THE RELATIONSHIP BETWEEN FISCAL STRESS AND PATTERNS OF STATE BUDGETING STRATEGIES USED IN CUTBACK MANAGEMENT IN THE LAST TWO U.S. RECESSIONS.

Author:Klase, Kenneth A.
Position:Report
 
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  1. INTRODUCTION

    State governments across the country dealt with significant fiscal stress in state budgeting during the Great Recession and the years afterward. Although the recession in 2007-2009 was the most severe recession in modern times since the Great Depression, states have faced repeated recessionary periods over time, most recently before the Great Recession in the early 2000s. The impact of these recessions has required states to undertake a range of budget responses to adapt to their changed fiscal environment. States have responded to the revenue constraints they have faced through a range of cutback management strategies and approaches. In an earlier period of fiscal retrenchment in government in the 1970s, Levine (1978) used the term cutback management to describe government actions for "managing organizational change toward lower levels of resource consumption and organizational activity." The principal focus of cutback management theory was on the strategies employed and the problems involved in managing declining resources in public bureaucracies. State budget responses to recent economic recessions have been characterized as essentially cutback management in a new era as states have responded to budget gaps and recessionary impacts during the most recent recessionary periods (Dougherty and Klase, 2009; Scorsone and Plerhoples, 2010).

    This study focuses on budget strategies states have employed to address the fiscal problems they have encountered in the most recent era of budget shortfalls and fiscal retrenchment in the states. It examines patterns of budget strategies used by states in response to budget shortfalls and determines the type and timing of the budget strategies states have employed in response to the fiscal stress experienced during the last two recessions. Although prior research has employed comparative analysis of budget strategies used by selected states at different times and at different levels of fiscal stress (Dougherty and Klase, 2009; Klase, 2011), this research uses an empirical analysis describing and summarizing the relationship between the budget strategies employed by all of the states over the period of the recessions and levels of fiscal stress experienced by states in each year. It looks at the prevailing sequence and timing of revenue-enhancing or expenditure-cutting state budget strategies and their relationship to levels of state budget shortfalls and fiscal stress over the range of years and stages in the recessionary periods and afterward. The study draws conclusions about the patterns of budget strategies used over these recessionary periods and evaluates those patterns against different theoretical models for cutback management.

  2. RELEVANT RESEARCH

    Research on cutback management from its inception has been tied to fiscal stress and strategies for decline or cutback (Levine, 1978; 1979). Most early research on cutback management focused on the responses of local governments to fiscal stress and retrenchment. It sought to determine how cities behave in the face of major revenue losses. Cutback management theory examined possible causes of fiscal stress and indicated that responses would likely depend on a number of factors including severity of fiscal stress and institutional and political circumstances (Levine, 1978; 1980).

    Levine (1978; 1979) and Levine, Rubin and Wolohojian (1981) developed an initial cutback management framework explaining the relationship between fiscal stress, organizational characteristics, and administrative responses. Most cutback management research since then has focused on examining how governments react to fiscal stress. This initial framework is one of the three frameworks that Bartle (1996) identified as alternative perspectives on city retrenchment processes: decrementalism or incrementalism in reverse; a systematic administrative response model to fiscal pressure on budgetary systems; and the unstructured, managerial response model. The decrementalism framework viewed responses as basically incrementalism in reverse (Lewis, 1984; Schick, 1983). Governments would focus on incremental changes in decreasing the budget. This perspective was not generally supported as reflecting actual practice since governments face widely varying circumstances when facing cutback management and would not necessarily respond by decreasing their budgets in an incremental manner (Behn, 1985, Bozeman & Straussman, 1982; Caiden, 1983). The second framework, the systematic administrative response model, corresponds to the initial cutback management framework which views government responses to fiscal pressure as systematic and dependent on resource levels and administrative responses to them. It also takes into account the effects of institutional structures (for example, formal authority structures) and political pressures (for example, from interest groups) in determining budgetary outcomes (Levine, Rubin, & Wolohojian, 1981; Wohlman and Davis, 1980). This perspective on cutback management responses to fiscal stress found some support in earlier research (Berne and Stiefel, 1993; Levine, Rubin, and Wolohojian, 1981; Rickards, 1984). The final framework, the unstructured, managerial response model, predicts that different cities will use different strategies and that there is unlikely to be much similarity among cities in their response to fiscal stress (Bartle, 1996; Downs and Rocke, 1984; Pammer, 1990). Bartle's research supported the managerial response model of government responses. He found that responses to fiscal stress varied depending on government-specific factors and were unstructured because of ambiguous goals and unclear preferences (Bartle, 1996).

    Of the frameworks outlined as alternative perspectives on the government retrenchment process, the systematic administrative response model and the unstructured, managerial response framework remain as viable alternative explanations for budget response decisions when faced with fiscal stress. Research has begun to focus on applying cutback management theory to state fiscal retrenchment and to look at the behavior of state governments in circumstances of revenue shortfalls and the resulting state responses to fiscal crises; however, initial research findings have been inconsistent. Consistent with the unstructured, managerial response model, Bowling and Burke (2006) found that general cutback strategies such as hiring freezes, pay freezes, layoffs, productivity improvements, etc. were used at about the same rate and scope across different periods of retrenchment. More consistent with the systematic administrative response model (Levine, Rubin, and Wolohojian, 1981) are findings that indicate cutback strategies follow a pattern of phased-in response to fiscal stress depending on its severity with states initially using across-the board cuts and hiring freezes initially, targeted cuts as deficits increased or fiscal stress continued, and finally layoffs or program elimination only after severe and prolonged budget deficits (Dougherty and Klase, 2009; Klase, 2011). Thus there is some evidence of phased-in responses by states to fiscal stress with the longest downturns generating a broader array of strategies (Rubin and Willoughby, 2009). Scorcone and Plerhoples (2010) characterize the developing body of research as "mixed evidence" with the three recent studies providing some accumulating evidence of "...a phased-in response to fiscal stress, varying across states depending on formal authority structures and the severity of the crisis" (p.182), but which requires further research and analysis.

    The types of responses used by states when faced with fiscal stress are the main focus of cutback management research. States commonly use several general types of responses to fiscal stress, including reducing spending, increasing revenue, implementing efficiency measures, or transferring funds from reserve funds such as rainy day funds (Arnett, 2012; Gold, 1995). Some strategies, for example, reducing expenditures through across-the-board or targeted cuts, can be implemented more quickly than others which might take time to implement or to have any effect, such as tax increases. States may be able to raise revenues through taxes or user fees if fiscal stress continues over a period of time. States may also use reorganization of agencies or privatization of services as efficiency measures to try to lower the cost of services. The use of state rainy day funds as a measure for budget stabilization has increased over time since the 1980's. Using some of these different types of general responses may result in trade-offs in the use of other responses, for example, using rainy day funds may prevent the necessity of implementing spending cuts or tax increases (Arnett, 2012; Hou, 2003, 2004). States can also take a range of other specific strategies beyond these general types of responses to eliminate budget deficits, including hiring freezes, early retirements, furloughs, layoffs, and reduced local aid (NASBO, 2013).

    Arnett (2012) has identified some critical questions about these different state responses to budget gaps and fiscal stress: which responses are selected by states; what is the timing of responses to fiscal stress; and what are the differences in strategies used depending on severity of fiscal stress. Although cutback management research has begun to address some of these questions, the research findings are nonetheless inconclusive, and questions remain as indicated earlier. The answer to these critical cutback management questions depends on issues related to fiscal stress since cutback management strategies by states are seen as responses to fiscal stress. Unfortunately, fiscal stress is an ambiguous term that is both hard to define and difficult to measure. While there is no consensus on how to operationalize the concept of fiscal stress, it generally describes the...

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