State budget balancing strategies: COVID‐19 and the Great Recession

Abstract

This research compares state budget balancing strategies taken during the COVID‐19 pandemic and the Great Recession of 2007–2009. Distinguishing features of the two crises, as well as differences among the states, lead them to engage such strategies in similar and dissimilar ways. Federal aid during both fiscal disasters is also distinctive. During the Great Recession, federal stimulus funds to states supported budget balancing efforts. In contrast, until the COVID‐19 relief bill of March 2021, federal assistance was primarily funneled directly to individuals and businesses and for pandemic‐specific spending. This left states on their own to close budget gaps fueled by COVID‐19.

Do budget Maneuvers reduce future budget resiliency? Evidence from states following the great recession

“…Likewise, the data created for this analysis supports NASBO's (2013) assertion that the use of budget maneuvers is uncommon and not a major resource for achieving budget balance. Rubin and Willoughby (2021, p. 6) observe that during the Great Recession, “…governors kept their budget and policy priorities taut, emphasizing their role as fiscal disciplinarians and offering cautionary advice for navigating forward.” They also observe that governors prioritized restoring rainy day fund balances and structural balance while taking a prudential approach to agency budget requests during the Great Recession.…”

“…Findings presented here do not suggest that budget maneuvers are benign and harmless instruments to achieve budgetary balance in a given fiscal year. Rather, it appears that for most states, some budget maneuvers such as fund sweeps are used as a flexible resource that can provide immediate budget relief, which Rubin and Willoughby (2021) note was especially important during the early months of the COVID‐19 pandemic—pursuing tax changes would not restore balance to the general fund without a long delay before increased receipts could be realized. Otherwise, NASBO (2013) argues that short‐term budget maneuvers provide “diminishing returns” which limits their usefulness especially amid a sluggish recovery.…”

“…2 Changes to tax rates and bases is inherently a long-term solution as new tax policy takes time to enact and implement. During fiscal crises such as the Great Recession and the COVID-19 pandemic, more immediate budget relief was necessary (Rubin & Willoughby, 2021).…”

“…In other words, it was not "raining" during the Volcker Alliance's FY 2015-19 study period. Rubin and Willoughby (2021) note that the purpose of rainy-day funds is to "help close budget gaps immediately" during fiscal crises, as they are "not intended to deal with structural budget deficits." Because rainy-day funds were enacted with the goal of stabilizing expenditures during recessions, they are not included in this analysis of maneuver use during the Great Recession period.…”

“…The period under investigation in their study (FY 2015‐18) was one of moderate growth and the absence of major fiscal shocks. Rubin and Willoughby (2021, p. 16) compare the state budget responses to the Great Recession versus those observed during the COVID‐19 pandemic. They find that during the pandemic, states were more likely to pursue budget deficit remedies such as accessing prior year fund balances, cash fund sweeps, and tapping rainy‐day funds relative to the Great Recession, which are best suited to provide immediate budget relief.…”