Understanding State Government Budget Problems:

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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
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Table 1Relative 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
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Poterbas measure of a states fiscal surprise
Forecast revenues actual revenues

• Deficit shock

revenue shock
expenditure shock
Actual outlays forecast outlays
behavioral response
Within year tax increase within year expenditure
cut
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Figure 16Timing 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
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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.