Managing Uncertainty: How State Budgeting Can Smooth Revenue Volatility

Abstract

This is the first in a series of reports by The Pew Charitable Trusts offering policymakers strategies that improve long-term fiscal health and manage budget uncertainty. In this report, Pew researchers examine patterns in revenue volatility across the 50 states between 1994 and 2012. The report examines the factors that drive volatility, including state-specific patterns of economic growth and contraction and their interaction with state taxes, and recommends the best ways to respond to these conditions. Future research will explore in greater detail how states can use fiscal management tools such as rainy day funds and revenue forecasting to better manage their finances over the course of the business cycle.Pew's research methods in reaching the conclusions and findings are discussed in detail at the end of this report. The team analyzed the relationships between state-specific economic data from the Federal Reserve Bank of Philadelphia and state revenue data compiled by the Rockefeller Institute of Government for all 50 states, and interviewed key fiscal policymakers and independent analysts in 15 states