The fiscal effects of U.S. State budget stabilization funds (BSFs): evidence from a meta-analysis

Abstract

A budget stabilization fund (BSF) is an important fiscal instrument for states to stabilize their budgets, but studies have found varying results regarding its impact. We conduct a meta-analysis to determine whether and under what conditions BSFs can serve as an effective countercyclical tool. By synthesizing a total of 540 effect sizes from 23 original studies, we find that on average, BSFs have a moderate positive effect on government savings and a small negative effect on fiscal stress. Additionally, strict withdrawal rules seem to attenuate the positive relationship between BSFs and government savings, and compromise the negative relationship between BSFs and fiscal stress. The presence of budget balance requirements, party conflict and some other environmental factors may also moderate the BSF-savings and BSF-stress relationships. This research contributes to the BSF literature and provides useful policy recommendations for state governments to consider when designing or revising their BSF legislations.

Notes

1 Typically, local governments are bound by state finance laws. Some states, New Jersey for example, do not allow local governments to set up countercyclical funds. As a result, most existing studies on BSFs use state data rather than local data.

2 For instance, Hou (2004) and Hou and Brewer (2010) classify balance caps into “low cap” (< 2%), “medium cap” (4 − 7%), and “high cap” (> 7%).

3 For the BSF-savings nexus, the Q-test result at study level is 35.48(p = 0.000) and I²=80.3%; and for the BSF-stress nexus, the Q-test result is 21.06(p = 0.10) and I²=33.5%. Ringquist (2013) suggests that researchers should choose between the fixed and random effects models on the basis of the theoretical criteria rather than on the basis of the Q-test. Therefore, despite the insignificant Q-test for the BSF-stress nexus, we still choose random effects model over fixed effects model for this study, because it is highly unlikely to exist a unique effect size of BSFs on fiscal stress in the complex reality of state and local finances. To be safe, we compare the results of both random effects and fixed effects models, and the difference in average effect size is minuscule (−0.070 vs. −0.069).

4 When Wagner (1999) is excluded, the mean effect size as well as the coefficients on the moderator variables continue to have the same signs, but some variables become more significant due to the influence of Wagner (1999). The underlying story of our meta-analysis remains consistent with or without Wagner (1999).

5 We are indebted to an anonymous reviewer for this explanation of the result on strict rules.

6 We thank an anonymous reviewer for pointing this out.

Additional information

Funding

National Natural Science Foundation of China, 2021, Grant ID: 72174215; Guangdong Planning Office of Philosophy and Social Science, 2019, Grant ID: GD19CGL41.

Notes on contributors

Qiushi Wang

Qiushi Wang is an Associate Professor of Public Administration at the School of Government and Center for Chinese Public Administration Research, Sun Yat-sen University, China. He received his PhD in Public Administration from the University of Nebraska at Omaha. His research interests include public pension management, municipal bonds and debt policy, government accounting, and nonprofit finance.

Jun Peng

Jun Peng is a Professor of Public Administration at the School of Government and Public Policy, University of Arizona. He received his PhD at the Rockefeller College of Public Affairs and Policy, University at Albany. His current research focuses on state and local government financial management in the U.S., such as budgeting, debt management and pension management. He is also the author of the monograph “State and Local Pension Fund Management,” which was published by Taylor and Francis in 2008.

Zhen Guan

Zhen Guan is a Doctoral student at the School of Government and Center for Chinese Public Administration Research, Sun Yat-sen University, China. Her research interests include subnational debt management, fiscal transparency, intergovernmental relation, and nonprofit finance.

Yan Xiao

Yan Xiao is an Assistant Professor at the Division of Politics, Administration, and Justice, California State University at Fullerton. She received her PhD in Public Administration from the University of Nebraska Omaha. Her research areas include municipal bonds and debt management, public pensions, and fiscal policy analysis.