A Comparative Analysis of Budget Stabilization Fund Effectiveness

BSFs seek to force state governments to gather surplus revenues during good times into a fund that can be drawn later during bad times, when revenues slacken and when it is most difficult to borrow the funds needed by the government for recovery. It has been deemed that “strict” funds whose deposit and withdrawal rules are mathematical formulas designed to limit discretion in their use, are effective in reducing expenditure, deficits, and expenditure volatility over time. I analyze the effectiveness of the “strictest” measures using the synthetic control method. The analysis indicates no significant effects on expenditures, deficits, nor expenditure volatility in the post-implementation period nor the 2000-2001 recession, when most states first activated their funds. I conclude that these funds, by design, do not effectively limit the discretion of political actors to deposit or withdraw funds. As such, Budget Stabilization Funds do not overcome the agency problems they need to for true effectiveness