wPss3v31 POLICY RESEARCH WORKING PAPER 3131 Social Sector Expenditures and Rainy-Day Funds Christian Y. Gonzalez Vicente B. Paqueo The World Bank Latin America and the Caribbean Region Economic Policy Sector Unit and Social Protection Sector Unit September 2003 I POLICY RESEARCH WORKING PAPER 3131 Abstract Gonzalez and Paqueo examine the effects of budget reducing the volatility of social sector expenditures. The stabilization funds-often called rainy-day funds-on the authors also find that states that have stringent deposit volatility of social spending and, for contrast, on and withdrawal rules have higher rainy-day fund nonsocial sector spending. They analyze the rainy-day balances, and thus are more effective in reducing the funds of U.S. states. The authors find that rainy-day volatility of social sector expenditures. Finally, for long- funds are ineffective in reducing the volatility of term effectiveness, stabilization funds depend obviously nonsocial sector expenditures but are effective in on sustained economic growth. This paper-a joint product of the Economic Policy Sector Unit and the Social Protection Sector Unit, Latin America and the Caribbean Region-is part of a larger effort in the region to draw lessons from U.S. states on the effects of budget stabilization funds on the volatility of expenditures. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Patricia Holt, room 18-805, telephone 202-473-7707, fax 202-522- 2119, email address pholt@worldbank.org. Policy Research Working Papers are also posted on the Web at http:// econ.worldbank.org. The authors may be contacted at cgonzalez@worldbank.org or vpaqueo@worldbank.org. September 2003. (19 pages) The Policy Research Working Paper Senes disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Produced by the Research Support Team Social Sector Expenditures and Rainy-Day Funds Christian Y. Gonzalez and Vicente B. Paqueo World Bank, 1818 H Street NW Washington DC 20433, USA cgonza1ez(a,worldbank.org vpagueogworldbank.org Social Sector Expenditures and Rainy-Day Funds By Christian Y. Gonzalez and Vicente B. Paqueo I. INTRODUCTION Reflecting increasing concern about economic insecurity and its social welfare consequences, an analysis of Latin American countries reveals the need for better social risk management systems to deal with economic shocks and uncertainty (De Ferranti, Perry, et al., 2000). Such a system involves a combination of policy instruments ranging from market insurance and self-insurance to social protection. One of these instruments highlighted in the above-mentioned study is the budget stabilization fund, often called "rainy-day fund." 'Noting that many countries suffer from pro-cyclical social spending, they argued for governments to save in good times to finance social spending in bad times. To quote: "The poor do not, for example, frequently pull their children out of school during bad times-although they do when the recession is severe. But the fact that some educational and health outcomes are hurt during especially bad times may be as much the result of the government's inability to maintain the quality of social services as the household's decision to invest less during crises... Governments should save in good times to finance social spending in bad times... " (De Ferranti, Perry, et al., 2002, pp. 9-10) During the last two decades, virtually all of the U.S. states have adopted rainy-day funds, that allow them to smooth public spending over time by saving during booms and using the balances to cover revenue shortfalls during recessions. Prior to 1981, few states had such funds (Gold (1981), and Knight and Levinson (1999a)). By 1984, 18 states had enacted rainy day funds, and by 1994, 45 states had them (Knight and Levinson (1999a)). In 2000, almost all of the U.S. states have adopted budget stabilization funds, and their balances averaged $158 per capita, or 3.22 percent of total state expenditures. This paper examines the effect of rainy-day funds on the volatility of social spending and, for contrast, on non-social sector expenditures. Further, it analyzes empirically the determinants of the size of the rainy funds. The characteristics of state rainy-day funds differ across states, in particular in terms of the stringency of their 3 deposit and withdrawal rules as well as the fund's size. This paper examines those afore- mentioned rules and other factors in determining the size of the rainy-day funds. Analysis of the U.S. experience could reveal useful lessons for Latin American and other developing countries. II. LITERATURE REVIEW The literature on "rainy-day funds" is summarized in table 1. Navin and Navin (1994) examine the state budget stabilization funds of Indiana, Iowa, Missouri, Michigan, Minnesota, Ohio and Wisconsin. In particular, they examined the movement of fund balances over time (1983-1991) to see how the fund balances move in relation to some indicators of fiscal health. The authors find that the use of these funds varies significantly among states as does the level of funding and therefore the ability of these tools to serve as effective instruments of counter-cyclical state fiscal policy. Sobel and Holcombe (1996) examined the degree to which rainy-day funds eased the fiscal stress experienced by states during the 1990-1991 recession. The authors constructed a measure of state fiscal stress as the amount of discretionary tax increases plus the amount by which expenditure growth fell below average. Then, they constructed an empirical model to see whether the presence of an explicit rainy-day fund had an effect on the degree of fiscal stress experience by a state. Sobel and Holcombe found that rainy-day funds were effective in reducing fiscal stress if they had mandatory requirements for making deposits. Also, they show that for a given amount of fiscal stress, states that have rainy-day funds are more likely to cope with that fiscal stress through spending reductions than through increases in taxes. Levinson (1998) shows that stringent balanced budget requirements enforced in some U.S. states have exacerbated business cycles in those states. He also shows that states with rainy-day funds have smoother business cycle fluctuations. Knight and Levinson (1999a) examined the effect of rainy-day funds on state savings behavior. They found that states with rainy-day funds have higher total balances than states without such funds and also have higher balances after adoption than before adoption. Furthermore, 4 rainy-day fund deposits increase total balances dollar-for-dollar. In sum, according to these authors rainy-day funds appear to belong to the growing set of fiscal institutions with real fiscal and economic consequences. Wagner (1999) shows that the increase in state budget stabilization funds is attributed to the 1980-1982 recession. In a descriptive analysis of commodity-based stabilization and savings funds currently in place in Norway, Chile, Alaska, Venezuela, Kuwait, and Oman, Fasano (2000) finds that the outcome of their experience has so far been mixed, with differences among countries reflecting differences in objectives, institutional arrangements, adherence to operational rules, and the soundness of the overall fiscal policy. Nevertheless, he observed that in most cases the stabilization funds he reviewed have contributed to the enhancement of the effectiveness of fiscal policy by making the budget expenditure less driven by revenue availability. With respect to the determinants of adoption of rainy-day funds, Wagner and Sobel (2001) shows that states with tax and expenditure limit laws in place were significantly more likely to establish these funds. They were significantly less likely, however, to adopt funds with stringent deposit and withdrawal rules. This suggests that some states adopted budget stabilization funds to circumvent existing fiscal constraints. Finally, in the most recent study of the issue, Gonzalez (2002) has found these rainy-day funds to be ineffective, consistent with the findings of Sobel and Holcombe (1996) and Wagner and Sobel (2001). Noting that most of the states are not well prepared for the most recent recession, he finds that only 4 out of 50 states have enough rainy-day funds to ease a recession similar to that of the early 1990s. In this regard, he points out that the reason why some states don't have enough savings is because they have reached their cap on the fund size. The above review of the literature reveals that current analyses have not examined the impact of stabilization funds on social expenditures. They have been limited mainly 5 to the analysis of their effectiveness in smoothing total spending and reducing fiscal stress. It may be argued that rainy-day funds, even if they are not earmarked for specific expenditures such as those of the U.S. states, could reduce the volatility of social sector expenditures - and could do so without simultaneously stabilizing non-social sector expenditures. This differential effect can happen because politicians may prefer certain type of expenditures more than others. For example, during a lean year a politician facing the decision whether to use the rainy-day funds to finance the construction of a new road or to maintain the outlays for a certain school and health services could be more incline to choose the latter. That is, it maybe the case that politicians care more about maintaining a certain level of social sector expenditures, even at the expense of non-social sector expenditures.1 III. THE IMPACT OF RAINY-DAY FUNDS ON THE VOLATILITY OF EXPENDITURES In the United States, state governments are responsible in the allocation on what it is known as the general fund. The general fund can be divided between social and non- social sector expenditures. The categories used for social sector expenditures in the General Fund are: elementary education, higher education, Medicaid, and cash assistance programs. In the non-social expenditures we could find the following categories: transportation, correction, and others. We will use these two type of expenditures to measure the effect of rainy-day funds on the volatility of expenditures. To construct a measure of the volatility of expenditures (income), we ran a regression between expenditures (income) in real terms and a trend line. Then, we predicted the residuals and obtained their absolute value. Thus, the absolute value of the predicted residuals are used as a proxy for the volatility of expenditures (income). ' Such political preference would be stronger in cases where the influence of labor unions is relatively strong in the sector. 6 The basic specification that we used to test the'effect of rainy-day funds on the volatility of expenditures is the following: Vol exp3, = A31Volinc,, + /2Rainys,,1_ + + 5, (1) where Volexp is the volatility of expenditures in state s at time t; Volinc is the volatility of gross state product (GSP) in state s at time t; Rainy is the rainy-day fund balance in state s at the end of year t-1; and co are state fixed effects. The above variables are in million 1988 dollars. Data: The data are drawn from a number of different sources. State rainy-day fund balances, and expenditures were obtained from several issues of the Fiscal Survey of States and State Expenditure Report published by the National Association of State Budget Officers (NASBO). Data on the characteristics of rainy-day funds2 were obtained from NASBO (1999), Wagner (1999), and Knight and Levinson (1999a) and from the departments of finance of some states. Results. Table 3 shows the regression results-for (1), using data from the 1985 to 2000 period. We find that a dollar in the rainy-day fund balance decreases the volatility of social sector expenditures by about 34 cents. By contrast, column (3) of Table 3 shows that rainy-day fund balances do not have any effect on non-social sector expenditures. This implies that rainy-day funds are effective in reducing the volatility of the social sector expenditures but are ineffective as an overall budget stabilization fund. This result is consistent with Sobel and Holcombe (1996), Wagner and Sobel (2001), and Gonzalez (2002), which as mentioned found that rainy-day fimds do not reduce the volatility of aggregate spending. Also, column (1) of Table 3 shows that states with higher volatility of income have a higher volatility in social sector expenditures. Most of the regression results depicted in columns (1 and 3) of Table 3 are statistically significant at a 90 percent level of confidence. We tried a variation on 2 See Table 2. 7 specification (1), using volatility in per capita gross state product instead of Volinc. As shown in column (2) in Table 3, the result is greater precision in the estimated coefficient of the rainy-day variable. A Hausman's specification test was also performed, indicating that the regression results from a random effects specification are biased. However, its coefficients are statistically significant and have the same sign as the fixed effects results. Finally, all of the regression results depicted in column (4) are not statistically significant, which implies that there is no correlation between the volatility of non-social expenditures and the rainy-day fund balances and the volatility of gross state product per capita. We tried different specifications and found the same results. IV. RAINY-DAY FUND BALANCES AND CHARACTERISTICS The characteristics of state rainy-day funds differ across states. They differ in particular in their deposit and withdrawal rules as well as the fund's size. Some states' laws mandate deposits to rainy-day funds in certain years. In others, they are determined by a formula based on the projected revenues. The majority of the states require only regular legislative approval for withdrawal of these funds. This allows coverage of revenue shortfalls, but has the drawback of not providing very stringent controls to ensure that funds are left untouched until they are needed. "Some states have maximum limits, or caps, on fund sizes. These limits range from 2 percent to 25 percent of expenditures. The most common limit is 5 percent, the generally accepted minimum level of total balances by credit rating agencies (Eckl (1997)), and the amount suggested by the National Conference of State Legislatures (Sobel and Holcombe (1996))."3 To examine the determinants of the size of the rainy-day fund, we constructed three dummy variables. The first is a dummy that indicates if the state has an stringent deposit rule for its rainy-day fund. This variable takes the value of 1 if the state requires that some money should be deposited into the rainy-day fund account, and the value of zero otherwise. The second dummy indicates whether the state has an stringent withdrawal rule for its budget stabilization fund. Specifically, this variable takes the value 3 Knight and Levinson (1 999a). 8 of 1 if the state requires a super majority approval in Congress, and zero otherwise. The third dummy indicates whether the rainy-day fund has a cap or not. The following specification was estimated to explain the observed differences in the states' rainy-day fund balances. Rainy,, = A/Rainy5,,., + l2Withdrawi, +,f3Cap5,, +f34Deposi(, +f5lincomen, +, 6GrowtA, + eV, + e,, (2) where Rainy is the rainy-day fund balance in state s at the end of year t; Withdraw is a dummy variable indicating if the rainy-day fund has an stringent withdrawal rule; Cap is a dummy variable indicating if the rainy-day fund has a cap; Deposit is a dummy variable indicating if the rainy-day fund has an stringent deposit rule, Income is gross state product (GSP) per capita in state s at time t, Growth is the growth rate of gross state product, and co are state fixed effects. Results. Table 4 shows the regression results for (2) by using data from the 1985 to 2000 period. We found that, relative to the mean, states with stringent deposit rules have 124 percent more money on their rainy-day fund accounts than states without those strict rules. Also, we found that states with stringent withdrawal rules, on average, 137 percent more dollars on their rainy-day fund accounts than states without those tough withdrawal rules. Contrary to expectation, the coefficient for the rainy-day fund's cap is not statistically significant, although it has the expected sign. Further, high-income states have higher rainy-day fund balances than low-income states. Finally, states with high economic growth rate have higher rainy-day fund balances than those states with lower rates. These results are consistent with those from Sobel and Holcombe (1996). All of the results depicted in Table 4 are statistically significant. Also, using Hausman's specification test, we find that the regression results from a random effects specification are biased. However, its coefficients are statistically significant and have the same sign as the fixed effects results. 9 V. CONCLUSION In this paper we examine the effect of rainy-day funds on the volatility of expenditures. We found that rainy-day funds have a negative effect on the volatility of social sector expenditures and has no effect on the volatility of non-social sector expenditures. Therefore, rainy-day funds appear effective in reducing the volatility of social sector expenditures but are ineffective as an overall budget stabilization fund. The finding of a differential effect of rainy-day funds on the volatility of social and non-social spending qualifies earlier results regarding their effectiveness. With respect to the determinants of the size of rainy-day funds across states, the conclusion is that states with stringent deposit and withdrawal rules have higher balances. Therefore, these states are the most effective in reducing the volatility of social sector expenditures. Moreover, unsurprisingly, the effectiveness of the rainy-day funds depends on economic growth. Higher rates of growth means greater potential for accumulation and less pressure to spend the rainy-day fund. These findings hold important lessons for the establishment and maintenance of an effective stabilization fund to reduce volatility of public social spending, although their application might not be straightforward in developing countries where political maturity is lacking and effective governance is weak. 10 References Bohn, Henning and Robert P. Inman (1996): "Balanced Budget Rules and Public Deficits: Evidence from the US States." National Bureau of Economic Research, Working Paper 5533. De Ferranti, David, Guillermo E. Perry, Indermit S. Gill and Luis Serven (2000): "Securing our Future in a Global Economy." World Bank Latin American and Caribbean Studies. Fasano, Ugo (2000): "Review of the Experience with Oil Stabilization and Savings Funds in Selected Countries." International Monetary Fund, Working Paper WP/00/1 12. Gold, Steven D. (1995): "The Fiscal Crisis of the States. Lessons for the Future." Georgetown University Press. Gold, Steven D. (1984a): "Contingency Measures and Fiscal Limitations: The Real World Significance of Some Recent State Budget Innovations." National Tax Journal 37(3), pp.421-432. Gold, Steven D. (1984b): "State Tax Increases of 1983: Prelude to Another Tax Revolt?" National Tax Journal 37(1), pp.9-22. Gonzalez, Christian Y. (2002): "Have States learn the lessons from their last fiscal crisis? An analysis of State Rainy Day Funds in the most recent economic near recession." Georgetown University. Dissertation. Knight, Brian and Arik Levinson (1999a): "Rainy Day Funds and State Government Savings." National Tax Journal 52(3), pp.459-472. Knight, Brian and Arik Levinson (1999b): "Fiscal Institutions in the US States." Institutions, Politics and Fiscal Policy, Kluwer Academic Press. Levinson, Arik (1998): "Balanced Budgets and Business Cycles: Evidence from US States." National Tax Journal 51(4), pp. 715-732. Navin, John C. and Leo J. Navin (1994): "An Evaluation of State Budget Stabilization Funds Among Midwestern States." Growth and Change 25 (Fall edition), pp. 445-466. Pollock, Richard and Jack P. Suyderhoud (1986): "The Role of Rainy Day Funds in Achieving Fiscal Stability." National Tax Journal 39(4), pp.485-497. Poterba, James M. (1994): "State Responses to Fiscal crises: The Effect, of Budgetary Institutions and Politics." The Journal of Political Economy 102 (4), pp. 799-821. 11 Sobel, Russell S. and Randall G. Holcombe (1996): "The Impact of State Rainy Day Funds in Easing State Fiscal Crises. During the 1990-1991 Recession." Public Budgeting and Finance (Fall), pp.28-48. Sorensen, Bent E., Lisa Wu and Oved Yosha (1999): "Output Fluctuations and Fiscal Policy: US State and Local Governments 1978-1994." Centre for Economic Policy Research, Discussion Paper No. 2286. Wagner, Gary A. (1999): "Essays on the Political Economy of State Government Saving and the Role of Budget Stabilization Funds." West Virginia University, Dissertation. Wagner, Gary A. and Russell S. Sobel (2001): "State Budget Stabilization Fund Adoption: Preparing for the Next Recession or Circumventing Fiscal Constraints?" Working Paper. 12 Table 1 Literature Review Paper Findings (and critiques) Pollock and Suyderhoud (1986) The authors claim that formula-based rainy-day funds can be destabilizing if not properly implemented. They used simulations to support their claim. Navin and Navin (1994) The authors examined the movement of the fund balances over time (between 1983 and 1991), to see how the fund balances move in relation to a number of indicators of state fiscal health. They show that use of the funds varies significantly among the states as does the level of funding and therefore the ability of the funds to serve as an effective tool for counter-cyclical state fiscal policy. Sobel and Holcombe (1996) The authors examined the degree to which rainy- day funds eased the fiscal stress experienced by states during the 1990-1991 recession. The authors constructed a measure of state fiscal stress as the amount of discretionary tax increases plus the amount by which expenditure growth fell below average. Then they constructed an empirical model to see whether the presence of an explicit rainy-day fund had an effect on the degree of fiscal stress experience by a state. Sobel and Holcombe found that rainy-day funds were effective reducing fiscal stress if they had mandatory requirements for making deposits. Also they show that for a given amount of fiscal stress, states that have rainy-day funds are more likely to cope with that fiscal stress through spending reductions than through increases in taxes. Knight and Levinson (1999a) The authors examined the effect of rainy-day funds on state savings behavior. In particular, the authors point out that states with rainy-day funds maybe inherently savers. If this were the case, states would save enough in their general fund accounts to avoid fiscal stress without the creation of special accounts. Knight and Levinson (1999b) The authors examined fiscal institutions in US states, and their fiscal and economic consequences. The authors point out the interaction of rainy-day funds with other fiscal institutions. In particular, Knight and Levinson discuss the endogeneity of balanced budget requirements and rainy-day funds. Wagner (1999) The author shows that increase in state budget stabilization funds is attributed to the 1980-1982 recession. The existence of tax and expenditure limitation laws, revenue uncertainty, the state's current fiscal health, and political motives also influence a state's choice to adopt a fund. Fasano (2000) The author examines the experience of oil funds currently in place in Norway, Chile (copper), the State of Alaska, Venezuela, Kuwait, and Oman. He 13 finds that their experience has been mixed. But that in most of the cases, stabilization funds have been effective by making budget expenditure less driven by revenue availability. Their effectiveness appear to be determine by fiscal discipline and sound macroeconomic management. Wager and Sobel (2001) The authors find that states with tax and expenditure limit laws were significantly more likely to adopt statutory funds, but were significantly less likely to adopt funds with stringent deposit and withdrawal rules, suggesting that some funds were adopted to circumvent existing fiscal constraints. Gonzalez (2002) The author shows that most of the states are not well prepared for the most recent recession. In particular, he finds that 4 out of 50 states have enough rainy- day funds to ease a similar recession than that of the early 1990s. Also, he concludes that the reason why some states don't have enough savings is because they have reached their cap on the fund size. 14 Table 2 Rainy-Day Fund Characteristics State Fund Name Year First Deposit Rule Withdrawal Maximum Fund Adopted Balance Rule Size AL Education Trust Fund- 1927 1988 Formula Appropriation 2% of Proration Prevention expenditures Account AK Budget Reserve Fund 1986 1991 Appropriation Appropriation No limit AK Constitutional Budget 1990 1991 Mineral revenues in 3/% of legislature No limit Reserve excess of pernnanent fund AZ Budget Stabilization 1990 1994 Statutory formula Statutory Rolling cap Fund formula AR CA Special Fund for 1976 1977 General Fund Surplus Revenue No limit Economic Uncertainties shortfall CO Required Fund Balance 1982 1982 4% Revenue forecast Revenue 4% revenue I______ _______________________ I____________ ___________ _______________________ shortfall forecast CT Budget Reserve Fund 1979 1984 Not less than 10% of Govemor 5% of current net General Fund Surplus request and 2/3 General Fund legislative appropriations approval DE Budget Reserve 1979 1979 General Fund Surplus 3/5 of 5% of General Account legislature Fund Revenue FL Working Capital Fund 1959 1965 General Fund Surplus Revenue 10% of previous shortfall year's General Fund Revenue FL Budget Stabilization 1992 1995 Required appropriation Revenue IO/o of previous Fund equal to 5% of last shortfall year's General year's general fund Fund Revenue revenue GA Revenue Shortfall 1976 1976 3% of General fund Appropriation No limit Reserve surplus HI Emergency & Budget 2000 2000 40% of Tobacco settle. Appropriation No limit Reserve Fund ID Budget Stabilization 1984 1984 Appropriation Appropriation No Limit Fund IL Budget Stabilization 2001 2001 Balance of Tobacco Controller's No Limit Fund reserve fund Discretion IN Counter-Cyclical 1982 1985 Statutory formula Statutory 7% of General Revenue and Economic formula Fund Revenue Stabilization Fund IA Cash Reserve Fund 1984 1994 Appropriation Single-bill Statutory formula appropriation not to cause fund to fall below 3% of revenue estimate for that year IA Economic Emergency 1984 1992 Appropriation Appropriation 5% of revenue Fund estimate for that fiscal year KY Budget Reserve Trust 1983 1983 General Fund Surplus Appropriation 5% of General Fund Account and appropriation Fund Revenue KS General Fund Ending 1993 1993 7.5% of General Fund Appropriation No limit Balance expenditures that year I LA Revenue Stabilization 1990 1999 Revenues exceeding Appropriation No limit and Mineral Trust Fund $750 million from minerals . 15 State Fund Name Year First Deposit Rule Withdrawal Maximum Fund Adopted Balance Rule Size ME Rainy Day Fund 1985 1985 1/2 of General Fund Appropriation 5% of General Surplus Fund Revenue MD Revenue Stabilization 1985 1986 Required appropriation Appropriation Less of 5% of Account equal to 5% of General Fund estimated GF revenue revenue or $50 that year million MA Comrnonwealth 1985 1986 General Fund Surplus Appropriation 5% of budgeted _____ Stabilization Fund revenue Ml Countercyclical Budget 1977 1978 Statutory formula Statutory 25% of General and Economic formula Fund Revenue Stabilization Fund MN Budget Reserve 1981 1984 Appropriation Appropriation $522 million Account MN Cash Flow Account 1995 1996 Appropriation Appropriation $350 million MS Working Cash 1982 1983 Appropriation Appropriation 7 I/l % of General Stabilization Reserve Fund Revenue _______ Fund MO Budget Stabilization 1992 1992 Appropriation Appropriation 5% of previous Fund year's General Fund Revenue MT . __ NC Savings Reserve 1991 1991 General Fund Surplus Appropriation 5% of General _______ Account _ Fund Revenue ND Budget Stabilization 1987 1990 General Fund surplus in Revenue must No limit Fund excess of $40 million be 2 1/2% below forecast NE Cash Reserve Fund 1983 1984 General Fund Surplus Revenue No limit shortfall NH Revenue Stabilization 1987 1987 General Fund Surplus Revenue 5% of General Reserve Account shortfall Fund Revenue NJ Surplus Revenue Fund 1990 1993 50% of General Fund Revenue 5% of anticipated Surplus shortfall General Fund Revenue Tax Stabilization 1945 1946 Statue Revenue No limit NY__ Reserve Fund shortfall NY Constitutional Reserve 1993 1994 General Fund Surplus Appropriation No limit Fund NM Tax Stabilization 1966 1967 Appropriation Revenue No limit Reserve . . shortfall NV Budget Stabilization 1994 1994 Statutory formnula Revenue 10% of General Designation shortfall Fund Revenue OH Budget Stabilization 1981 1985 5% of previous year's Appropriation No limit Fund General Fund revenue if surplus is realized OK Constitutional Reserve 1986 1988 10% of previous year's Govemor No limit Fund General Fund revenue if request and 2/3 surplus is realized legislative approval or M legislative approval OR General Purpose 1995 1995 Appropriation Appropriation No limit Emergency Fund PA Tax Stabilization 1985 1986 15% of General Fund 2/3 of 3% of anticipated Reserve Fund Surplus legislative General Fund approval Revenue RI Budget Reserve and 1985 1985 Appropriation Revenue No limit Cash Stabilization shortfall Account 16 State Fund Name Year First Deposit Rule Withdrawal Maximum Fund .___________________ Adopted Balance Rule Size SC General Reserve Fund 1978 1978 Statue requiring 3% of Revenue No limit previous year's General shortfall and Fund revenues zero balance in CRF SC Capital Reserve Fund 1986 1986 Statue requiring 2% of Revenue No limit previous year's General shortfall Fund revenue SD Budget Reserve Fund 1991 1992 General Fund Surplus Revenue 5% of General shortfall Fund appropriations TN Revenue Fluctuation 1972 1972 10% of estimated tax Revenue 5% of estimated Reserve revenue growth shortfall tax revenue TX Economic Stabilization 1987 1990 V. of General Fund Revenue 10% of General Fund surplus plus oil and gas shortfall or Fund revenue royalties appropriation UT Budget Reserve 1986 1987 25% of General Fund Revenue 8% of General Account Surplus shortfall Fund appropriations VA Revenue Stabilization 1992 1995 Statutory Formula Statutory 10% of annual tax Fund Formula revenues VT Budget Stabilization 1988 1988 General Fund surplus Revenue 5% of prior year's Trust Fund shortfall appropriation WA Emergency Reserve 1981 1989 General Fund Surplus 2/3 legislative 5% of biennial Fund approval General Fund Revenue WI Require Reserve 1981 1981 1% of General Fund Revenue No limit Revenue shortfall WI Budget Stabilization 1985 1985 Appropriation Appropriation No limit Fund WV Revenue Shortfall 1994 1995 General Fund Surplus Revenue 5% of General Reserve Fund shortfall Fund I______ I____________________ ___________ _________ I____________________ I_____________ appropriations WY Budget Reserve 1982 1983 Appropriation Appropriation 5% of estimated Account General Fund I__ _ _ _ _ _ _ _ I_________ _ revenue Sources: Gonzalez (2002), Wagner (1998), Knight and Levinson (1999), and NASBO (1999). 17 Table 3 Estimates on the effect of Rainy-Day Funds on the Volatility of Expenditures ____ ~~~~~~~1 2 3 4 Dependent Volatility of Social Volatility of Volatility of Non- Volatility of Variables Sector Expenditures Social Sector Social Sector Non-Social Expenditures Expenditures Sector Expenditures Volatility 6.05e-08* 9.56e-08* of GSP (2.2e-08) (4.34e-08) Volatility 0.156* 0.091 of GSP per (0.067) (0.14) capita Rainy-Day -0.33** -0.209* -0.2 0.022 Fund (0.19) (0.12) (0.21) (0.15) Balances in the previous year Fixed Yes Yes Yes Yes effects (State) N 695 695 694 694 R square 0.45 0.394e 0.76 0.7 F 4.25 3.69 2.44 0.21 Note: Robust Standard errors are in parentheses. * Statistically significant at a 95 percent level of confidence. ** Statistically significant at a 90 percent level of confidence. 18 Table 4 Rainy-dayfund characteristics and balances 5 Dependent Variable Rainy-Day Fund Balance Rainy-Day Fund Balance in the previous 0.1 1* year (0.047) GSP per capita 0.025* (0.0079) Growth rate of GSP 848.6* (423.4) Stringent Deposit Rule 219.2* (85.7) Stringent Withdrawal Rule 240.5* (102.2) Cap -65.8 (79.1) Fixed Effects Yes N 484 R square 0.17 F 9.01 Note: Standard errors are in parentheses. * Statistically significant at a 95 percent level of confidence. 19 Policy Research Working Paper Series Contact Title Author Date for paper WPS3101 Portfolio Preferences of Foreign Reena Aggarwal July 2003 A. 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