Essays on State Fiscal Institutions

The following three essays investigate the effect various fiscal institutions have on state budgeting decisions. In the first essay, the impact of stringent balanced budget rules on a non-general fund expenditure category, environmental expenditure, is investigated. The essay finds that states with especially stringent balanced budget rules have lower average environmental expenditure than states absent stringent rules. Using a Fixed-Effects panel estimation, the paper finds that stringent balanced budget rules are associated with 1.55% lower per capita environmental expenditure than weak rules. Further, the presence of political interest groups in a state significantly mitigates this reduction, causing environmental expenditure to fall by less than 0.36% in stringent rule states who fall in the top ten of the nation with respect to green interest group presence. In the second essay, the impact of rainy day fund usage (the depositing and withdrawing of funds) on state budgeting decisions is analyzed. The essay concludes that when states use their rainy day funds to prevent future fiscal angst, they alter their fiscal mix to do so. A Fixed-Effects panel estimation is utilized to test for the impact of fund usage on specific categories, and finds that rainy day fund usage is significantly correlated with changes to states’ fiscal mixes. States with significant RDF balances are correlated with rises in the shares of social assistance and capital projects of 2.58% and 2.69% respectively. The third essay seeks to understand whether existing fiscal restraints, such as balanced budget rules, tax and expenditure limits, and debt limits effect a state’s ability to accumulate sizable rainy day fund balances. A Fixed-Effects panel estimation indicates that revenue limits and stringent balanced budget rules appear significantly correlated with rainy day fund share of total general fund expenditure. Revenue limiting laws reduce the share by 1.96 percentage points. Stringent balanced budget rules reduce the effect of revenue surpluses on the share, with stringent rule states having lower rainy day fund shares by about 9 basis points for every $100 million in surplus revenue.