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Essays on State and Local Fiscal Institutions Open Access

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As of December 2008, 30 states faced a limit to the amount of money they could spend or to the level of revenue they could raise. All but one currently has in place some form of balanced budget requirement, and almost every state has imposed some sort of restriction on the ability of its local governments to raise property tax revenue (National Conference of State Legislatures, 2008; Mullins & Wallin, 2004). These limits exist despite the fact that traditional norms of public finance, with their view of a benevolent government that maximizes the public interest, see no need for them. Much of the research on fiscal restrictions focuses on whether such mechanisms achieve their stated objectives: reducing spending, reducing debt, etc. A consensus seems to be emerging that institutions affecting a government's ability to manage its finances can be effective so long as they are well designed; poorly designed spending caps or budget stabilization funds will have no effect (Bohn & Inman, 1996; Kiewiet & Szakaly, 1996; Mullins & Joyce, 1996; Wagner, 2003). However, little attention has been paid to the unintended or ancillary consequences of these rules. This motivates the central question to be examined in this dissertation: what are the unforeseen consequences of fiscal institutions, and what sort of bearing do they have on the overall fiscal health of the state? In order to address these questions, I focus on three of the major budgetary institutions in place at the state and local level in the United States: tax and expenditure limitations (TELs), budget stabilization funds, and debt restrictions. Each of these institutions is the product of a complicated political process at the state and/or local level, and the presence of each has significant implications for public financial management. The essays that follow draw upon a variety of datasets, including data on local government finances in Colorado, a national panel of state pension contributions, and data on municipal debt issuance in California. The findings are summarized below: - An analysis of Colorado's Taxpayer's Bill of Rights suggests that TELs increase revenue and expenditure volatility, regardless of whether districts vote to override the restrictions imposed on them. - The effective management of budget stabilization funds can assist states in meeting their pension obligations, yet strict withdrawal rules that make it more difficult for state legislators to access these funds may result in lower annual contributions. - After the passage of Proposition 39 in 2000, which lowered the procedural hurdles required of school districts to issue general obligation bonds, school districts in California issued no more debt relative to other governments than they had previously and were no more responsive to changing credit conditions.

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