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Creating a national state rainy day fund: a modest proposal to improve future state fiscal performance

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  • Rick Mattoon
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    Abstract

    Throughout the 1990s states created budget stabilization (rainy day) funds to help provide counter-cyclical support in their budgeting process. Despite the sweeping popularity of such funds, many states have failed to adopt either contribution or expenditure rules that would create significant balances in their rainy day accounts.> This paper ask the question; what would happen if a national rainy day fund were established for the states with specific contribution and expenditure rules? The proposed fund would borrow from the unemployment compensation trust fund model by creating experience ratings for each state that would trigger differential fund contributions. Simulations on fund performance under differing rules are provided.> By constructing a national fund, local state pressure to spend reserve balances whenever they reach significant levels, could be avoided. In addition, a more tightly constructed fund might improve state credit ratings and reduce capital financing costs for states.

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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2003/wp2003-20.pdf
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    Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-03-20.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedhwp:wp-03-20

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    Keywords: Funds availability ; Fiscal policy;

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    1. Knight, Brian & Levinson, Arik, 1999. "Rainy Day Funds and State Government Savings," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 459-72, September.
    2. Donald Bruce & William F. Fox & M.H. Tuttle, 2006. "Tax Base Elasticities: A Multi-State Analysis of Long-Run and Short-Run Dynamics," Southern Economic Journal, Southern Economic Association, vol. 73(2), pages 315–341, October.
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