenditures during recessions. Does the stabilization function of government, and its theory, still hold? Previous studies focus on federal and state levels; only a few look at local governments. This article explores whether localities save and spend across the boom-bust cycle; we intend to identify the determinants of local government savings and estimate the impact of savings on stabilizing expenditures. Unlike some early evidence that shows countercyclical stabilization properties of local unreserved general fund balance, the empirical results of our study on North Carolina counties do not support the stabilization role by localities. This study carries timely and important implications for state/local policy making and financial operations; it also adds to the literature on the stabilization function of government.

Decentralization of Human Resource Management: Driving Forces and Implications

In the past two decades, decentralization ofh uman resources management has been one ofthe themes of administrative reform. While a lot of research has been conducted at the federal level, less of it has specifically targeted state government This article uses data from the 1998 survey of state governments to fill in this gap by identifying the driving forces and implications of human resources management decentralization in thestates.

Fiscal Reserves and State Own-Source Expenditure in Downturn Years

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.

Local Option Sales Taxes and Fiscal Disparity: The Case of Georgia Counties

While local option sales taxes (LOST) have become an important revenue source for local governments, there has been concern about the distribution of LOST revenues: the uneven distribution of sales tax bases may have introduced a new source of fiscal inequality and exacerbated existing fiscal disparity. Using Georgia county data (N=159, 1970-2000), this study examines whether and how LOST have affected local fiscal disparity. Our findings suggest that the effects of LOST on fiscal disparity vary with the approach to measure revenue-raising capacity; thus the issue of LOST distribution is sensitive to the underlying conceptualization of fiscal equity.

Determinants of Pay-as-You-Go Financing of Capital Projects: Evidence from the States

Although states have long practiced pay-as-you-go in financing their capital projects as a supplement to debt, academia has paid scarce attention to pay-go financing. This study fills in the niche by providing empirical evidence on what determines the use of pay-go in financing capital projects. It develops a model that considers the preferences of both voters and politicians when they make capital financing decisions in a given institutional setting. The empirical results suggest that the use of pay-go is affected by a states income level, its economic conditions, the presence of a divided government, as well as its budgetary institutions.

Pay-as-You-Go Financing and Capital Outlay Volatility: Evidence from the States Over Two Recent Economic Cycles

Pay-as-you-go (pay-go or cash) and pay-as-you-use (pay-use or debt) are two mechanisms to finance capital projects. While pay-go faces multiple constraints, pay-use smoothes outlays, stabilizes tax rates, and improves inter-generational equity. Thus, pay-use has dominated infrastructure financing for decades. In recent years, there has been revived academic interest in pay-go as an alternate financing mechanism; however, there is a large gap in the literature and inadequate evidence on the effects of pay-go, especially its effects on capital outlay volatility. This paper fills in the niche. Examining state experience over the two recent economic cycles, this paper finds evidence that suggests that pay-go is associated with lower volatility in capital spending in the long run, but may increase short-run variability. We recommend that states couple pay-go in boom years with pay-use in lean years. In unison, the two mechanisms can reduce aggregate volatility and increase long-run stability of capital expenditures.

Balanced Budget Requirements and State Spending: A Long–Panel Study

This study tests the effects of balanced budget requirements on three measures of state expenditure using data on 48 states for the years 1950–2004. We find that the following rules are effective in constraining expenditures: (1) requiring that the governor submits a balanced budget; (2) placing controls on supplemental appropriations; and (3) prohibiting the carry‐over of a deficit from one fiscal year or biennium into the next. The latter two rules exert larger individual effects than the first. All else equal, states can best improve their prospects of reigning in spending by instituting technical rules that govern budgetary outcomes, as opposed to political rules that dictate how the budget is assembled and approved.