Forecasting General Fund Revenue: An Analysis of Idaho FY 1998 to FY 2011

Forecasting state general fund revenue (GFR) though business cycles means possibly confusing a cycle with an underlying long‐run trend. Relative to the actual revenue, the mean squared error of the academic, legislative, governor's, the growth path (GP), and Holt‐Winters (HW) forecasts for Idaho GFR was not significantly different than the naïve forecast's; the Combined GP‐HW forecast has significantly smaller mean square error. The GP model (ARIMA 1, 2, 1) produced a short‐run elasticity of revenue with respect to income of 1.05 (±0.05). The best GFR forecasts combined a HW two‐step‐ahead level with a GP one‐step‐ahead trend that provided a forecast of GFR with the smallest root mean square error between FY 1998 and FY 2009. A budget stabilization fund needs to be 34–40 percent of GFR for GFR to sustain growth at the state's long‐run expansion rate during a contraction.     

The Fiscal Impact of Federal and State Aid to Large U.S. Cities: An Empirical Analysis of Budgetary Response

This article examines four types of aid programs to thirty-nine large U.S. cities federal revenue sharing, federal categorical aid, state general aid, and state categorical aid. The central finding is that there is significant variation in the magnitude of property tax reduction resulting from different types of state general aid. Property tax credits and exemptions are less effective approaches in reducing local property taxes than are state lump-sum aid or city use of piggybacked taxes Categorical state and federal aid mostly fund additional city spending and have small but important stimulative effects on the revenue side These results suggest that differences in the design of aid programs have important implications for their fiscal impact and their effectiveness in reducing property taxes.     

Budget Deficits in the States: Virginia

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State Lotteries for Public Revenue

Lotteries, the state fiscal gimmick of the eighties, operate in jurisdictions encompassing substantially more than half the nation's population and enjoy considerable public acceptance. The revenue they generate is small, rarely more than two percent of state general revenue, it is subject to major year-to-year swings, and it is very expensive to generate, particularly when vendor commissions are recognized as part of cost. Furthermore, lotteries bear a high implicit excise tax rate and, because of the pattern of play across income classes, appears to worsen the overall equity of the revenue system. Their economic impact appears to be that of an internal transfer, although states with major lottery equipment suppliers have most to gain, particularly if they do not operate their own lottery. Lotteries are not destined to become mainstays of government finance, although their spread is likely, even with the fiscal questions they raise.     

Estimating Tax Evasion Losses: The Road Fund Case

Federal, state, and local government concern about the loss of state revenues from tax evasion has increased in recent years. In order for policymakers to address this issue effectively, more information regarding the nature and magnitude of the problem is needed. This article reports on research that focuses on estimating the level of road fund tax evasion for several states. Estimates of road fund tax evasion are developed from previous research regarding individual state evasion levels, perceptions of road fund tax evasion by state revenue officials, and a statistical estimate of road fund tax evasion.     

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.     

Changes in the Usage of Enterprise Funds by Large City Governments

Using a nationwide sample of large cities, this article analyzes changes in the use of enterprise funds during the past decade. The major findings are that (1) the aggregate number of enterprise funds increased, with the largest increases occurring in solid waste and drainage; (2) part of the increase was offset by the elimination of some enterprise funds, particularly in the area of recreational services; (3) 60 percent of the cities experienced one or more changes in the types of enterprise funds they used; (4) the revenues associated with most types of enterprise funds have increased at a faster rate than general fund revenues; and (5) some cities are using alternative fiscal structures (e.g., special revenue funds and discrete component units) to account for services that are reported as enterprise funds in other cities. A continuum of fiscal structures is presented as a framework for addressing why cities might choose one structure over another and what the possible implications of a particular fiscal structure might be.     

Organizational Structure and the Optimal Design of Policymaking Panels: Evidence from Consensus Group Commissions’ Revenue Forecasts in the American States

Increasing both the size and diversity of policymaking panels is widely thought to enhance the accuracy of collective policy decisions. This study advances the theoretical conditions in which improving collective accuracy necessitates an efficient trade‐off between a panel's size and its level of organizational diversity. This substitution effect between these organizational characteristics is empirically supported with data on official general‐fund revenue forecasts made by consensus group (CG) independent commissions in the American states. Evidence of an asymmetric substitution effect is also uncovered, whereby increasing organizational diversity in large CG commissions produces revenue forecasts that reduce collective accuracy by slightly more than three times as much compared to decreasing such diversity in small CG commissions. This study underscores the limits of organizational diversity as a mechanism for improving collective judgments when policymaking authority is diffuse among many panel members.     

Life at the Bottom of the Fiscal Food Chain: Examining City and County Revenue Decisions

Any shifting of responsibilities from the state or federal governmentsto local governments would fall mostly on the shoulders of general-purposegovernments, namely, cities (municipalities) and counties. Thisstudy explores city and county revenue decisions associatedwith general funds—the governmental fund most likely tobe affected by state requirements for greater local financingresponsibility for new or devolved programs. The results suggestthat state control over local revenue authority affects decisionsregarding the imposition of financial burdens on residents,and that intergovernmental aid to cities and counties does notnecessarily mitigate those burdens. Despite evidence of healthyfinancial reserves, especially for cities, shifting responsibilitiesfrom the state to city or county governments could place citiesand counties in difficult fiscal positions. Given the importanceof own-source revenues to current budgets, and in view of thequestionable impact of intergovernmental aid on city and countyresidents' revenue burdens, questions persist about the abilityof city and county governments to maintain (and, if necessary,to expand) services during economic recession.     

What's So Magical about Five Percent? A Nationwide Look at Factors That Influence the Optimal Size of State Rainy Day Funds

State rainy day funds have increased in popularity as countercyclical planning devices over the past 15 years. The view is widely held that all states need a rainy day fund balance of five percent in order to guard themselves against the threat of budgetary dislocation. This article compares the actual balances in state rainy day funds in 1997 to several factors affecting budgetary volatility. Little relationship is found between rainy day fund balances and the actual level of volatility in a given state. The article finds no justification for a "one size fits all" approach; each state should design policies based on its own peculiar needs.     

The Impact of Tax Revenue from Capital Gains Realizations on State Income Tax Revenue and Budget Conditions

We explore the effect of the rapid increase in capital gains realizations on state income tax revenue during the 1990s and 2000s, and the effect that this had on state fiscal decisions regarding the use of these revenue. We find wide variation in the growth of capital gains realizations across states and that the growth in capital gains had a significant effect on state income tax revenue for many states. We find that states used a sizable portion of the additional revenue from capital gains to fund reserves in the year the revenue was generated, and that capital gains revenue lead to some reductions in taxes but not to increases in expenditures. The evidence suggests that states were conservative in their use of capital gains related revenues.     

The Lottery and Education: Robbing Peter to Pay Paul?

Despite the promises of some states to use lottery revenues to fund education, they may be guilty of robbing Peter to pay Paul. This study examines the question of revenue fungibility in the case of state lotteries. Using time-series analysis, the research suggests that education is not a big winner in state lotteries. Two different patterns of fungibility emerge from the analysis that are suggestive of underlying budgetary politics.     

Actuarial status of the Hospital Insurance and Supplementary Medical Insurance Trust Funds

This article, adapted from a summary of the 1983 Annual Reports of the Medicare Boards of Trustees, presents the present and projected future actuarial status of the Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) Trust Funds following the enactment of the Tax Equity and Fiscal Responsibility Act of 1982 and the Social Security Amendments of 1983. Although the Trustees characterize the outlook for the HI Trust Fund as slightly more optimistic than it was a year earlier, they report that the fund may be exhausted sometime between 1988 and 1996 unless benefits under the HI part of Medicare are reduced or financing is improved. The SMI Trust Fund, which is financed by premiums adjusted each year to reflect actual experience and by general revenue contributions, is characterized as actuarially sound. The Trustees note, however, the growing extent to which general revenue financing is becoming the major source of income for the SMI part of Medicare.     

State government purchases in a federalist economy

This paper empirically examines the impact of state government purchasing preference laws on expenditures and revenue of individual states. Purchasing preferences allow firms located within a state to win state contracts without being the low bidder. We find that states with purchasing preference laws spend 3% more in real terms per capita than other states. Evidence is found indicating that the preferences require revenue increases to fund them (the tax base does not rise sufficiently), and that there is some apparent taxpayer resistance to these preferences. This evidence is consistent with a coalition model of state government behavior because it indicates there is significant redistribution of income between groups within the state.We thank the Center for Public Policy at the University of Houston for financial support. This paper benefitted by comments received from Gordon Tullock and an anonymous referee.     

Turning Up the Heat: The Impact of Electric Utility Competition on K–12 Education Funding in Ohio

Ohio, like many states, is currently-considering deregulation of the retail electric power industry. This issue is made more complex in Ohio because structural change in the delivery of electric power is also likely to have a negative effect on state and local government revenues. This effect occurs because of three main forces: the elimination of differential property tax treatment of utilities relative to general businesses, the likely decrease in state electricity excise tax revenues as a result of falling power prices and administrative difficulty in taxing out of state providers, and the potential for stranded costs to diminish the taxable value of electric generating equipment. This article provides an overview of these issues and a brief analysis of the extent to which these problems will be shared by other states. The article then demonstrates the impact of deregulation-induced tax changes on both state and local school district revenues in Ohio and concludes with a discussion of how the state's ability to insulate local governments from these adverse fiscal effects is made both more imperative and more difficult by a recent Supreme Court Ruling on school funding Finally, the issues discussed in the article are placed in a more general context of the challenges of adjusting tax policy to changing circumstances     

Toward a Theory of Fiscal Slack

Though the fiscal slack literature has advanced over the past decade, more research is needed for a systematic understanding of the determinants and uses of fiscal reserves at the local level. This paper reviews theory and empirical evidence on the determinants of municipal fiscal reserves offers a conceptual framework for analyzing fiscal reserves accumulation and tests a series of hypotheses using a panel of 2007–2012 financial data for 145 U.S. cities from 21 states. Generalized least squares models show that unassigned general fund balances and unrestricted net assets are positively associated with general fund surpluses in the previous year and with local household incomes, while not being related to measures of fiscal risk, revenue effort, and voter characteristics. Overall, the findings suggest a relatively stronger influence of the capacity to save than the need to save on local fiscal reserves.     

Simulating Massachusetts Municipalities' Recession Readiness: Early Warning of a Perfect Storm?

We simulate effects of two recessions on Massachusetts municipalities in light of their relative dependence on state aid, capacity to increase property taxes under Proposition 2½ constraints, growth, and nondiscretionary costs. We also explore the efficacy of local government stabilization funds in light of current literature on stabilization funds, slack resources in general, and the state–local fiscal relationship. We found substantial variance in Massachusetts municipalities' recession readiness. Fifty‐five (16 percent) municipalities have insufficient resources to weather a severe recession scenario without significant sacrifice due to reliance on state grants‐in‐aid, low property tax revenue growth, erosion of property tax revenue increments by increases in nondiscretionary expenditures, and inadequate stabilization funds.     

Coping With the Loss of General Revenue Sharing in Ohio

The authors examine the impact of the loss of general revenue sharing on Ohio local governments. A study of seven large cities and surrounding counties found that the loss of the federal funds did not trigger any fiscal crises: it came as no surprise. Localities engaged in a number of coping strategies including cuts in spending and replacement of lost federal funds from local surpluses, increased debt, and some tax increases.     

Fiscal Reaction to State Aid Uncertainties: Evidence from New York State

Late budgets have become increasingly present across the states and especially persistent in states such as New York and California. The combination of delayed states budgets and institutional constraints may trigger specific budgetary strategies. Uncertainty over state aid may lead school districts to over‐ or underestimate school budgets, which ultimately may have an effect on real property taxes and the amount of education consumed. Evidence from New York State school districts suggests that school districts react to uncertainty in the state budget through a combination of revenue, expenditure, and fund balance changes. The findings suggest that districts engage in “gaming” the institutional constraints, and tend to build up large fund balances as a response to perceived uncertainty.     

Budget Deficits in the States: Massachusetts

Massachusetts entered the current recession carrying a structural deficit counterbalanced by a healthy, $2.1 billion stabilization fund, equal to 10 percent of total tax revenue. Like most states, Massachusetts only dimly realized the depth of the current recession in October 2008 when revenue collections began to slip and welfare caseloads began to increase. By May of 2009, a total FY2009 budget gap of $4 billion had been identified, the combined effect of plummeting revenues and increased costs for welfare and medical assistance. The Commonwealth closed the FY2009 budget gap through a combination of budget cuts, stabilization fund transfers, and federal stimulus funds. The Commonwealth faced an even larger $4.8 billion budget gap in FY2010. With the stabilization fund severely depleted, the FY2010 budget gap was closed primarily by budget cuts, federal stimulus money, and a sales and use tax increase. Because of the Commonwealth's reliance on one-time money to close current budget gaps, a significant budget gap of at least $2.8 billion for FY2011 was identified soon after passage of the budget. In this paper we discuss the political and historic context in which the budget gaps occurred, outline the causes of the budget gaps, and evaluate the strategies employed to close them.