Rainy Day Funds October 30, 2014

NTA Session I CounterCyclical Fiscal Policies for States and Localities

NTA Session II Volatility in States: Are Rainy Day Funds Up to the Task?

Current Utah Proposal Budget grows at the long run rate rather than forecasted revenues Surplus years accrue into a rainy day fund Deficit years are financed by the previous surpluses accumulated in the rainy day fund Separates the debate of government size from tax policy

Two Year State Budgeting Cycle

Alternative Objectives Long term saving plan with expenditure smoothing Forecaster indemnity fund

Revenue and Expenditure Smoothing

Cycle and Trend

Unobserved Components Models Hodrick-Prescott The l values gives the relative importance of smoothing and controls the degree of smoothness. The larger values for l give more smoothness. Hodrick and Prescott suggest the following values for l. 100Annual data 1,600Quarterly data 14,400Monthly data

Cyclical Component of Total State Tax Revenue

Proposed Saving Plan Won’t Work for Tax Revenue

Coincident Indicators Nonagricultural employment Unemployment rate Average hours worked in manufacturing Real wage and salary disbursements

Would Budgeting Plan Work for US Economy?

Rainy Day Funds would need an initial endowment.

Probability Distributions of State Growth Rates Absolute Location: Mean and median Scale: Standard deviation and interquartile range Symmetry: Skewness Outliers: Kurtosis Relative Inherent Growth Rate Cyclical Growth Volatility Systematic and Unsystematic Risk Standard Error of Regression Dynamic Growth Volatility Switching Regression Probability of Staying in Expansion Probability of Staying in Recession

Mean Growth Rate State Economy

Standard Deviation of Growth Rate State Economy

Equity Market Growth and Risk

State Growth and Volatility Relative to US

Systematic Risk (R-Squared) State Economy

Nonsystematic Growth Rate (Alpha) State Economy

Systematic Volatility (Beta) State Economy

Adaptive Expectations (Exponential Smoothing)

Adaptive Expectations Growth Rate State Economy

Adaptive Expectations Forecasting Error State Economy

Switching Regression

Transition Probabilities Future ExpansionRecession Current Expansion Recession

Ability to Replicate the Business Cycle

Revenue and Expenditure Smoothing

State Tax Revenue During an Expansion

Expenditures and the Budget

State Tax Revenues

State Expenditures

Surpluses and Deficits Billions of Dollars

Rainy Day Fund