States Strengthened Fiscal Policies in 2018

More seek to improve incentive programs, reform rainy day funds, and support local governments

States Strengthened Fiscal Policies in 2018
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In March, Utah Governor Gary Herbert (R) signed a measure that requires the state to regularly conduct comprehensive budget stress tests and produce long-term spending plans that allow leaders to consider the future implications of current budget decisions.   

House Bill 452, which received unanimous support in the Legislature, bolstered Utah’s reputation as a national leader in fiscal management. Since 2008, the state has conducted regular analyses of revenue volatility that are used to inform reserve fund targets. The new law requires the generation of additional information on fiscal conditions and will enable policymakers to better anticipate potential shortfalls and avoid sudden adjustments to tax rates or program funding.

Utah was not alone in its efforts to strengthen state fiscal protections in 2018. Several other states also moved to enact policies to better prepare them for future ups and downs and to boost confidence that they are spending taxpayer dollars effectively.  

Improving state tax incentive programs

Massachusetts took steps to evaluate whether government incentive programs were yielding the intended results. Like other states, Massachusetts commits millions of dollars to tax incentive programs, hoping to create jobs, attract businesses, and strengthen local economies. Whether these investments produce results is often an open question.

On Aug. 8, Governor Charlie Baker (R) signed House Bill 4820, a measure intended to find some answers. The legislation requires creation of a commission that includes leading legislators and executive branch officials to regularly evaluate and report on all tax expenditures, including incentive programs. These evaluations will provide more complete information about the fiscal and economic impact of programs and help lawmakers decide whether the incentives are worth the investment.

As more states evaluate their incentive programs, leaders have an increasing body of information about their impact. In 2018, Alaska, Connecticut, Indiana, Maine, Nebraska, and Wisconsin used such evaluations to make policy changes. This progression—from research to research-informed policy change—improves program outcomes and helps states make data-driven decisions that best serve their communities. 

Helping localities detect fiscal distress

In Nebraska, state and local officials engaged in conversations about improving fiscal policy, but lawmakers have not yet enacted reform legislation.  Early in the year, state leaders considered the Fiscal Stress Management Act, which aims to monitor the fiscal condition of Nebraska’s local governments. State leaders heard testimony about best practices for detecting fiscal distress and are now working with an expert at the University of Nebraska, Omaha to develop and pilot a system to assess local fiscal conditions. Getting such information on a regular basis would allow officials to detect distress early and take proactive measures to intervene as appropriate.  

Policymakers in Colorado embarked on a statewide effort to monitor local fiscal conditions over the next three years. The state’s Division of Local Government initiated a project to work with eight communities to implement best fiscal management practices. Called the Strategic Planning Initiative, the effort will monitor 12 indicators of local fiscal health.

Delaware joined Utah in reforming reserve fund policies in 2018. In June, Governor John Carney (D) adopted evidence-based recommendations from the Delaware Economic and Financial Advisory Council through Executive Order 21. This action created a budget stabilization fund in the executive budget that is designed to receive money when revenue growth exceeds expected levels and to distribute money when state revenues decline. The recommendations were based on the council’s analysis of several factors: the state’s existing mechanisms to weather economic ups and downs, the volatility of state revenue, and the level of risk—essentially the portion of any revenue shortfall—that the state intends the rainy day fund to cover.

Examining debt affordability

In South Carolina, the State Treasurer’s Office improved an annual report examining the state’s debt by, among other things, including projections of future debt levels and existing repayment sources. With this new information, state leaders have a better understanding about how to manage South Carolina’s debt moving forward and a broader picture of the state’s fiscal standing.

Over time, more states have put in place or considered these kinds of policies so they can take advantage of the additional information generated. By harnessing that data, lawmakers can ensure that they are prepared for fiscal challenges in the future while making the most effective use of the resources they have now.

Robert Zahradnik works on The Pew Charitable Trusts’ states’ fiscal health team.

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Economic development incentives play a central role in states’ efforts to create jobs and strengthen their economies. Pew’s research shows how states can ensure that incentives are effective and fiscally sound. 

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State Debt Management

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State officials often choose to borrow money to finance large expenses, such as expanding a congested highway or replacing defunct wastewater treatment plants. By distributing the cost of a large investment over many years, governments can free up cash on hand to meet their current day-to-day expenses. Borrowing for long-lasting infrastructure, primarily by issuing bonds, also spreads the cost over generations of taxpayers, enabling states to finance multiple pressing needs simultaneously. As debt financing continues to be an attractive option for states seeking to bolster aging public facilities, utilities, and services, it is important for policymakers to understand just how much debt they can afford to issue.

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Strengthening Local Fiscal Health

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Local governments are essential to the nation’s prosperity—central to the quality of life, jobs, and long-term prospects of most Americans. However, research from Pew finds that even as many cities and towns struggle to recover from the Great Recession, new challenges are emerging. Local governments face costly infrastructure needs, reduced state and federal aid, and growing long-term liabilities.