Year of Publication

2010

College

Martin School of Public Policy and Administration

Degree Name

Master of Public Policy

Executive Summary

During times of economic recessions, many states throughout the U.S. may experience budget pressures that impact their overall fiscal health. Kentucky, in particular, has been faced with structural budget imbalances, declining revenue receipts, and spending reductions. Although economic conditions greatly affect states’ abilities to maintain balanced budgets, other factors may contribute to the variation among states’ financial conditions. This study assesses the effect that budget-balancing strategies, processes, and policies have on states’ fiscal health, as measured by state fiscal peril scores reported by the Pew Center on the States and year-end budget balances as a percentage of expenditures estimated by the National Association of State Budget Officers.

This analysis uses state-level economic, demographic, and fiscal data for 22 sampled states over the period 2001-2008. Three statistical models are presented to estimate the effects of fiscal policy-relevant variables on state fiscal health. Controlling for the effects of state economic and demographic characteristics, the results of the analysis indicate that various types of budget-balancing strategies, processes, and policies have an impact on state fiscal health. Policymakers in Kentucky may want to consider these types of practices; however, unique characteristics inherent to the state may limit the effectiveness of certain policies in Kentucky. The findings of this study are limited by the possibility of reverse causation, where fiscal health may affect the level and type of budget-balancing strategy used in a state. Future analysis using more recent data for 50 states is recommended to better understand the impacts of fiscal practices and policies.

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