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The Relationship between Fiscal Stress and Patterns of State Budgeting Strategies Used in Cutback Management in the Last Two U.S. Recessions

Published in PFM, Vol. 18 No. 1

This research examines patterns of budget responses used in cutback management by all fifty states in response to budget shortfalls and fiscal stress. It uses NASABO data on state budget responses for all fifty states during 2002-2013, including the last two recessions, to address research questions concerning which response strategies are used, timing of respons- es in relation to fiscal stress, and differences in budget response strategies depending on se- verity of fiscal stress.
Based on analysis of frequency data, states used more responses, and increasingly more severe responses, over the course of recessionary periods and in the years immediately after- ward as the lagged impact of fiscal stress increased in severity. This pattern in state responses also reflects a time lag in the number and severity of state responses to fiscal stress in reces- sionary periods. The pattern of state responses observed over the two recessions provides some evidence that the initial responses to fiscal stress generally involve the use of less severe responses with more severe responses added when fiscal stress increases.
Bivariate contingency analysis, Chi-Square Test of significance, and Measures of Associ- ation are used to evaluate the significance and strength of the relationship between the use of various budget strategies and levels of fiscal stress based on Low, Medium, or High levels of Fiscal Stress. Fiscal Stress is defined in terms of budget solvency using interquartile ranges of percent expenditure change between fiscal years to represent budget shortfall for the states in each year. The findings from Chi Square tests and the measures of association for the rela- tionship between individual budget responses and fiscal stress over the period indicate that the majority of state budget responses are moderately strongly associated with levels of fiscal stress.
This research defined a variable that aggregates patterns of state budget response in terms of severity. The Budget Response Severity variable is categorized as Low, Medium or High in severity based on the highest severity level of budget responses used by a state in a given year. Using bivariate contingency analysis, Chi-Square Test of Significance, and Measures of Association, Budget Response Severity was found to be moderately strongly as- sociated with the severity of fiscal stress.
The study concludes that the patterns of state budget response strategies used over the period are consistent with a phased-in response model to fiscal stress with more severe budget responses used by states as levels of fiscal stress increase. The findings contribute to further testing and confirmation of cutback management’s systematic administrative response model to fiscal pressure on budgetary systems.3

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