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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

March 2011: 

State And Local Governments: 

Knowledge of Past Recessions Can Inform Future Federal Fiscal 
Assistance: 

GAO-11-401: 

GAO Highlights: 

Highlights of GAO-11-401, a report to congressional committees. 

Why GAO Did This Study: 

The most recent recession, which started in December 2007, is 
generally believed to be the worst economic downturn the country has 
experienced since the Great Depression. In response to this recession, 
Congress passed the American Recovery and Reinvestment Act of 2009 
(Recovery Act), which provided state and local governments with about 
$282 billion in fiscal assistance. The Recovery Act requires GAO to 
evaluate how national economic downturns have affected states since 
1974. In this report, GAO (1) analyzes how state and local government 
budgets are affected during national recessions and (2) identifies 
strategies to provide fiscal assistance to state and local governments 
and indicators policymakers could use to time and target such 
assistance. This report is being released in conjunction with a 
companion report on Medicaid and economic downturns to respond to a 
related statutory requirement in the Recovery Act. GAO analyzed 
economic data and states’ general fund budget data; reviewed past 
federal fiscal assistance and related evaluations; and interviewed 
analysts at key associations and think tanks. GAO shared relevant 
findings with policy research organizations and associations 
representing state and local officials, who generally agreed with our 
conclusions. We incorporated technical comments from the Bureau of 
Labor Statistics. 

GAO identifies strategies for Congress to consider but does not make 
recommendations in this report. 

What GAO Found: 

Understanding state and local government revenue and expenditure 
patterns can help policymakers determine whether, when, where, and how 
they provide federal fiscal assistance to state and local governments 
in response to future national recessions. In general, state and local 
governments’ revenues increase during economic expansions and decline 
during national recessions (relative to long-run trends). State and 
local revenue declines have varied during each recession, and the 
declines have been more severe during recent recessions. Additionally, 
revenue fluctuations vary substantially across states, due in part to 
states’ differing tax structures, economic conditions, and industrial 
bases. State and local government spending also tends to increase 
during economic expansions, but spending on safety net programs, such 
as health and hospitals and public welfare, appears to decrease during 
economic expansions and increase during national recessions, relative 
to long-run trends. These trends can exacerbate the fiscal conditions 
of state and local governments given that demand for health and other 
safety net programs increases during recessions, and these programs 
now consume larger shares of state budgets relative to prior decades. 
This implies that, during recessions, state and local governments may 
have difficulties providing services. To mitigate the effect on 
services from declining revenues, state and local governments take 
actions including raising taxes and fees, tapping reserves, and using 
other budget measures to maintain balanced budgets. 

Although every recession reflects varied economic circumstances at the 
national level and among the states, knowledge of prior federal 
responses to national recessions provides guideposts for policymakers 
to consider as they design strategies to respond to future recessions. 
Considerations include: 

* Timing assistance so that the aid begins to flow as the economy is 
contracting, although assistance that continues for some period beyond 
the recession’s end may help these governments avoid actions that slow 
economic recovery; 

* Targeting assistance based on the magnitude of the recession’s 
effects on individual states’ economic distress; and; 

* Temporarily increasing federal funding (by specifying the conditions 
for ending or halting the state and local assistance when states’ 
economic conditions sufficiently improve). 

Policymakers also balance their decision to provide state and local 
assistance with other federal policy considerations such as competing 
demands for federal resources. 

Policymakers can select indicators to identify when the federal 
government should start and stop providing aid, as well as how much 
aid should be allocated. Timely indicators are capable of 
distinguishing states’ economic downturns from economic expansions. 
Indicators selected for targeting assistance are capable of 
identifying states’ individual circumstances in a recession. In 
general, timely indicators capable of targeting assistance to states 
can be found primarily in labor market data. Indicators such as 
employment, unemployment, hourly earnings, and wages and salaries also 
offer the advantage of providing information on economic conditions 
rather than reflecting states’ policy choices (a limitation of data on 
state revenue trends). In some cases, it may be appropriate for 
policymakers to select multiple indicators or select indicators to 
reflect their policy goals specific to a particular recession. 

States have been affected differently during each of these recessions. 
For example, unemployment rates, entry into, and exit out of economic 
downturns have varied across states during past recessions. Federal 
responses to prior recessions have included various forms of federal 
fiscal assistance to these governments as well as decisions not to 
provide direct fiscal assistance to these governments. In three of the 
six most recent national recessions, the federal government did not 
provide fiscal assistance directly to state and local governments. 
However, during these recessions, the federal response included 
increased spending for other programs such as unemployment insurance 
as well as increases in existing grants not administered by state and 
local governments. When the federal government has provided fiscal 
assistance directly to state and local governments in response to 
national recessions, such assistance has included unrestricted fiscal 
assistance, increased funding for existing programs, and new grant or 
loan programs. Federal assistance in response to the recessions 
beginning in 1973 and 2001 represented a relatively small share of 
total federal grant funding to the sector. In contrast, the 2009 
Recovery Act provided a significant increase in grant funding to the 
sector and helped offset the sector’s tax receipt declines. The figure 
below summarizes the national unemployment rate, recession dates, and 
federal fiscal assistance to state and local governments since 1973. 

Figure: National Unemployment Rate and Federal Fiscal Assistance to 
State and Local Governments, 1973 to 2010: 

[Refer to PDF for image: illustrated line graph] 

Recession period: November 1973-March 1975. 

Calendar year: 1973; 
Percentage of labor force unemployed: 4.9; 
Congressional legislation: Comprehensive Employment And Training Act 
of 1973 (CETA); Pub. L. 93-203. 

Calendar year: 1974; 
Percentage of labor force unemployed: 5.6; 
Congressional legislation: Emergency Jobs and Unemployment Assistance 
Act of 1974; Pub. L. 93-567. 

Calendar year: 1975; 
Percentage of labor force unemployed: 8.5. 

Calendar year: 1976; 
Percentage of labor force unemployed: 7.7; 
Congressional legislation: Public Works Employment Act of 1976; Pub. 
L. 94-369. State and Local Fiscal Assistance Amendments of 1976; Pub. 
L. 94-488. 

Calendar year: 1977; 
Percentage of labor force unemployed: 7.1; 
Congressional legislation: Economic Stimulus Appropriations Act of 
1977; Pub. L. 95-29. Public Works Employment Act of 1977; Pub. L. 95-
28. Tax Reduction and Simplification Act of 1977; Pub. L. 95-30. 

Calendar year: 1978; 
Percentage of labor force unemployed: 6.1. 

Calendar year: 1979; 
Percentage of labor force unemployed: 5.8. 

Recession period: January 1980-July 1980 and July 1981-November 1982. 
No federal fiscal assistance to state and local governments during 
these recessions[B]. 

Calendar year: 1980; 
Percentage of labor force unemployed: 7.1. 

Calendar year: 1981; 
Percentage of labor force unemployed: 7.6. 

Calendar year: 1982; 
Percentage of labor force unemployed: 9.7. 

Calendar year: 1983; 
Percentage of labor force unemployed: 9.6. 

Calendar year: 1984; 
Percentage of labor force unemployed: 7.5. 

Calendar year: 1985; 
Percentage of labor force unemployed: 7.2. 

Calendar year: 1986; 
Percentage of labor force unemployed: 7. 

Calendar year: 1987; 
Percentage of labor force unemployed: 6.2. 

Calendar year: 1988; 
Percentage of labor force unemployed: 5.5. 

Calendar year: 1989; 
Percentage of labor force unemployed: 5.3. 

Recession period: July 1990-March 1991. No federal fiscal assistance 
to state and local governments during th1s recession[B]. 

Calendar year: 1990; 
Percentage of labor force unemployed: 5.6. 

Calendar year: 1991; 
Percentage of labor force unemployed: 6.8. 

Calendar year: 1992; 
Percentage of labor force unemployed: 7.5. 

Calendar year: 1993; 
Percentage of labor force unemployed: 6.9. 

Calendar year: 1994; 
Percentage of labor force unemployed: 6.1. 

Calendar year: 1995; 
Percentage of labor force unemployed: 5.6. 

Calendar year: 1996; 
Percentage of labor force unemployed: 5.4. 

Calendar year: 1997; 
Percentage of labor force unemployed: 4.9. 

Calendar year: 1998; 
Percentage of labor force unemployed: 4.5. 

Calendar year: 1999; 
Percentage of labor force unemployed: 4.2. 

Calendar year: 2000; 
Percentage of labor force unemployed: 4. 

Recession period: March 2001-November 2001. 

Calendar year: 2001; 
Percentage of labor force unemployed: 4.7. 

Calendar year: 2002; 
Percentage of labor force unemployed: 5.8. 

Calendar year: 2003; 
Percentage of labor force unemployed: 6; 
Congressional legislation: Jobs and Growth Tax Relief Reconciliation 
Act of 2003, (JGTRRA); Pub. L. 108-27. 

Calendar year: 2004; 
Percentage of labor force unemployed: 5.5. 

Calendar year: 2005; 
Percentage of labor force unemployed: 5.1. 

Calendar year: 2006; 
Percentage of labor force unemployed: 4.6. 

Recession period: December 2007-June 2009. 

Calendar year: 2007; 
Percentage of labor force unemployed: 4.6. 

Calendar year: 2008; 
Percentage of labor force unemployed: 5.8. 

Calendar year: 2009; 
Percentage of labor force unemployed: 9.3; 
Congressional legislation: American Recovery and Reinvestment Act of 
2009, (Recovery Act); Pub. L. 111-5. 

Calendar year: 2010; 
Percentage of labor force unemployed: 9.6; 
Congressional legislation: The 2010 Education Jobs and Recovery Act 
FMAP Extension[A]; Pub. L. 111-226. 

Sources: GAO analysis of BLS and NBER data, federal fiscal assistance 
public laws, and pertinent legislative history. 

[A] Pub.L.No. 111-226 has no official title, so we refer to this act 
as The 2010 Education Jobs and Recovery Act FMAP Extension. 

[B] Other forms of federal assistance we assistance to state and local 
governments. 

[End of figure] 

View GAO-11-401 or key components. For more information, contact 
Stanley J. Czerwinski at (202) 512-6806 or czerwinskis@gao.gov, or 
Thomas J. McCool at (202) 512-2700 or mccoolt@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

State and Local Governments' Revenue and Expenditure Patterns during 
National Recessions Reflect Variations in Economic Circumstances and 
Policy Choices: 

Strategies to Respond to National Recessions Require Decisions on 
Whether, When, and How to Provide Federal Fiscal Assistance to State 
and Local Governments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Definitions of Selected Categories of State and Local 
Government Expenditures and Revenues: 

Appendix III: Examples of Congressional Responses to Assist State and 
Local Governments in Response to National Recessions Since 1973: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Variations in U.S. National Recessions, 1973 to Present: 

Table 2: Cyclical Behavior of State and Local Government Expenditures, 
1977 to 2008: 

Table 3: Selected Indicators for Timing or Targeting Federal 
Assistance to States: 

Table 4: Correlations of the Cyclical Components of State and Local 
Government Revenues and Expenditures and GDP: 

Table 5: Summary of Elasticities of State Tax Revenues with Respect to 
Wages: 

Figures: 

Figure 1: Variation in Percentage Point Changes in State Unemployment 
Rates during Past National Recessions: 

Figure 2: National Unemployment Rate and Federal Fiscal Assistance to 
State and Local Governments, 1973 to 2010: 

Figure 3: Changes in State and Local Government Current Tax Receipts 
during National Recessions, 1973 through 2010: 

Figure 4: State Government Aggregate Tax and Fee Policy Changes as a 
Percentage of General Fund Revenues, State Fiscal Years 1990 to 2010: 

Figure 5: State Government Total Balances as a Percentage of Total 
Expenditures, State Fiscal Years 1979 to 2010: 

Figure 6: Net Investment, Lending, and Borrowing in the State and 
Local Government Sector: 

Figure 7: State and Local Government General Expenditures, GDP, and 
National Recession Dates, 1977-2008 (Procyclical): 

Figure 8: State and Local Government Current Expenditures on 
Elementary and Secondary Education, GDP, and National Recession Dates, 
1977-2008 (Procyclical): 

Figure 9: State and Local Government Current Expenditures on Public 
Welfare, GDP, and National Recession Dates, 1977-2008 
(Countercyclical): 

Abbreviations: 

ARFA: Antirecession Fiscal Assistance: 

BEA: Bureau of Economic Analysis: 

BLS: Bureau of Labor Statistics: 

CES: Current Employment Statistics: 

CETA: Comprehensive Employment And Training Act of 1973: 

CBO: Congressional Budget Office: 

CRS: Congressional Research Service: 

EECBG: Energy Efficiency and Conservation Block Grant: 

FMAP: Federal Medical Assistance Percentage: 

GDI: gross domestic income: 

GDP: gross domestic product: 

GSP: gross state product: 

JGTRRA: Jobs and Growth Tax Relief Reconciliation Act of 2003: 

LAUS: Local Area Unemployment Statistics: 

NASBO: National Association of State Budget Officers: 

NBER: National Bureau of Economic Research: 

NGA: National Governors Association: 

NIPA: U.S. National Income and Product Accounts: 

PCI: per capita income: 

SAA: State Administering Agency: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

March 31, 2011: 

Congressional Committees: 

The federal government provided fiscal assistance to state and local 
governments in response to three of the six national recessions since 
1974.[Footnote 1] The most recent recession, which began in December 
2007, is generally believed to be the worst economic downturn the 
country has experienced since the Great Depression. In response to 
this recession, Congress passed the American Recovery and Reinvestment 
Act of 2009 (Recovery Act), which provided about $282 billion in 
federal fiscal assistance to state and local governments.[Footnote 2] 
The 2007 recession also brought renewed focus to federal programs that 
provide fiscal assistance to state governments during economic 
downturns. We have previously addressed questions about such programs, 
noting that in providing assistance to state and local governments, it 
is important to consider the timing, targeting, and amount of 
assistance based on a variety of factors, including the fiscal health 
of state governments and the federal government's goals for providing 
such assistance.[Footnote 3] 

The Recovery Act assigned GAO a range of responsibilities to help 
promote accountability and transparency as well as to evaluate 
specific aspects of the act. This report, in conjunction with a 
companion GAO report on aspects of federal fiscal assistance related 
to health care, responds to a specific requirement to evaluate how 
national economic downturns have affected states since 1974--
especially with regard to Medicaid--including any recommendations to 
help address those effects in the future.[Footnote 4] Accordingly, our 
objectives for this report are to (1) analyze how state and local 
government budgets are affected during national recessions and (2) 
identify what strategies exist to provide federal fiscal assistance to 
state and local governments during national recessions and indicators 
policymakers could use to time and target such assistance. 

To analyze how national recessions affect state and local governments' 
revenues, expenditures, and borrowing, we examined data from the 
Bureau of Economic Analysis's (BEA) National Income and Product 
Accounts (NIPA), the Census Bureau's Annual Survey of State and Local 
Government Finances, and the Census Bureau's Census of Governments. To 
describe state governments' discretionary tax and fee changes and 
total balances, we collected and analyzed states' general fund data 
from the National Governors Association (NGA) and National Association 
of State Budget Officers' (NASBO) The Fiscal Survey of States (Fiscal 
Survey). We assessed the reliability of the data we used for this 
review and determined that they were sufficiently reliable for our 
purposes. Appendix I provides additional details about the scope and 
methodology of our review, including certain limitations concerning 
the data available for our purposes. 

To identify federal strategies for providing federal assistance to 
state and local governments during national recessions, we reviewed 
federal fiscal assistance programs enacted since 1973.[Footnote 5] We 
identified these programs and potential considerations for designing a 
federal countercyclical assistance program by reviewing GAO, 
Congressional Budget Office (CBO), and Congressional Research Service 
(CRS) reports and conducting a search for relevant legislation. We 
used these and other reports to identify issues policymakers should 
consider when selecting a strategy. We also analyzed the legislative 
history and statutory language of past federal fiscal assistance 
programs, as well as policy goals stated in the statutes. To identify 
factors policymakers should consider when selecting indicators to 
implement their strategy, we reviewed GAO, CBO, CRS, Federal Reserve 
Banks, Department of the Treasury (Treasury), and academic reports. We 
considered indicators' availability at the state level and timeliness 
(in terms of frequency and publication lag time) to identify 
indicators policymakers could use to time and target federal fiscal 
assistance during national recessions.[Footnote 6] Finally, we 
interviewed key associations and think tanks familiar with the design 
and implementation of programs providing federal fiscal assistance to 
state and local governments to understand the range of perspectives 
regarding these programs and to identify relevant related research on 
these issues. 

We provided relevant sections of a draft of this report to the Bureau 
of Labor Statistics and external experts. They offered technical 
suggestions, which we incorporated as appropriate. 

We conducted this performance audit from February 2010 to March 2011, 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

Recessions mark a distinct phase of the overall business cycle, 
beginning with a business cycle "peak" and ending with a business 
cycle "trough." Between trough and peak the economy is in an 
expansion. The National Bureau of Economic Research (NBER) identifies 
dates for national recessions, which can vary in overall duration and 
magnitude.[Footnote 7] While NBER sets dates for the peaks and troughs 
of national recessions, no dates are set for turning points in state 
economies. State economic downturns vary in magnitude, duration, and 
timing, and do not necessarily coincide with dates identified for 
national recessions. 

Characteristics of National Recessions: 

NBER defines a recession as a significant decline in economic activity 
spread across the economy, lasting more than a few months, normally 
visible in real gross domestic product (GDP), real income, employment, 
industrial production, and wholesale-retail sales. NBER uses several 
monthly indicators to identify national recessions. These indicators 
include measures of GDP and gross domestic income (GDI), real personal 
income excluding transfers, the payroll and household measures of 
total employment, and aggregate hours of work in the total economy. 
[Footnote 8] 

Since 1973, NBER has identified six national recessions. These 
recessions have varied considerably in duration and magnitude (table 
1). For example, real GDP declined by 4.1 percent over the course of 
the 2007-2009 recession, which lasted 18 months. Similarly, real GDP 
declined by about 3 percent during the 1973-1975 and 1981-1982 
recessions, both of which lasted 16 months. In contrast, real GDP 
declined 1.4 percent and 0.7 percent in the 1990 and 2001 recessions, 
respectively, both of which lasted 8 months. 

Table 1: Variations in U.S. National Recessions, 1973 to Present: 

Recession period: Nov. 1973 to Mar. 1975; 
Recession duration (in months): 16; 
Maximum unemployment rate (in percent): 8.6; 
Measure of magnitude: (Percentage change from peak to trough): 
Real GDP: -3.2; 
Real private consumption: -0.8; 
Real personal income less transfers: -5.3; 
Payroll survey employment: -1.6; 
Household survey employment: -1.3. 

Recession period: Jan. 1980 to July 1980; 
Recession duration (in months): 6; 
Maximum unemployment rate (in percent): 7.8; 
Measure of magnitude: (Percentage change from peak to trough): 
Real GDP: -2.2; 
Real private consumption: -1.2; 
Real personal income less transfers: -2.3; 
Payroll survey employment: -1.1; 
Household survey employment: -1.1. 

Recession period: July 1981 to Nov. 1982; 
Recession duration (in months): 16; 
Maximum unemployment rate (in percent): 10.8; 
Measure of magnitude: (Percentage change from peak to trough): 
Real GDP: -2.6; 
Real private consumption: 2.9; 
Real personal income less transfers: -0.1; 
Payroll survey employment: -3.1; 
Household survey employment: -1.6. 

Recession period: July 1990 to Mar. 1991; 
Recession duration (in months): 8; 
Maximum unemployment rate (in percent): 6.8; 
Measure of magnitude: (Percentage change from peak to trough): 
Real GDP: -1.4; 
Real private consumption: -1.1; 
Real personal income less transfers: -2.1; 
Payroll survey employment: -1.1; 
Household survey employment: -1.0. 

Recession period: Mar. 2001 to Nov. 2001; 
Recession duration (in months): 8; 
Maximum unemployment rate (in percent): 5.5; 
Measure of magnitude: (Percentage change from peak to trough): 
Real GDP: 0.7; 
Real private consumption: 2.4; 
Real personal income less transfers: -1.2; 
Payroll survey employment: -1.2; 
Household survey employment: -1.1. 

Recession period: Dec. 2007 to June 2009; 
Recession duration (in months): 18; 
Maximum unemployment rate (in percent): 9.5; 
Measure of magnitude: (Percentage change from peak to trough): 
Real GDP: -4.1; 
Real private consumption: -2.4; 
Real personal income less transfers: -5.6; 
Payroll survey employment: -5.4; 
Household survey employment: -4.3. 

Source: GAO analysis of BEA, BLS, and NBER data. 

Notes: A trough occurs when the declining phase of the business cycle 
ends and the rising phase of the business cycle begins. Similar 
economic patterns may not repeat themselves in future economic 
downturns. 

[End of table] 

Characteristics of State Economic Downturns: 

States are affected differently by national recessions. For example, 
unemployment rates have varied across states during past 
recessions.[Footnote 9] During the course of the 2007-2009 recession, 
the national unemployment rate nearly doubled, increasing from 5.0 
percent to 9.5 percent. The unemployment rate in individual states 
increased between 1.4 and 6.8 percentage points, with a median change 
of 4 percentage points (figure 1). In contrast, a smaller national 
unemployment rate increase of 1.3 percentage points during the 1990- 
1991 recession reflected unemployment rate changes in individual 
states ranging from -0.2 to 3.4 percentage points. 

Figure 1: Variation in Percentage Point Changes in State Unemployment 
Rates during Past National Recessions: 

[Refer to PDF for image: illustration] 

For each of the following dates, the following data is depicted: 

Minimum and maximum variation of percentage points changes in 
unemployment rates; 
Median; 
first through third quartile: 

January 1980 to July 1980; 
July 1981 to November 1982; 
July 1990 to March 1991; 
March 2001 to November 2001; 
December 2007 to June 2009. 

Source: GAO analysis of BLS data. 

Note: The figure depicts percentage point changes in unemployment 
rather than actual unemployment rates. We calculated the change in 
unemployment by subtracting each state's unemployment rate at the time 
of an NBER trough from the unemployment rate at an NBER peak. The 1973 
recession is excluded because the BLS data series used begins with 
1976. 

[End of figure] 

Recent economic research suggests that while economic downturns within 
states generally occur around the same time as national recessions, 
their timing--or entrance into and exit out of the economic downturn-- 
and duration varies.[Footnote 10] Some states may enter or exit an 
economic downturn before or after a national recession. Other states' 
economies may expand while the country as a whole is in recession. 
States can also experience an economic downturn not associated with a 
national recession. States' differing characteristics, such as 
industrial structure, contribute to these differences in economic 
activity. For example, manufacturing states tend to experience 
economic downturns sooner than other states in a recession, while 
energy sector states are often out of sync with the country as a whole. 

Federal Actions in Response to National Recessions: 

The federal government has multiple policy options at its disposal for 
responding to national recessions, although federal policy responses 
are not necessarily limited to the time periods of national recession. 
[Footnote 11] For example, in response to the recession beginning in 
December 2007, the federal government and the Federal Reserve together 
acted to moderate the downturn and restore economic growth when 
confronted with unprecedented weakness in the financial sector and the 
overall economy. The Federal Reserve used monetary policy to respond 
to the recession by pursuing one of the most significant interest rate 
reductions in U.S. history. In concert with the Department of the 
Treasury, it went on to bolster the supply of credit in the economy 
through measures that provide Federal Reserve backing for a wide 
variety of loan types, from mortgages to automobile loans to small 
business loans. 

The federal government also used fiscal policy to confront the effects 
of the recession. Existing fiscal stabilizers, such as unemployment 
insurance and progressive aspects of the tax code, kicked in 
automatically in order to ease the pressure on household income as 
economic conditions deteriorated. In addition, Congress enacted 
legislation providing temporary tax cuts for businesses and a tax 
rebate for individuals in the first half of 2008 to buoy incomes and 
spending[Footnote 12] and created the Troubled Asset Relief Program 
[Footnote 13] in the second half of 2008 to give Treasury authority to 
act to restore financial market functioning.[Footnote 14] 

The federal government's largest response to the recession to date 
came in early 2009 with the passage of the Recovery Act, the broad 
purpose of which is to stimulate the economy's overall demand for 
goods and services, or aggregate demand. Fiscal stimulus programs are 
intended to increase aggregate demand--the spending of consumers, 
business firms, and governments--and may be either automatic or 
discretionary. Unemployment insurance, the progressive aspects of the 
tax code, and other fiscal stabilizers provide stimulus automatically 
by easing pressure on household incomes as economic conditions 
deteriorate. Discretionary fiscal stimulus, such as that provided by 
the Recovery Act, can take the form of tax cuts for households and 
businesses, transfers to individuals, grants-in-aid to state and local 
governments, or direct federal spending. In response, households, 
businesses, and governments may purchase more goods and services than 
they would have otherwise, and governments and businesses may refrain 
from planned workforce cuts or even hire additional workers. Thus, 
fiscal stimulus may lead to an overall, net increase in national 
employment and output. 

The federal government may have an interest in providing fiscal 
assistance to state and local governments during recessions because 
doing so could reduce actions taken by these governments that could 
exacerbate the effects of the recession. Output, income, and 
employment all tend to fall during recessions, causing state and local 
governments to collect less revenue at the same time that demand for 
the goods and services they provide is increasing. Since state 
governments typically face balanced budget requirements and other 
constraints, they adjust to this situation by raising taxes, cutting 
programs and services, or drawing down reserve funds, all but the last 
of which amplify short-term recessionary pressure on households and 
businesses.[Footnote 15] Local governments may make similar 
adjustments unless they can borrow to make up for reduced revenue. By 
providing assistance to state and local governments, the federal 
government may be able to forestall, or at least moderate, state and 
local governments' program and service cuts, tax increases, and 
liquidation of reserves. The federal government has provided varied 
forms of assistance directly to state and local governments in 
response to three of the past six recessions (figure 2).[Footnote 16] 
States have been affected differently during each of these recessions. 
For example, unemployment rates, entry into, and exit out of economic 
downturns have varied across states during past recessions. See 
appendix III for a description of each piece of legislation. 

Figure 2: National Unemployment Rate and Federal Fiscal Assistance to 
State and Local Governments, 1973 to 2010: 

[Refer to PDF for image: illustrated line graph] 

Recession period: November 1973-March 1975. 

Calendar year: 1973; 
Percentage of labor force unemployed: 4.9; 
Congressional legislation: Comprehensive Employment And Training Act 
of 1973 (CETA); Pub. L. 93-203. 

Calendar year: 1974; 
Percentage of labor force unemployed: 5.6; 
Congressional legislation: Emergency Jobs and Unemployment Assistance 
Act of 1974; Pub. L. 93-567. 

Calendar year: 1975; 
Percentage of labor force unemployed: 8.5. 

Calendar year: 1976; 
Percentage of labor force unemployed: 7.7; 
Congressional legislation: Public Works Employment Act of 1976; Pub. 
L. 94-369. State and Local Fiscal Assistance Amendments of 1976; Pub. 
L. 94-488. 

Calendar year: 1977; 
Percentage of labor force unemployed: 7.1; 
Congressional legislation: Economic Stimulus Appropriations Act of 
1977; Pub. L. 95-29. Public Works Employment Act of 1977; Pub. L. 95-
28. Tax Reduction and Simplification Act of 1977; Pub. L. 95-30. 

Calendar year: 1978; 
Percentage of labor force unemployed: 6.1. 

Calendar year: 1979; 
Percentage of labor force unemployed: 5.8. 

Recession period: January 1980-July 1980 and July 1981-November 1982. 
No federal fiscal assistance to state and local governments during 
these recessions[B]. 

Calendar year: 1980; 
Percentage of labor force unemployed: 7.1. 

Calendar year: 1981; 
Percentage of labor force unemployed: 7.6. 

Calendar year: 1982; 
Percentage of labor force unemployed: 9.7. 

Calendar year: 1983; 
Percentage of labor force unemployed: 9.6. 

Calendar year: 1984; 
Percentage of labor force unemployed: 7.5. 

Calendar year: 1985; 
Percentage of labor force unemployed: 7.2. 

Calendar year: 1986; 
Percentage of labor force unemployed: 7. 

Calendar year: 1987; 
Percentage of labor force unemployed: 6.2. 

Calendar year: 1988; 
Percentage of labor force unemployed: 5.5. 

Calendar year: 1989; 
Percentage of labor force unemployed: 5.3. 

Recession period: July 1990-March 1991. No federal fiscal assistance 
to state and local governments during th1s recession[B]. 

Calendar year: 1990; 
Percentage of labor force unemployed: 5.6. 

Calendar year: 1991; 
Percentage of labor force unemployed: 6.8. 

Calendar year: 1992; 
Percentage of labor force unemployed: 7.5. 

Calendar year: 1993; 
Percentage of labor force unemployed: 6.9. 

Calendar year: 1994; 
Percentage of labor force unemployed: 6.1. 

Calendar year: 1995; 
Percentage of labor force unemployed: 5.6. 

Calendar year: 1996; 
Percentage of labor force unemployed: 5.4. 

Calendar year: 1997; 
Percentage of labor force unemployed: 4.9. 

Calendar year: 1998; 
Percentage of labor force unemployed: 4.5. 

Calendar year: 1999; 
Percentage of labor force unemployed: 4.2. 

Calendar year: 2000; 
Percentage of labor force unemployed: 4. 

Recession period: March 2001-November 2001. 

Calendar year: 2001; 
Percentage of labor force unemployed: 4.7. 

Calendar year: 2002; 
Percentage of labor force unemployed: 5.8. 

Calendar year: 2003; 
Percentage of labor force unemployed: 6; 
Congressional legislation: Jobs and Growth Tax Relief Reconciliation 
Act of 2003, (JGTRRA); Pub. L. 108-27. 

Calendar year: 2004; 
Percentage of labor force unemployed: 5.5. 

Calendar year: 2005; 
Percentage of labor force unemployed: 5.1. 

Calendar year: 2006; 
Percentage of labor force unemployed: 4.6. 

Recession period: December 2007-June 2009. 

Calendar year: 2007; 
Percentage of labor force unemployed: 4.6. 

Calendar year: 2008; 
Percentage of labor force unemployed: 5.8. 

Calendar year: 2009; 
Percentage of labor force unemployed: 9.3; 
Congressional legislation: American Recovery and Reinvestment Act of 
2009, (Recovery Act); Pub. L. 111-5. 

Calendar year: 2010; 
Percentage of labor force unemployed: 9.6; 
Congressional legislation: The 2010 Education Jobs and Recovery Act 
FMAP Extension[A]; Pub. L. 111-226. 

Sources: GAO analysis of BLS and NBER data, federal fiscal assistance 
public laws, and pertinent legislative history. 

[A] Pub. L. No. 111-226 has no official title, so we refer to this act 
as The 2010 Education Jobs and Recovery Act FMAP Extension. 

[B] Other forms of federal assistance were provided, but these 
approaches did not focus on fiscal assistance to state and local 
governments. These other forms of federal assistance included: The Job 
Training Partnership Act, Pub. L. No. 97-300 (Oct. 13, 1982); Public 
Law No. 98-8, known as the Emergency Jobs Appropriations Act of 1983 
(March 24, 1983); and the Supplemental Appropriations Act of 1993, 
Pub. L. No. 103-50 (July 2, 1993). 

[End of figure] 

Congressional decisions about whether to provide fiscal assistance to 
state and local governments ultimately depend on what role 
policymakers believe the federal government should take during future 
national recessions. Perspectives on whether and the extent to which 
the federal government should provide fiscal assistance to state and 
local governments are far-ranging--some advocate for not creating an 
expectation that federal fiscal assistance will be provided, while 
others argue for a greater federal role in providing fiscal assistance 
to state and local governments in response to national recessions. 

Some policy analysts warn against creating an expectation that federal 
assistance will be available to state and local governments.[Footnote 
17] These analysts contend that federal fiscal assistance can distort 
state and local fiscal choices and induce greater spending of scarce 
state funds. For example, the matching requirements of federal grants 
can induce state governments to dedicate more resources than they 
otherwise would to areas where these resources are not necessarily 
required. According to these analysts, federal fiscal assistance to 
state and local governments reduces government accountability and 
erodes state control by imposing federal solutions on state problems. 
Those who hold this perspective see little justification for 
insulating state governments from the same fiscal discipline that 
other sectors of the economy follow during a recession. 

In contrast, other policy analysts favor a federal role in promoting 
the fiscal health of state and local governments during economic 
downturns.[Footnote 18] Proponents of this view contend that during 
economic downturns, state and local governments face the dilemma that 
demand for social welfare benefits increases at the same time that 
state and local governments' ability to meet these demands is 
constrained as a result of decreasing tax revenues. 

State and Local Governments' Revenue and Expenditure Patterns during 
National Recessions Reflect Variations in Economic Circumstances and 
Policy Choices: 

State and Local Government Revenue Declines in National Recessions 
Vary in Magnitude, over Time, and across States: 

General revenues collected by state and local governments over the 
past three decades are procyclical--typically increasing when the 
national economy is expanding and decreasing during national 
recessions, relative to their long-run trend.[Footnote 19] Own-source 
revenues, which made up about 80 percent of state and local general 
revenues in 2008, and total tax revenues, which made up about 68 
percent of state and local own-source revenues in 2008, display 
similar cyclical behavior. In addition, state and local revenue growth 
lagged the resumption of national economic growth after the 2001 and 
2007-2009 recessions, but preceded it during the 1981-1982 and 1990-
1991 recessions. 

State and local governments' current tax receipts have declined in 
each of the six national recessions since 1973. However, both the 
severity of these revenue declines and the time it has taken for 
revenues to recover has varied (figure 3).[Footnote 20] During the 
most recent recession, state and local governments experienced more 
severe and long-lasting declines in revenue than in past recessions. 
For example, over the course of the 2007-2009 recession, current tax 
receipts declined 9.2 percent--from $1.4 trillion in the fourth 
quarter of 2007 to $1.2 trillion in the second quarter of 2009--and 
had not yet returned to the peak level 5 quarters after the end of the 
recession. In contrast, the recessions beginning in 1980, 1981, and 
1990 were less severe. For example, over the course of the 1990-1991 
recession, current tax receipts declined less than 1 percent--from 
$789 billion in the third quarter of 1990 to about $785 billion in the 
first quarter of 1991--and recovered as the recession ended in the 
first quarter of 1991. 

Figure 3: Changes in State and Local Government Current Tax Receipts 
during National Recessions, 1973 through 2010: 

[Refer to PDF for image: multiple line graph] 

Percent of revenue: 

Quarters after NBER business cycle peak: 0; 
1973 Q4-1976 Q1: 100%; 
1981 Q3-1982 Q3: 100%; 
1980 Q1-1981 Q1: 100%; 
1990 Q3-1991 Q2: 100%; 
2001 Q1-2002 Q3: 100%; 
2007 Q4-2010 Q3: 100%. 

Quarters after NBER business cycle peak: 1; 
1973 Q4-1976 Q1: 98.7%; 
1981 Q3-1982 Q3: 97.6%; 
1980 Q1-1981 Q1: 99.1%; 
1990 Q3-1991 Q2: 100.8%; 
2001 Q1-2002 Q3: 100.4%; 
2007 Q4-2010 Q3: 100.2%. 

Quarters after NBER business cycle peak: 2; 
1973 Q4-1976 Q1: 99.5%; 
1981 Q3-1982 Q3: 98.6%; 
1980 Q1-1981 Q1: 99.1%; 
1990 Q3-1991 Q2: 99.5%; 
2001 Q1-2002 Q3: 97.3%; 
2007 Q4-2010 Q3: 101%. 

Quarters after NBER business cycle peak: 3; 
1973 Q4-1976 Q1: 99.8%; 
1981 Q3-1982 Q3: 99.4%; 
1980 Q1-1981 Q1: 99.8%; 
1990 Q3-1991 Q2: 100.4%; 
2001 Q1-2002 Q3: 97.8%; 
2007 Q4-2010 Q3: 99.2%. 

Quarters after NBER business cycle peak: 4; 
1973 Q4-1976 Q1: 97%; 
1981 Q3-1982 Q3: 100.7%; 
1980 Q1-1981 Q1: 100.6%; 
2001 Q1-2002 Q3: 97.7%; 
2007 Q4-2010 Q3: 96.2%. 

Quarters after NBER business cycle peak: 5; 
1973 Q4-1976 Q1: 95.7%; 
2001 Q1-2002 Q3: 97.3%; 
2007 Q4-2010 Q3: 94%. 

Quarters after NBER business cycle peak: 6; 
1973 Q4-1976 Q1: 97%; 
2001 Q1-2002 Q3: 100%; 
2007 Q4-2010 Q3: 90.8%. 

Quarters after NBER business cycle peak: 7; 
1973 Q4-1976 Q1: 98.8%; 
2007 Q4-2010 Q3: 93.5%. 

Quarters after NBER business cycle peak: 8; 
1973 Q4-1976 Q1: 99.4%; 
2007 Q4-2010 Q3: 95.3%. 

Quarters after NBER business cycle peak: 9; 
1973 Q4-1976 Q1: 102.2%; 
2007 Q4-2010 Q3: 96.9%. 

Quarters after NBER business cycle peak: 10; 
2007 Q4-2010 Q3: 96.3%. 

Quarters after NBER business cycle peak: 11; 
2007 Q4-2010 Q3: 97.2%. 

Source: GAO analysis of BEA data. 

Note: Quarter 0 denotes the peak of an NBER business cycle. The number 
of quarters shown for each recession represents the amount of time 
needed for tax receipts to return to or surpass their levels at the 
beginning of the recession period (NBER business cycle peak). For the 
2007 recession, receipts have yet to return to their peak levels. The 
levels of state and local current tax receipts for each recession are 
indexed to their levels at the beginning of the recession period. 
Current tax receipts are tax revenues received by these governments 
from all sources. 

[End of figure] 

Larger revenue declines during the two most recent recessions have 
coincided with increased volatility in state and local government 
revenues during the past two decades. This increased volatility can be 
attributed to the fact that since 1973, states have become 
increasingly reliant on individual income taxes, which are usually 
more volatile than other revenues.[Footnote 21] Income tax receipts 
rose from 15 percent of current tax receipts in 1973 to 20 percent in 
2009. Analysts have attributed the increase in income tax as a portion 
of state revenues to state policy changes favoring income taxes and 
changes in the ways workers are compensated.[Footnote 22] Over time, 
state and local government revenues have become more volatile due to 
an increased reliance on income tax and a decreased reliance on sales 
tax. Several factors have contributed to these shifts, including sales 
tax exemptions for certain items, such as food and medicine; an 
increase in the share of consumption represented by services, as 
services are often excluded from sales tax; and increased Internet 
sales, which can reduce opportunities for state tax collections. 

Revenue fluctuations during national recessions vary substantially 
across states. Analysts have reported that this is due in part to 
states' differing tax structures, economic conditions, and industrial 
bases. The aggregate revenue levels described earlier mask varying 
trends among individual state and local governments, as some state and 
local governments experience minimal or no revenue declines during 
national recessions, while others face severe reductions in tax 
revenues. For example, the median decline in state tax collections 
from the first quarter of 2008 to the first quarter of 2009 was 11 
percent. While variations ranged from a 72 percent decline to a 15 
percent increase during this period, most individual state tax 
collections declined between 16 percent and 6 percent. 

To better understand the extent to which an individual state's 
government tax revenues decline during national recessions, we 
estimated how responsive state government tax revenues are to changes 
in total wages, a proxy for the amount of economic activity.[Footnote 
23] We found that, on average, state tax revenues decrease by 1 
percent when wages decrease by about 1 percent. However, this effect 
varies substantially across individual states, with state tax revenues 
falling by anywhere from about 0.2 percent to about 1.8 percent in 
response to a 1 percent decline in wages. This means that given the 
same reduction in wages, one state's tax revenues may fall at up to 
nine times the rate of another state. 

State and Local Government Spending Increases during Economic 
Expansions and Decreases during National Recessions Relative to Long- 
Run Trends While Spending on Safety Net Programs Displays the Opposite 
Pattern: 

General expenditures by state and local governments are procyclical 
(table 2).[Footnote 24] General expenditures also tend to lag the 
national business cycle by one to two years, so they tend to decline 
relative to trend later than GDP and also to increase relative to 
trend later than GDP. However, general expenditures by state and local 
governments grew at an average annual rate of about 4 percent during 
the period from 1977 to 2008, so declines in general expenditures 
relative to trend do not necessarily correspond to absolute declines 
in the level of general expenditures.[Footnote 25] 

Table 2: Cyclical Behavior of State and Local Government Expenditures, 
1977 to 2008: 

Expenditure function: General expenditures; 
Correlation with GDP: 0.34; 
Cyclical behavior: Procyclical. 

Expenditure function: Capital outlays; 
Correlation with GDP: 0.50; 
Cyclical behavior: Procyclical. 

Expenditure function: Current expenditures; 
Correlation with GDP: 0.23; 
Cyclical behavior: Procyclical. 

Expenditure function: Elementary and secondary education; 
Correlation with GDP: 0.60; 
Cyclical behavior: Procyclical. 

Expenditure function: Higher education; 
Correlation with GDP: 0.29; 
Cyclical behavior: Procyclical. 

Expenditure function: Health and hospitals; 
Correlation with GDP: -0.36; 
Cyclical behavior: Countercyclical. 

Expenditure function: Highways; 
Correlation with GDP: 0.53; 
Cyclical behavior: Procyclical. 

Expenditure function: Police and corrections; 
Correlation with GDP: 0.38; 
Cyclical behavior: Procyclical. 

Expenditure function: Public welfare; 
Correlation with GDP: -0.31; 
Cyclical behavior: Countercyclical. 

Expenditure function: All other current expenditures; 
Correlation with GDP: 0.40; 
Cyclical behavior: Procyclical. 

Source: GAO analysis of BEA and U.S. Census Bureau data. 

Notes: To describe how state and local government expenditures change 
during national economic downturns, we first decomposed real state and 
local government expenditures and GDP into their (1) long-run trend 
and (2) business cycle components. We then calculated the correlations 
of the business cycle components of state and local government 
expenditures with the business cycle component of GDP. We used data 
for the period 1977 to 2008 for the United States. The cyclical 
components of expenditures and of GDP are the percent deviations in 
expenditures and GDP from their long-run trends. In general, a 
positive correlation indicates that expenditures are procyclical and a 
negative correlation indicates that expenditures are countercyclical. 
Specifically, we identified revenues as procyclical if the correlation 
was greater than or equal to 0.2, and we identified revenues as 
countercyclical if the correlation was less than or equal to -0.2. Our 
results may be sensitive to the method we used to estimate the 
business cycle components of expenditures and of GDP, may not 
generalize to other time periods, and may not apply to individual U.S. 
states. Appendix I contains additional details on our methodology and 
its limitations. Appendix II contains definitions of state and local 
government expenditures. 

[End of table] 

Both of the main components of general expenditures--capital outlays 
and current expenditures--are procyclical. Capital outlays, which made 
up about 13 percent of general expenditures in 2008, are expenditures 
on the purchase of buildings, land, and equipment, among other things. 
Current expenditures, which made up the remaining 87 percent of 
general expenditures in 2008, include all non-investment spending, 
such as supplies, materials, and contractual services for current 
operations; wages and salaries for employees; and cash assistance to 
needy individuals. Capital outlays show a stronger procyclical 
relationship than current expenditures, and therefore typically fall 
relative to trend more than current expenditures during national 
recessions. Trends in capital outlays and current expenditures tend to 
lag the national business cycle by 1 to 2 years. However, like general 
expenditures, both capital outlays and current expenditures by state 
and local government grew by approximately 4 percent per year between 
1977 and 2008, so declines below their long-run trends do not imply 
that the levels of either capital outlays or current expenditures 
declined. 

Spending associated with social safety net programs appears to behave 
differently over the business cycle than other types of spending. For 
example, current expenditures on health and hospitals and on public 
welfare-expenditures associated with social safety net programs such 
as Medicaid and Temporary Assistance for Needy Families (TANF)--
typically increase relative to trend during national recessions (i.e., 
these expenditures are countercyclical).[Footnote 26] In contrast, 
current expenditures on elementary and secondary education, higher 
education, highways, and police and corrections typically decrease 
relative to trend during economic downturns (i.e., these expenditures 
are procyclical). Current expenditures on health and hospitals and on 
public welfare may be countercyclical because the number of people 
living in poverty is one of the main drivers of both types of 
expenditures, and the number of people living in poverty tends to 
increase during national recessions and to decrease during national 
expansions. 

In addition, current expenditures on some functions seem to lag the 
business cycle more than others. For example, current expenditures on 
elementary and secondary education and higher education seem to lag 
the business cycle by 1 to 2 years, while current expenditures on 
other functions do not seem to lag the business cycle. Thus, while 
state and local governments tend to reduce total current expenditures 
relative to trend during national recessions, they do not do so for 
every service. Furthermore, current expenditures on some services, 
such as education, take longer to recover than others after the 
recession is over. However, current expenditures on all the services 
we analyzed grew every year on average during the period of 1977 to 
2008, so declines relative to trend were not necessarily absolute 
declines in spending on these services. 

If state and local government expenditures are typically procyclical, 
then state and local governments may have difficulties providing 
services during recessions. Reduced expenditures relative to trend 
during recessions may be reflecting reduced revenues relative to trend 
rather than reduced desire for services. For example, current 
expenditures on elementary and secondary education tend to fall 
relative to trend during recessions, but the population of elementary 
and secondary school-age children is unlikely to vary much as a result 
of the business cycle. Current expenditures on higher education also 
tend to fall relative to trend during recessions even though 
enrollment in colleges and universities may increase during 
recessions.[Footnote 27] Furthermore, the finding that current 
expenditures on health and hospitals and on public welfare tend to 
increase relative to trend during recessions does not definitively 
indicate the extent to which these increases are meeting increased 
demand during recessions. For example, we have previously reported 
that economic downturns in states result in rising unemployment, which 
can lead to increases in the number of individuals who are eligible 
for Medicaid coverage, and in declining tax revenues, which can lead 
to less available revenue with which to fund coverage of additional 
enrollees. Between 2001 and 2002, Medicaid enrollment rose 8.6 
percent, which was largely attributed to states' increases in 
unemployment. During this same period, state tax revenues fell 7.5 
percent.[Footnote 28] The extent to which state governments maintained 
the capacity to fund their Medicaid programs differed during past 
recessions. These differences reflect variations in state unemployment 
rate increases and varied increases in Medicaid enrollment during 
recession periods.[Footnote 29] 

State Governments Raise Taxes and Fees, Tap Reserves, and Use Other 
Budget Measures to Address Revenue Declines during National Recessions: 

As revenues decline and demand increases for programs such as Medicaid 
and unemployment insurance during national recessions, state 
governments make fiscal choices within the constraints of their 
available resources. These decisions typically entail raising taxes, 
tapping reserves, reducing spending (as described earlier), or using 
other budget strategies to respond to revenue declines. 

State Governments Increase Taxes and Fees to Respond to Revenue 
Shortfalls during National Recessions, but Individual State Policy 
Choices Vary: 

In our analysis of the discretionary changes state governments have 
made to their revenue policies since 1990, we found that--in the 
aggregate--state governments made policy changes to increase taxes and 
fees during or after every national recession since state fiscal year 
1990 (figure 4).[Footnote 30] For example, tax and fee increases as a 
percent of state general fund revenue peaked at about 5.1 percent in 
state fiscal year 1992, about 1.8 percent in state fiscal year 2004, 
and about 3.9 percent in state fiscal year 2010. From state fiscal 
years 1995 to 2001, states reduced taxes and fees by amounts ranging 
from 0.7 percent to 1.5 percent of general fund revenues. From state 
fiscal years 2003 to 2008, discretionary changes in states' taxes and 
fees ranged from -0.3 percent to 1.8 percent.[Footnote 31] 

Figure 4: State Government Aggregate Tax and Fee Policy Changes as a 
Percentage of General Fund Revenues, State Fiscal Years 1990 to 2010: 

[Refer to PDF for image: line graph] 

[Depicted on the graph are NBER recession periods: 1991; 2002; 2009-
2010] 

State fiscal year: 1990; 
Percentage of general fund revenue: 1.7%. 

State fiscal year: 1991; 
Percentage of general fund revenue: 3.6%. 

State fiscal year: 1992; 
Percentage of general fund revenue: 5.09%. 

State fiscal year: 1993; 
Percentage of general fund revenue: 0.95%. 

State fiscal year: 1994; 
Percentage of general fund revenue: 0.9%. 

State fiscal year: 1995; 
Percentage of general fund revenue: -0.73%. 

State fiscal year: 1996; 
Percentage of general fund revenue: -0.95%. 

State fiscal year: 1997; 
Percentage of general fund revenue: -1.05%. 

State fiscal year: 1998; 
Percentage of general fund revenue: -1.15%. 

State fiscal year: 1999; 
Percentage of general fund revenue: -1.5%. 

State fiscal year: 2000; 
Percentage of general fund revenue: -1.08%. 

State fiscal year: 2001; 
Percentage of general fund revenue: -1.15%. 

State fiscal year: 2002; 
Percentage of general fund revenue: 0.06%. 

State fiscal year: 2003; 
Percentage of general fund revenue: 1.6%. 

State fiscal year: 2004; 
Percentage of general fund revenue: 1.81%. 

State fiscal year: 2005; 
Percentage of general fund revenue: 0.62%. 

State fiscal year: 2006; 
Percentage of general fund revenue: 0.41%. 

State fiscal year: 2007; 
Percentage of general fund revenue: -0.31%. 

State fiscal year: 2008; 
Percentage of general fund revenue: -0.02%. 

State fiscal year: 2009; 
Percentage of general fund revenue: 0.24%. 

State fiscal year: 2010; 
Percentage of general fund revenue: 3.93%. 

Source: GAO analysis of data from NGA, NASBO, and NBER. 

Notes: Data for state fiscal year 2010 are estimated based on general 
fund amounts reported by state budget offices. NASBO conducted its 
2010 survey from March through May 2010 and reported amounts reflect 
enacted budget actions. Reported amounts do not include all states in 
all years. NBER recession dates are reported in state fiscal years, 
which begin on July 1 of each calendar year for all but four states 
(Alabama, Michigan, New York, and Texas). For example, we illustrate 
the national recession beginning July 1990 and ending March 1991 as 
beginning in the first month of state fiscal year 1991 and ending the 
ninth month of state fiscal year 1991. 

[End of figure] 

Within these national trends, individual state revenue policy choices 
varied considerably during our period of analysis. For example, in 
state fiscal year 1992, state governments enacted changes equal to 5.1 
percent of general fund revenues for all states in the aggregate. 
However, during that fiscal year, individual states' policy changes 
ranged from reducing taxes and fees by 1.4 percent to raising taxes 
and fees by 21.3 percent of general fund revenues. In state fiscal 
year 2008, aggregate state policy changes were about 0 percent of 
general fund revenues, but individual state policy changes ranged from 
decreasing taxes and fees by 6.1 percent to increasing taxes and fees 
by 19.3 percent. 

State Governments Tap Fiscal Reserves to Address Declines in Revenue 
During and After Periods of National Recession: 

As we have previously reported, most state governments prepare for 
future budget uncertainty by establishing fiscal reserves.[Footnote 
32] NASBO has reported that 48 states have budget stabilization funds, 
which may be budget reserves, revenue-shortfall accounts, or cash-flow 
accounts.[Footnote 33] 

State governments have tapped fiscal reserves to cope with revenue 
shortfalls during recent national recessions, as indicated by their 
reported total balances, which are comprised of general fund ending 
balances and the amounts in state budget stabilization "rainy day" 
funds (figure 5).[Footnote 34] Prior to the recessions beginning in 
2000 and 2007, state governments built large balance levels, in the 
aggregate. According to NGA and NASBO's Fiscal Survey of States, these 
balance levels reached 10.4 percent of expenditures in state fiscal 
year 2000 and 11.5 percent in 2006. Total balances typically reached 
their lowest points during or just after national recessions. By state 
fiscal year 2003, states' total balances dropped to 3.2 percent of 
expenditures, and in fiscal year 2010 they had fallen to 6.4 percent. 
These total balance levels appear inflated, however, because 
individual state governments' reserves can vary substantially. For 
example, NASBO reports that for state fiscal year 2010, two states 
(Texas and Alaska) represented $25.4 billion--more than 64 percent--of 
all state governments' total balances. Removing these states, total 
balances were 2.4 percent of expenditures for the remaining 48 state 
governments. 

Figure 5: State Government Total Balances as a Percentage of Total 
Expenditures, State Fiscal Years 1979 to 2010: 

[Refer to PDF for image: line graph] 

[Depicted on the graph are NBER recession periods: 1981; 1982-1983; 
1991; 2002; 2009-2010] 

State fiscal year: 1979; 
Total balance (percentage of expenditures: 8.7%. 

State fiscal year: 1980; 
Total balance (percentage of expenditures: 9%. 

State fiscal year: 1981; 
Total balance (percentage of expenditures: 4.4%. 

State fiscal year: 1982; 
Total balance (percentage of expenditures: 2.9%. 

State fiscal year: 1983; 
Total balance (percentage of expenditures: 1.5%. 

State fiscal year: 1984; 
Total balance (percentage of expenditures: 3.8%. 

State fiscal year: 1985; 
Total balance (percentage of expenditures: 5.2%. 

State fiscal year: 1986; 
Total balance (percentage of expenditures: 3.5%. 

State fiscal year: 1987; 
Total balance (percentage of expenditures: 3.1%. 

State fiscal year: 1988; 
Total balance (percentage of expenditures: 4.2%. 

State fiscal year: 1989; 
Total balance (percentage of expenditures: 4.8%. 

State fiscal year: 1990; 
Total balance (percentage of expenditures: 3.4%. 

State fiscal year: 1991; 
Total balance (percentage of expenditures: 1.1%. 

State fiscal year: 1992; 
Total balance (percentage of expenditures: 1.8%. 

State fiscal year: 1993; 
Total balance (percentage of expenditures: 4.2%. 

State fiscal year: 1994; 
Total balance (percentage of expenditures: 5.1%. 

State fiscal year: 1995; 
Total balance (percentage of expenditures: 5.8%. 

State fiscal year: 1996; 
Total balance (percentage of expenditures: 6.8%. 

State fiscal year: 1997; 
Total balance (percentage of expenditures: 7.9%. 

State fiscal year: 1998; 
Total balance (percentage of expenditures: 9.2%. 

State fiscal year: 1999; 
Total balance (percentage of expenditures: 8.4%. 

State fiscal year: 2000; 
Total balance (percentage of expenditures: 10.4%. 

State fiscal year: 2001; 
Total balance (percentage of expenditures: 9.1%. 

State fiscal year: 2002; 
Total balance (percentage of expenditures: 3.7%. 

State fiscal year: 2003; 
Total balance (percentage of expenditures: 3.2%. 

State fiscal year: 2004; 
Total balance (percentage of expenditures: 4.6%. 

State fiscal year: 2005; 
Total balance (percentage of expenditures: 8.4%. 

State fiscal year: 2006; 
Total balance (percentage of expenditures: 11.5%. 

State fiscal year: 2007; 
Total balance (percentage of expenditures: 10.1%. 

State fiscal year: 2008; 
Total balance (percentage of expenditures: 8.6%. 

State fiscal year: 2009; 
Total balance (percentage of expenditures: 4.6%. 

State fiscal year: 2010; 
Total balance (percentage of expenditures: 6.4%. 

Source: GAO analysis of data from NGA, NASBO, and NBER 

Notes: Total balances are comprised of general fund ending balances 
and the amounts in state budget stabilization "rainy day" funds. For 
fiscal year 2010, two states represented $25.4 billion (64 percent) of 
all states' total balances. Removing these states from fiscal year 
2010, states' total balances would be 2.4 percent. Data for state 
fiscal year 2010 are estimated based on general fund amounts reported 
by state budget offices. NASBO conducted its 2010 survey from March 
through May 2010. Reported amounts do not include all states in all 
years. NBER recession dates are reported in state fiscal years. State 
fiscal years begin on July 1 of each calendar year for all but four 
states (Alabama, Michigan, New York, and Texas). For example, we 
illustrate the national recession beginning July 1990 and ending March 
1991 as beginning in the first month of state fiscal year 1991 and 
ending the ninth month of state fiscal year 1991. 

[End of figure] 

State and Local Governments also Rely on a Variety of Other Budget 
Measures to Address Revenue Declines during National Recessions: 

Since 1973, state and local governments have, in general, borrowed 
more and saved less during national recessions. Net lending or net 
borrowing by state and local governments--which is comprised of total 
receipts minus total expenditures--has fallen after the peak of each 
business cycle since 1973 (figure 6).[Footnote 35] While the state and 
local government sector increased its borrowing substantially during 
recent recessions, the sector did not increase net investments to the 
same extent.[Footnote 36] For example, net borrowing increased from 
0.2 percent of GDP in the first quarter of 2006 to 1.15 percent of GDP 
in the third quarter of 2008 for all state and local governments in 
the aggregate. In contrast, state and local government investment 
ranged from 1.1 percent to 1.2 percent of GDP during the same period. 

Figure 6: Net Investment, Lending, and Borrowing in the State and 
Local Government Sector: 

[Refer to PDF for image: multiple line graph] 

[Depicted on the graph are NBER recession periods: 1974Q1-1975Q1; 
1980Q1-1981Q1; 1982Q1-1983Q1; 1991Q1; 2001Q1; 2008Q1-2010Q1] 

Percent of GDP: 

Date: 1973Q1; 
Net government investment: 1.55; 
Net lending or net borrowing(-): 0.42. 

Date: 1973Q2; 
Net government investment: 1.47; 
Net lending or net borrowing(-): 0.23. 

Date: 1973Q3; 
Net government investment: 1.46; 
Net lending or net borrowing(-): 0.08. 

Date: 1973Q4; 
Net government investment: 1.49; 
Net lending or net borrowing(-): -0.02. 

Date: 1974Q1; 
Net government investment: 1.58; 
Net lending or net borrowing(-): -0.12. 

Date: 1974Q2; 
Net government investment: 1.67; 
Net lending or net borrowing(-): -0.28. 

Date: 1974Q3; 
Net government investment: 1.61; 
Net lending or net borrowing(-): -0.42. 

Date: 1974Q4; 
Net government investment: 1.51; 
Net lending or net borrowing(-): -0.59. 

Date: 1975Q1; 
Net government investment: 1.69; 
Net lending or net borrowing(-): -1.01. 

Date: 1975Q2; 
Net government investment: 1.45; 
Net lending or net borrowing(-): -0.71. 

Date: 1975Q3; 
Net government investment: 1.47; 
Net lending or net borrowing(-): -0.51. 

Date: 1975Q4; 
Net government investment: 1.58; 
Net lending or net borrowing(-): -0.69. 

Date: 1976Q1; 
Net government investment: 1.65; 
Net lending or net borrowing(-): -0.67. 

Date: 1976Q2; 
Net government investment: 1.39; 
Net lending or net borrowing(-): -0.4. 

Date: 1976Q3; 
Net government investment: 1.22; 
Net lending or net borrowing(-): -0.21. 

Date: 1976Q4; 
Net government investment: 1.09; 
Net lending or net borrowing(-): 0.18. 

Date: 1977Q1; 
Net government investment: 1.13; 
Net lending or net borrowing(-): 0.03. 

Date: 1977Q2; 
Net government investment: 1.14; 
Net lending or net borrowing(-): 0.09. 

Date: 1977Q3; 
Net government investment: 1.03; 
Net lending or net borrowing(-): 0.39. 

Date: 1977Q4; 
Net government investment: 0.99; 
Net lending or net borrowing(-): 0.35. 

Date: 1978Q1; 
Net government investment: 0.92; 
Net lending or net borrowing(-): 0.46. 

Date: 1978Q2; 
Net government investment: 1.2; 
Net lending or net borrowing(-): 0.4. 

Date: 1978Q3; 
Net government investment: 1.25; 
Net lending or net borrowing(-): 0.04. 

Date: 1978Q4; 
Net government investment: 1.25; 
Net lending or net borrowing(-): 0.12. 

Date: 1979Q1; 
Net government investment: 1.04; 
Net lending or net borrowing(-): 0.19. 

Date: 1979Q2; 
Net government investment: 1.19; 
Net lending or net borrowing(-): -0.13. 

Date: 1979Q4; 
Net government investment: 1.27; 
Net lending or net borrowing(-): -0.1. 

Date: 1979Q4; 
Net government investment: 1.33; 
Net lending or net borrowing(-): -0.23. 

Date: 1980Q1; 
Net government investment: 1.38; 
Net lending or net borrowing(-): -0.31. 

Date: 1980Q2; 
Net government investment: 1.27; 
Net lending or net borrowing(-): -0.38. 

Date: 1980Q3; 
Net government investment: 1.14; 
Net lending or net borrowing(-): -0.22. 

Date: 1980Q4; 
Net government investment: 1.09; 
Net lending or net borrowing(-): -0.05. 

Date: 1981Q1; 
Net government investment: 1.19; 
Net lending or net borrowing(-): -0.2. 

Date: 1981Q2; 
Net government investment: 0.97; 
Net lending or net borrowing(-): -0.12. 

Date: 1981Q3; 
Net government investment: 0.86; 
Net lending or net borrowing(-): -0.08. 

Date: 1981Q4; 
Net government investment: 0.91; 
Net lending or net borrowing(-): -0.28. 

Date: 1982Q1; 
Net government investment: 0.84; 
Net lending or net borrowing(-): -0.35. 

Date: 1982Q2; 
Net government investment: 0.83; 
Net lending or net borrowing(-): -0.35. 

Date: 1982Q3; 
Net government investment: 0.83; 
Net lending or net borrowing(-): -0.38. 

Date: 1982Q4; 
Net government investment: 0.87; 
Net lending or net borrowing(-): -0.47. 

Date: 1983Q1; 
Net government investment: 0.8; 
Net lending or net borrowing(-): -0.22. 

Date: 1983Q2; 
Net government investment: 0.76; 
Net lending or net borrowing(-): -0.19. 

Date: 1983Q3; 
Net government investment: 0.81; 
Net lending or net borrowing(-): -0.03. 

Date: 1983Q4; 
Net government investment: 0.77; 
Net lending or net borrowing(-): 0.1. 

Date: 1984Q1; 
Net government investment: 0.83; 
Net lending or net borrowing(-): 0.26. 

Date: 1984Q2; 
Net government investment: 0.87; 
Net lending or net borrowing(-): 0.32. 

Date: 1984Q3; 
Net government investment: 0.93; 
Net lending or net borrowing(-): 0.11. 

Date: 1984Q4; 
Net government investment: 0.95; 
Net lending or net borrowing(-): 0.21. 

Date: 1985Q1; 
Net government investment: 0.96; 
Net lending or net borrowing(-): 0.11. 

Date: 1985Q2; 
Net government investment: 1.04; 
Net lending or net borrowing(-): 0.06. 

Date: 1985Q3; 
Net government investment: 1.05; 
Net lending or net borrowing(-): 0. 

Date: 1985Q4; 
Net government investment: 1.01; 
Net lending or net borrowing(-): -0.02. 

Date: 1986Q1; 
Net government investment: 1.09; 
Net lending or net borrowing(-): 0.04. 

Date: 1986Q2; 
Net government investment: 1.11; 
Net lending or net borrowing(-): -0.12. 

Date: 1986Q3; 
Net government investment: 1.12; 
Net lending or net borrowing(-): -0.08. 

Date: 1986Q4; 
Net government investment: 1.05; 
Net lending or net borrowing(-): -0.28. 

Date: 1987Q1; 
Net government investment: 1.09; 
Net lending or net borrowing(-): -0.46. 

Date: 1987Q2; 
Net government investment: 1.07; 
Net lending or net borrowing(-): -0.15. 

Date: 1987Q3; 
Net government investment: 1.08; 
Net lending or net borrowing(-): -0.38. 

Date: 1987Q4; 
Net government investment: 1.08; 
Net lending or net borrowing(-): -0.43. 

Date: 1988Q1; 
Net government investment: 1.07; 
Net lending or net borrowing(-): -0.37. 

Date: 1988Q2; 
Net government investment: 1.12; 
Net lending or net borrowing(-): -0.42. 

Date: 1988Q3; 
Net government investment: 1.08; 
Net lending or net borrowing(-): -0.2. 

Date: 1988Q4; 
Net government investment: 1.11; 
Net lending or net borrowing(-): -0.24. 

Date: 1989Q1; 
Net government investment: 1.08; 
Net lending or net borrowing(-): -0.12. 

Date: 1989Q2; 
Net government investment: 1.1; 
Net lending or net borrowing(-): -0.19. 

Date: 1989Q3; 
Net government investment: 1.11; 
Net lending or net borrowing(-): -0.31. 

Date: 1989Q4; 
Net government investment: 1.16; 
Net lending or net borrowing(-): -0.64. 

Date: 1990Q1; 
Net government investment: 1.23; 
Net lending or net borrowing(-): -0.52. 

Date: 1990Q2; 
Net government investment: 1.18; 
Net lending or net borrowing(-): -0.61. 

Date: 1990Q3; 
Net government investment: 1.17; 
Net lending or net borrowing(-): -0.67. 

Date: 1990Q4; 
Net government investment: 1.24; 
Net lending or net borrowing(-): -0.87. 

Date: 1991Q1; 
Net government investment: 1.19; 
Net lending or net borrowing(-): -0.86. 

Date: 1991Q2; 
Net government investment: 1.17; 
Net lending or net borrowing(-): -0.87. 

Date: 1991Q3; 
Net government investment: 1.18; 
Net lending or net borrowing(-): -0.8. 

Date: 1991Q4; 
Net government investment: 1.19; 
Net lending or net borrowing(-): -0.88. 

Date: 1992Q1; 
Net government investment: 1.24; 
Net lending or net borrowing(-): -0.83. 

Date: 1992Q2; 
Net government investment: 1.15; 
Net lending or net borrowing(-): -0.72. 

Date: 1992Q3; 
Net government investment: 1.06; 
Net lending or net borrowing(-): -0.71. 

Date: 1992Q4; 
Net government investment: 1; 
Net lending or net borrowing(-): -0.58. 

Date: 1993Q1; 
Net government investment: 0.98; 
Net lending or net borrowing(-): -0.73. 

Date: 1993Q2; 
Net government investment: 1.04; 
Net lending or net borrowing(-): -0.68. 

Date: 1993Q3; 
Net government investment: 1.03; 
Net lending or net borrowing(-): -0.64. 

Date: 1993Q4; 
Net government investment: 1.02; 
Net lending or net borrowing(-): -0.38. 

Date: 1994Q1; 
Net government investment: 0.95; 
Net lending or net borrowing(-): -0.46. 

Date: 1994Q2; 
Net government investment: 0.98; 
Net lending or net borrowing(-): -0.52. 

Date: 1994Q3; 
Net government investment: 1.04; 
Net lending or net borrowing(-): -0.4. 

Date: 1994Q4; 
Net government investment: 1.03; 
Net lending or net borrowing(-): -0.48. 

Date: 1995Q1; 
Net government investment: 1.04; 
Net lending or net borrowing(-): -0.44. 

Date: 1995Q2; 
Net government investment: 1.08; 
Net lending or net borrowing(-): -0.66. 

Date: 1995Q3; 
Net government investment: 1.03; 
Net lending or net borrowing(-): -0.48. 

Date: 1995Q4; 
Net government investment: 1.02; 
Net lending or net borrowing(-): -0.35. 

Date: 1996Q1; 
Net government investment: 0.99; 
Net lending or net borrowing(-): -0.26. 

Date: 1996Q2; 
Net government investment: 1.01; 
Net lending or net borrowing(-): -0.34. 

Date: 1996Q3; 
Net government investment: 1.06; 
Net lending or net borrowing(-): -0.33. 

Date: 1996Q4; 
Net government investment: 1.15; 
Net lending or net borrowing(-): -0.37. 

Date: 1997Q1; 
Net government investment: 1.2; 
Net lending or net borrowing(-): -0.41. 

Date: 1997Q2; 
Net government investment: 1.15; 
Net lending or net borrowing(-): -0.33. 

Date: 1997Q3; 
Net government investment: 1.09; 
Net lending or net borrowing(-): -0.19. 

Date: 1997Q4; 
Net government investment: 1.03; 
Net lending or net borrowing(-): -0.13. 

Date: 1998Q1; 
Net government investment: 1; 
Net lending or net borrowing(-): -0.07. 

Date: 1998Q2; 
Net government investment: 1.09; 
Net lending or net borrowing(-): -0.2. 

Date: 1998Q3; 
Net government investment: 1.18; 
Net lending or net borrowing(-): -0.26. 

Date: 1998Q4; 
Net government investment: 1.18; 
Net lending or net borrowing(-): -0.15. 

Date: 1999Q1; 
Net government investment: 1.2; 
Net lending or net borrowing(-): -0.33. 

Date: 1999Q2; 
Net government investment: 1.18; 
Net lending or net borrowing(-): -0.35. 

Date: 1999Q3; 
Net government investment: 1.18; 
Net lending or net borrowing(-): -0.3. 

Date: 1999Q4; 
Net government investment: 1.23; 
Net lending or net borrowing(-): -0.34. 

Date: 2000Q1; 
Net government investment: 1.28; 
Net lending or net borrowing(-): -0.32. 

Date: 2000Q2; 
Net government investment: 1.21; 
Net lending or net borrowing(-): -0.25. 

Date: 2000Q3; 
Net government investment: 1.22; 
Net lending or net borrowing(-): -0.41. 

Date: 2000Q4; 
Net government investment: 1.23; 
Net lending or net borrowing(-): -0.55. 

Date: 2001Q1; 
Net government investment: 1.27; 
Net lending or net borrowing(-): -0.66. 

Date: 2001Q2; 
Net government investment: 1.39; 
Net lending or net borrowing(-): -0.96. 

Date: 2001Q3; 
Net government investment: 1.22; 
Net lending or net borrowing(-): -0.89. 

Date: 2001Q4; 
Net government investment: 1.35; 
Net lending or net borrowing(-): -1.35. 

Date: 2002Q1; 
Net government investment: 1.37; 
Net lending or net borrowing(-): -1.38. 

Date: 2002Q2; 
Net government investment: 1.33; 
Net lending or net borrowing(-): -1.38. 

Date: 2002Q3; 
Net government investment: 1.33; 
Net lending or net borrowing(-): -1.29. 

Date: 2002Q4; 
Net government investment: 1.34; 
Net lending or net borrowing(-): -1.38. 

Date: 2003Q1; 
Net government investment: 1.31; 
Net lending or net borrowing(-): -1.64. 

Date: 2003Q2; 
Net government investment: 1.27; 
Net lending or net borrowing(-): -1.25. 

Date: 2003Q3; 
Net government investment: 1.31; 
Net lending or net borrowing(-): -1.05. 

Date: 2003Q4; 
Net government investment: 1.27; 
Net lending or net borrowing(-): -0.79. 

Date: 2004Q1; 
Net government investment: 1.23; 
Net lending or net borrowing(-): -0.99. 

Date: 2004Q2; 
Net government investment: 1.25; 
Net lending or net borrowing(-): -1.01. 

Date: 2004Q3; 
Net government investment: 1.2; 
Net lending or net borrowing(-): -0.9. 

Date: 2004Q4; 
Net government investment: 1.16; 
Net lending or net borrowing(-): -0.63. 

Date: 2005Q1; 
Net government investment: 1.12; 
Net lending or net borrowing(-): -0.49. 

Date: 2005Q2; 
Net government investment: 1.12; 
Net lending or net borrowing(-): -0.53. 

Date: 2005Q3; 
Net government investment: 1.11; 
Net lending or net borrowing(-): -0.44. 

Date: 2005Q4; 
Net government investment: 1.14; 
Net lending or net borrowing(-): -0.63. 

Date: 2006Q1; 
Net government investment: 1.1; 
Net lending or net borrowing(-): -0.2. 

Date: 2006Q2; 
Net government investment: 1.16; 
Net lending or net borrowing(-): -0.26. 

Date: 2006Q3; 
Net government investment: 1.16; 
Net lending or net borrowing(-): -0.4. 

Date: 2006Q4; 
Net government investment: 1.14; 
Net lending or net borrowing(-): -0.46. 

Date: 2007Q1; 
Net government investment: 1.19; 
Net lending or net borrowing(-): -0.58. 

Date: 2007Q2; 
Net government investment: 1.21; 
Net lending or net borrowing(-): -0.53. 

Date: 2007Q3; 
Net government investment: 1.2; 
Net lending or net borrowing(-): -0.61. 

Date: 2007Q4; 
Net government investment: 1.2; 
Net lending or net borrowing(-): -0.79. 

Date: 2008Q1; 
Net government investment: 1.17; 
Net lending or net borrowing(-): -0.91. 

Date: 2008Q2; 
Net government investment: 1.19; 
Net lending or net borrowing(-): -0.95. 

Date: 2008Q3; 
Net government investment: 1.19; 
Net lending or net borrowing(-): -1.15. 

Date: 2008Q4; 
Net government investment: 1.15; 
Net lending or net borrowing(-): -1.1. 

Date: 2009Q1; 
Net government investment: 1.14; 
Net lending or net borrowing(-): -1. 

Date: 2009Q2; 
Net government investment: 1.24; 
Net lending or net borrowing(-): -0.98. 

Date: 2009Q3; 
Net government investment: 1.23; 
Net lending or net borrowing(-): -0.82. 

Date: 2009Q4; 
Net government investment: 1.14; 
Net lending or net borrowing(-): -0.72. 

Date: 2010Q1; 
Net government investment: 1.02; 
Net lending or net borrowing(-): -0.54. 

Source: GAO analysis of BEA; NBER data. 

Notes: Net lending or net borrowing is comprised of total receipts 
minus total expenditures. Net lending occurs when total receipts 
exceed total expenditures and net borrowing occurs when total 
expenditures exceed total receipts. Net investment is gross government 
investment minus consumption of fixed capital. 

[End of figure] 

The level of total state and local government debt per capita varies 
substantially across states.[Footnote 37] Our analysis found that on 
average state and local government total debt per capita was $7,695 in 
fiscal year 2008; however, within individual states debt ranged from a 
minimum of $3,760 per capita to a maximum of $14,513 per capita. As a 
percentage of gross state product (GSP), total state and local 
government debt averaged 16.9 percent and ranged from 6.6 percent to 
25.4 percent in fiscal year 2008.[Footnote 38] State and local 
government total debt levels appear to correlate with GSP, suggesting 
that state and local governments within states with more fiscal 
resources tend to hold more debt. 

State budget officials have used other short-term budget measures to 
address revenue declines while avoiding broad-based tax increases. 
Some of these strategies include: 

* shifting revenues or expenditures across fiscal years, 

* securitizing revenue streams,[Footnote 39] 

* reducing payments or revenue sharing to local governments, 

* deferring infrastructure maintenance, 

* borrowing from or transferring funds from outside the general fund 
to address revenue shortfalls, and: 

* reducing funding levels for pensions.[Footnote 40] 

In addition, a number of state governments have redesigned government 
programs to improve efficiency and reduce expenditures. According to 
the National Governor's Association Center for Best Practices (NGA 
Center), a recession provides state fiscal managers with an 
opportunity for cutting back inefficient operations.[Footnote 41] The 
NGA Center tracked state governments' efforts to restructure 
government, and in fiscal years 2009 and 2010, a broad range of budget 
cuts and programmatic changes were enacted in areas such as 
corrections, K-12 education, higher education, and employee costs 
(salaries and benefits). While some of these changes were temporary, 
the NGA Center contends these changes reflect a "new normal" for state 
government in the long term. The NGA Center found that at least 15 
state governments conducted governmentwide reviews to improve 
efficiency and reduce costs; at least 18 state governments reorganized 
agencies; and more than 20 state governments altered employee 
compensation, including enacting pension reforms. 

Strategies to Respond to National Recessions Require Decisions on 
Whether, When, and How to Provide Federal Fiscal Assistance to State 
and Local Governments: 

GAO and Other Evaluations of Prior Federal Fiscal Assistance 
Strategies Identify Design Considerations Including Effective Timing 
and Targeting of Aid: 

Evaluations of prior federal fiscal assistance strategies have 
identified considerations to guide policymakers as they consider the 
design of future legislative responses to national recessions. To 
ensure that federal fiscal assistance is effective, we and others have 
said that policymakers can benefit from considering the following when 
developing a policy strategy.[Footnote 42] 

* Timing/triggering mechanisms--Fiscal assistance that begins to flow 
to state and local governments when the national economy is 
contracting is more likely to help state and local governments avoid 
actions that exacerbate the economic contraction, such as increasing 
taxes or cutting expenditures. Since it takes time for state and local 
government revenues and service demands to return to pre-recession 
levels, fiscal assistance that continues beyond the end of a recession 
may help state and local governments avoid similar actions that slow 
the economic recovery. Federal policy strategies specifically intended 
to stabilize state and local governments' budgets may have to be timed 
differently than those designed to stimulate the national economy, 
because state budget difficulties often persist beyond the end of a 
recession. 

Securing legislative approval of fiscal assistance through Congress 
can result in a time lag before such assistance is available. For 
example, the Recovery Act was passed in February 2009, nearly five 
quarters after the national recession began in December 2007. There 
can also be a second lag that results from the time it takes for the 
federal government to distribute fiscal assistance to the states. 
Further, state governments often have to set up mechanisms for 
channeling the funds into the necessary programs. All of this slows 
the process of spending the money during a recession. In the case of 
the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), 
for example, we found that the first federal funds were distributed 19 
months after the end of the national recession. A trigger could 
automatically provide federal assistance, or it could prompt 
policymakers to take action. Economists at the Federal Reserve Bank of 
Chicago have described the ideal countercyclical assistance program as 
one having an automatically activated, pre-arranged triggering 
mechanism that could remove some of the political considerations from 
the program's design and eliminate delays inherent to the legislative 
process. Such a trigger could also specify criteria for ending 
assistance. 

* Targeting--If federal fiscal assistance to state and local 
governments is targeted based on the magnitude of the recession's 
effect on each state's economy, this approach can facilitate economic 
recovery and moderate fiscal distress at the state and local level. 
Targeting requires careful consideration of the differences in 
individual states' downturns while also striking a balance with other 
policy objectives. As discussed below, effective targeting of federal 
fiscal assistance is dependent upon the selection of indicators that 
correspond to the specific purpose(s) of the particular policy 
strategy. 

* Temporary--As a general principle, federal fiscal assistance 
provided in response to national recessions is temporary. While a 
federal fiscal stimulus strategy can increase economic growth in the 
short run, such efforts can contribute to the federal budget deficit 
if allowed to run too long after entering a period of strong recovery. 
The program can be designed so that the assistance ends or is phased 
out without causing a major disruption in state government budget 
planning. If federal assistance is poorly timed, badly targeted, or 
permanently increases the budget deficit, the short-term benefits of 
the assistance package may not offset the long-term cost. 

* Consistency with other policy objectives--The design of federal 
fiscal assistance occurs in tandem with consideration of the impact 
these strategies could have on decision makers' other policy 
objectives. Such considerations include competing demands for federal 
resources and an assessment of states' ability to cope with their 
economic conditions without further federal assistance. As the 
Peterson-Pew Commission on Budget Reform recently noted in its report, 
current budget practices recognize the costs of economic emergencies 
only when these events occur. Although we do not know when recessions 
will occur or how severe future recessions will be, the current 
practice of waiting to act until these economic events occur can 
result in greater public costs than if policy objectives of advance 
preparation (such as reduced consumption and increased savings during 
economic upswings) were incorporated into federal fiscal assistance 
strategies.[Footnote 43] A standby federal fiscal assistance policy 
could induce moral hazard by encouraging state or local governments to 
expect similar federal actions in future crises, thereby weakening 
their incentives to properly manage risks. For example, states could 
have less incentive to build, maintain, and grow their rainy day or 
other reserve funds if they believe they may receive assistance from 
the federal government during future recessions. Another consideration 
is the policy objective of maintaining accountability while promoting 
flexibility in state spending. Past studies have shown that 
unrestricted federal funds are fungible and can be substituted for 
state funds, and the uses of such funds can be difficult or impossible 
to track.[Footnote 44] 

Overall Design Considerations and Policy Goals Influence Selection of 
Indicators to Time and Target Federal Fiscal Assistance: 

When policymakers select indicators to time and target federal fiscal 
assistance in response to a national recession, their selection 
depends on the specific purposes of the proposed assistance program. 
For example, during a recession, policymakers may choose to provide 
general fiscal assistance or assistance for specific purposes such as 
supporting states' Medicaid or education programs. The indicators 
chosen to time and target general fiscal assistance could differ from 
those chosen for the purpose of supporting Medicaid or education. 
Indicators chosen for Medicaid could also differ from those chosen to 
provide assistance for education. In addition, different indicators 
may be needed to determine the timing (triggering on), the targeting 
(allocating), and the halting (triggering off) of federal fiscal 
assistance. For example, policymakers could use a national labor 
market indicator to begin assistance and a state-level indicator to 
halt assistance. We previously reported on a policy strategy intended 
to support state Medicaid programs during economic downturns.[Footnote 
45] This strategy used state unemployment rates to trigger the flow of 
aid on and off. This strategy used state unemployment rates along with 
an additional indicator--relative state Medicaid costs--to determine 
the amount of aid each state receives. 

Policymakers could select indicators with the intent of responding to 
the effects of a particular recession. For example, if policymakers 
want to begin providing fiscal assistance to state and local 
governments as states enter an economic downturn, they are challenged 
by the fact that different states may enter into economic downturns at 
different times. Policymakers would need to select an indicator that 
provides information on the overall amount of economic activity in 
individual states, that is frequent enough to distinguish between 
different phases of the business cycle, and is available with 
relatively little lag time. 

Timely, state-level, publicly available indicators can be found 
primarily in labor market data, but are also found in housing market 
and personal income data.[Footnote 46] The indicators in table 3 are 
all commonly used measures of national macroeconomic activity that are 
also available at the state level. At the national level, indicators 
such as employment, weekly hours, and housing units authorized by 
building permits are procyclical, while other indicators, such as 
unemployment, are countercyclical. The indicators in table 3 are 
published either monthly or quarterly, and thus cover periods shorter 
than the length of the typical national recession. These indicators 
are available with less than a 6-month publication lag, as indicators 
with publication lags greater than 6 months may not reveal the 
downturn until it is already over and the recovery has begun.[Footnote 
47] 

Table 3: Selected Indicators for Timing or Targeting Federal 
Assistance to States: 

Indicator: Coincident index; 
Source: Federal Reserve Bank of Philadelphia; 
Frequency: Monthly. 

Indicator: Employment; 
Source: U.S. Bureau of Labor Statistics (BLS) State and Metro Area 
Employment, Hours, and Earnings (SAE); 
Frequency: Monthly. 

Indicator: Employment; 
Source: BLS Local Area Unemployment Statistics (LAUS); 
Frequency: Monthly. 

Indicator: Employment; 
Source: BLS Quarterly Census of Employment and Wages (QCEW); 
Frequency: Monthly. 

Indicator: Hourly earnings; 
Source: BLS SAE; 
Frequency: Monthly. 

Indicator: Housing units authorized by building permits; 
Source: U.S. Census Bureau; 
Frequency: Monthly. 

Indicator: Personal income; 
Source: U.S. Bureau of Economic Analysis (BEA); 
Frequency: Quarterly. 

Indicator: Unemployment; 
Source: BLS LAUS; 
Frequency: Monthly. 

Indicator: Unemployment rate; 
Source: BLS LAUS; 
Frequency: Monthly. 

Indicator: Wages and salaries; 
Source: BEA; 
Frequency: Quarterly. 

Indicator: Wages and salaries; 
Source: BLS QCEW; 
Frequency: Quarterly. 

Indicator: Weekly hours; 
Source: BLS SAE; 
Frequency: Monthly. 

Source: GAO analysis of BEA, BLS, Federal Reserve Bank of 
Philadelphia, and U.S. Census Bureau data. 

Note: The indicators in this table are not an exhaustive list of all 
publicly available indicators to time or target assistance to states. 
Depending on the specific policy strategy used, policymakers may want 
to combine the indicators with other information, such as data on 
increased demand for specific programs, to target assistance for 
specific programs or state circumstances. For example, GAO has 
reported on a policy strategy that combined information on the change 
in a state's unemployment rate with an index of the average level of 
Medicaid expenditures by state. 

[End of table] 

The illustrative indicators shown in the table above exclude 
indicators of fiscal stress (such as declines in tax receipts or 
budget gaps) because they are dependent on state governments' policy 
choices and because state definitions and measurement techniques vary 
for calculations such as budget gaps. For example, the list does not 
include state governments' quarterly tax receipts because this measure 
reflects policy decisions within each state. Data sources detailing 
state-level participation in intergovernmental benefit programs are 
also excluded because program enrollment data can understate the 
number of individuals eligible for the program. For example, we did 
not include unemployment insurance claim data from the Employment and 
Training Administration because BLS has reported that unemployment 
insurance information cannot be used as a source for complete 
information on the number of unemployed. We excluded this indicator 
because claims data may underestimate the number of unemployed because 
some people are still jobless when their benefits run out, some are 
not eligible, and some never apply for benefits. 

Recent research suggests that some indicators may be better able to 
trigger assistance on and off than other indicators, depending on the 
specific purpose of the assistance. Economists from the Federal 
Reserve Bank of Chicago found that a trigger based on the national 
aggregate of the Federal Reserve Bank of Philadelphia's State 
Coincident Indexes--which are comprised of nonfarm payroll employment, 
average hours worked in manufacturing, the unemployment rate, and wage 
and salary disbursements--would turn assistance on close to the 
beginning of a national recession and would turn assistance off close 
to the end of a national recession.[Footnote 48] They found that a 
trigger based on the national unemployment rate also triggered the 
flow of assistance on close to the beginning of a national recession, 
but did not trigger the assistance off until well after the national 
economic recovery was under way, reflecting the lag in employment 
recovery after recessions. If the goal of aid is to maintain state and 
local government spending only during the recession, then the State 
Coincident Indexes may be an appropriate indicator. However, if the 
goal of aid is to maintain state and local government spending until 
an individual state's economy fully recovers, the unemployment rate 
may be an appropriate indicator. 

Future Approaches to Federal Fiscal Assistance Can Benefit from 
Knowledge of Results, Challenges, and Unintended Consequences of 
Previous Federal Responses: 

Knowledge of the results, challenges, and unintended consequences of 
past policy actions can inform deliberations as policymakers determine 
whether and how to provide federal fiscal assistance in response to 
future national recessions.[Footnote 49] Federal responses to prior 
recessions have included providing various forms of federal fiscal 
assistance directly to state and local governments as well as 
decisions not to provide fiscal assistance in response to national 
recessions. When the federal government has provided fiscal 
assistance, such assistance has fallen into two general categories: 
(1) unrestricted or general purpose fiscal assistance,[Footnote 50] 
which can include general revenue sharing programs; and (2) federal 
fiscal assistance through grants for specific purposes. This second 
category of assistance has included funding for existing grant 
programs (including both categorical and formula grants) as well as 
funding for new grant programs to state and local governments. 

Unrestricted or general purpose grants to states and localities 
maximize spending discretion for state and local governments. This 
approach has included antirecession payments and general revenue 
sharing funds to increase state and local expenditures or forestall 
potential tax increases. Because there are minimal restrictions on the 
use of these funds, they offer the advantage of not interfering with 
state spending priorities as well as the opportunity to use the funds 
quickly. However, our past evaluations, as well as work by others, 
have noted that this approach also presents challenges and unintended 
consequences.[Footnote 51] Due to the nature of such assistance, state 
and local governments may use unrestricted federal funds for 
activities that would have otherwise been funded using non-federal 
sources.[Footnote 52] Also, in an example from the 1970s, federal 
antirecession payments were provided through the Antirecession Fiscal 
Assistance (ARFA) program, which distributed more than $3 billion 
between July 1976 and September 1978 to state and local governments. 
State and local governments could use the ARFA funds for the 
maintenance of basic services customarily provided by these 
governments, such as public welfare, education and police protection. 
The ARFA funds were intended to facilitate state spending. However, 
because the funds were subject to states' standard appropriations 
procedures, this slowed states' spending of the funds. In its study of 
ARFA, the Department of the Treasury reported that states appropriated 
ARFA funds on average 7 months later than the states appropriated 
their own revenues, thereby delaying entry of the funds into the 
states' spending stream.[Footnote 53] 

More recently, we found similar issues in our 2004 review of the 
component of the JGTRRA[Footnote 54] that provided $10 billion in 
unrestricted, temporary fiscal relief payments to states that were 
allocated on a per capita basis.[Footnote 55] We found that these 
fiscal relief funds were not targeted to individual states based on 
the impact of the recession and found it doubtful that these payments 
were ideally timed to achieve their greatest possible economic 
stimulus. JGTRRA fiscal relief payments were first distributed to the 
states in June 2003, about 19 months after the end of the 2001 
recession and after the beginning of the economic expansion. However, 
because employment levels continued to decline even after the economy 
entered an expansion period, we found that the JGTTRA fiscal relief 
payments likely helped resolve ongoing state budgetary problems. 

Some prior federal fiscal assistance strategies have included use of 
existing grant programs to deliver assistance to states. This approach 
has the advantage of targeting funding to reflect federal policy 
priorities while avoiding the delays involved in establishing and 
implementing entirely new programs. For example, an amendment to the 
Comprehensive Employment and Training Act of 1973 (CETA) created Title 
VI, Emergency Jobs Programs (Title VI), which provided federal fiscal 
assistance in response to the recession that began in 1973. Title VI 
adapted the existing CETA federal jobs program to mitigate cyclical 
unemployment by providing funding to temporarily hire employees in 
federal, state, and local governments. While policy analysts found 
that Title VI provided visible and useful services to communities and 
fiscal relief to some localities, they also found that there were 
unintended consequences resulting from implementation of the program. 
According to our prior work, and the work of others, these 
consequences included the practice by some state governments of laying 
off current employees and later rehiring the same employees using 
Title VI funds, instead of using their existing state government 
funds.[Footnote 56] 

The federal government's responses to the recessions beginning in 
March 2001 and December 2007 provide recent examples of the use of 
existing grant structures to expedite the implementation of fiscal 
assistance. The federal response to both recessions included 
temporarily increasing the rate at which states are reimbursed for 
Medicaid expenditures through an increase to the existing Federal 
Medical Assistance Percentage (FMAP) formula. Both JGTRRA and the 
Recovery Act distributed increased FMAP funds to states through the 
existing Medicaid payment management system. We have reported that 
increased FMAP funds provided by the Recovery Act were better timed 
and targeted for state Medicaid needs than funds provided following 
the 2001 national recession.[Footnote 57] Overall, the timing of the 
initial provision of Recovery Act funds responded to state Medicaid 
needs because assistance began during the 2007 national recession 
while nearly all states were experiencing Medicaid enrollment 
increases and revenue decreases. However, state budget officials also 
referred to the temporary nature of the funds and the fiscal 
challenges expected to extend beyond the timing of funds provided by 
the Recovery Act. Officials discussed a desire to avoid what they 
referred to as the "cliff effect" associated with the dates when the 
funding ends. The increased FMAP funds provided by the Recovery Act 
were well targeted for state Medicaid enrollment growth based on 
changes in state unemployment rates. However, the Recovery Act did not 
allocate assistance based on state variation in the ability to 
generate revenue. As a result, the increased FMAP funding did not 
reflect varying degrees of decreased revenue that states had for 
maintaining Medicaid service. The increased FMAP funds provided to 
states following the 2001 recession were provided well after the 
recession ended and not targeted based on need. 

The Recovery Act also increased funding for other existing grant 
programs to provide fiscal assistance to state and local governments. 
For example, the Recovery Act provided an additional $2 billion in 
funds for the Edward Byrne Memorial Justice Assistance Grant (JAG) 
Program. Consistent with the pre-existing program, states and 
localities could use their Recovery Act JAG grant funds over a period 
of 4 years to support a range of activities in seven broad statutorily 
established program areas including law enforcement, crime prevention, 
and corrections. In a recent report, we found that of the states we 
reviewed, all reported using Recovery Act JAG funds to prevent cuts in 
staff, programs, or essential services. Recipients of Recovery Act JAG 
funding received their money in one of two ways--either as a direct 
payment from the Bureau of Justice Assistance or as a pass-through 
from a state administering agency (SAA)--and they reported using their 
funds primarily for law enforcement and corrections. Localities and 
SAAs that received funds directly from the Department of Justice 
expended their awards at varying rates, and the expenditure of 
Recovery Act JAG funds generally lagged behind the funds awarded by 
the SAAs.[Footnote 58] 

Federal fiscal assistance using existing grant programs can also 
result in the unintended consequence of hindering the countercyclical 
intent of the particular assistance program. This can occur because 
funds flow to states through existing funding formulas typically 
established for purposes other than providing federal fiscal 
assistance in response to a national recession. For example, in the 
case of Medicaid, the regular (base) FMAP formula is based on a 3-year 
average of a state's per capita income (PCI) relative to U.S. per 
capita income. PCI does not account for current economic conditions in 
states, as lags in computing PCI and implementing regular (base) FMAP 
rates mean that the FMAP rates reflect economic conditions that 
existed several years earlier.[Footnote 59] In the case of Recovery 
Act JAG funding, the Bureau of Justice Assistance allocated Recovery 
Act JAG funds the same way it allocated non-Recovery Act JAG funds by 
combining a statutory formula determined by states' populations and 
violent crime statistics with the statutory minimum allocation to 
ensure that each state and eligible territory received some funding. 
This approach offers expedience by relying on the existing formula. 
However, the purpose of the formula does not take into account states' 
fiscal circumstances during national recessions. 

Prior federal fiscal assistance provided for specific purposes has 
also included funding for new grant programs. For example, the 
Recovery Act created a new program, the State Fiscal Stabilization 
Fund (SFSF), in part to help state and local governments stabilize 
their budgets by minimizing budgetary cuts in education and other 
essential government services, such as public safety. SFSF funds for 
education distributed under the Recovery Act had to first be used to 
alleviate shortfalls in state support for education to local education 
agencies and public institutions of higher education. States had to 
use 81.8 percent of their SFSF formula grant funds to support 
education and use the remaining 18.2 percent to fund a variety of 
educational or noneducational entities including state police forces, 
fire departments, corrections departments, and health care facilities 
and hospitals. In our prior work, we found budget debates at the state 
level delayed the initial allocation of education-related funds in 
some states.[Footnote 60] 

In contrast to these approaches to providing fiscal assistance, in 
three of the six recessions since 1974, the federal government did not 
provide fiscal assistance directly to state and local governments 
(Jan. to July 1980, July 1981 to Nov. 1982, and July 1990 to March 
1991).[Footnote 61] Our prior report has noted that by providing state 
and local governments with fiscal assistance during downturns, the 
federal government may risk discouraging states from taking the 
actions necessary to prepare themselves for the fiscal pressures 
associated with future recessions.[Footnote 62] Other analysts have 
suggested that a recession provides state and local officials with an 
opportunity for cutting back inefficient operations. If the federal 
government immediately steps in with fiscal assistance, such an 
opportunity may be lost.[Footnote 63] Consequently, policymakers could 
respond to a future recession by deciding that the federal government 
should encourage state and local government accountability for their 
own fiscal circumstances by not providing federal fiscal assistance. 

As a possible alternative to direct federal fiscal assistance to state 
governments, policy analysts have also considered the concept of a 
federally sponsored tool to help states prepare for future recessions. 
We previously discussed proposals for other new programs that would 
help states respond to recessions but may not provide direct federal 
fiscal assistance. Examples of these proposed strategies include a 
national rainy day fund and an intergovernmental loan program that 
would help states cope with economic downturns by having greater 
autonomy over their receipt of federal assistance. None of these 
options have been included in federal fiscal assistance legislation to 
date.[Footnote 64] 

A national rainy day fund would require individual state governments 
to pay into a fund that would assist states during economic downturns, 
while a quasigovernmental agency would administer the fund.[Footnote 
65] The concept of a national rainy day fund is based on establishing 
a national risk pool to provide countercyclical assistance to states 
during economic downturns. The national rainy day fund could be 
modeled on the private unemployment compensation trust fund in that 
states would be given experience ratings that would require larger 
contributions based on their individual experience using their own 
rainy day funds. Proponents of the national rainy day fund argue that 
it could reduce state governments' fiscal uncertainty by allowing 
states to use national rainy day funds instead of raising taxes or 
modifying or cutting programs. An intergovernmental loan program could 
be an alternative to a national rainy day fund program. The funding 
for such a loan program could come from either the federal government 
or from the private capital market, and it could be subsidized and 
possibly guaranteed by the federal government. 

These alternative strategies to direct federal fiscal assistance to 
state governments face several design and implementation challenges. 
Convincing each state to fully fund its required contribution would be 
an initial challenge to the viability of a national rainy day program. 
With regard to an intergovernmental loan program, such a program could 
also delay state governments' budget decisions, as states may need to 
dedicate portions of future budgets to pay for interest on loans. 
Determining the appropriate amount of money each state should pay into 
a national rainy day fund and controlling the risk and cost of any 
direct intergovernmental loan program would present additional 
challenges. In addition, representatives from the state organizations 
and think tanks we spoke with told us they did not see proposals for a 
national rainy day fund or intergovernmental loan programs as 
politically feasible. The skepticism regarding these programs included 
concerns such as accountability issues with a national rainy day 
program, as well as issues with states' ability to pay back loan 
interest in a program patterned after the unemployment insurance trust 
fund. 

We are sending copies of this report to interested congressional 
committees. The report will be available at no charge on GAO's Web 
site at [hyperlink, http://www.gao.gov]. If you or your staff have any 
questions about this letter, please contact Stanley J. Czerwinski at 
(202) 512-6806 or czerwinskis@gao.gov, or Thomas J. McCool at (202) 
512-2700 or mccoolt@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made major contributions to this 
report are listed in appendix IV. 

Signed by: 

Stanley J. Czerwinski: 
Director, Strategic Issues: 

Signed by: 

Thomas J. McCool: 
Director, Center for Economics: 

List of Committees: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Thad Cochran: 
Ranking Member: 
Committee on Appropriations: 
United States Senate: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Orrin G. Hatch: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

The Honorable Joseph I. Lieberman: 
Chairman: 
The Honorable Susan M. Collins: 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Harold Rogers: 
Chairman: 
The Honorable Norman D. Dicks: 
Ranking Member: 
Committee on Appropriations: 
House of Representatives: 

The Honorable Fred Upton: 
Chairman: 
The Honorable Henry A. Waxman: 
Ranking Member: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Darrell Issa: 
Chairman: 
The Honorable Elijah E. Cummings: 
Ranking Member: 
Committee on Oversight and Government Reform: 
House of Representatives: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This appendix describes our objectives and the scope and methodology 
of the work we did to address them, including how we analyzed state 
and local budgets during national recessions, as well as identified 
strategies that exist to provide federal fiscal assistance to state 
and local governments. We also include a list of the organizations we 
contacted during the course of our work. 

Objectives and Scope: 

The American Reinvestment and Recovery Act of 2009 (Recovery Act) 
required GAO to evaluate how national economic downturns have affected 
states over the past several decades.[Footnote 66] Accordingly, our 
review focused on the following questions: 

* How are state and local government budgets affected during national 
recessions? 

* What strategies exist to provide federal fiscal assistance to state 
and local governments during national recessions and what indicators 
can policymakers use to time and target such assistance? 

Analyzing How State and Local Government Budgets Are Affected during 
Recessions: 

To assess how state and local government revenues and expenditures 
vary during the business cycle, we analyzed annual data on the 
following finance variables for the U.S. state and local government 
sector for 1977-2008: general revenues, own-source revenues, total tax 
revenues, intergovernmental revenues from the federal government, 
general expenditures, capital outlays, total current expenditures, 
current expenditures on elementary and secondary education, current 
expenditures on higher education, current expenditures on health and 
hospitals, current expenditures on highways, current expenditures on 
police and corrections, and current expenditures on public welfare. 
Detailed definitions of these variables are shown in appendix II. We 
also analyzed annual data on U.S. Gross Domestic Product (GDP) for 
1977-2008. All variables are adjusted for inflation using the GDP 
deflator and are expressed in constant 2009 dollars. The state and 
local government finance data are from the U.S. Census Bureau's Annual 
Survey of State and Local Government Finances and Census of 
Governments. The GDP and GDP deflator data are from the U.S. Bureau of 
Economic Analysis's National Income and Product Accounts (BEA NIPA). 

To describe the cyclical behavior of state and local government 
revenues and expenditures, we first plotted the cyclical 
components[Footnote 67] of the finance variables and the cyclical 
component of GDP--our benchmark indicator of the business cycle--to 
visually examine how they move in relation to one another. We then 
estimated the correlations of the cyclical components of the finance 
variables with the cyclical component of GDP for the same year, for 1 
to 3 years in the past, and 1 to 3 years in the future. In general, a 
finance variable is procyclical if the correlation of its cyclical 
component with the cyclical component of GDP for the same year is 
positive, and a finance variable is countercyclical if the correlation 
of its cyclical component with the cyclical component of GDP for the 
same year is negative. Specifically, we identified a finance variable 
as procyclical if the correlation was greater than or equal to 0.2 and 
as countercyclical if the correlation was less than or equal to -0.2. 
The larger the correlation is in absolute value, the stronger the 
procyclical or countercyclical relationship. A maximum correlation 
for, say, the previous year indicates that a finance variable tends to 
lag the business cycle by 1 year. 

We used three alternative methods to estimate the cyclical components 
of the state and local government finance variables and of GDP: (1) by 
linearly detrending the natural logarithms of the variables, (2) by 
using the Baxter-King bandpass filter, and (3) by using the Christiano-
Fitzgerald random walk bandpass filter. Figures 7-9 graph the cyclical 
components of selected finance variables and GDP as estimated by 
linear detrending. Table 4 shows the correlations we calculated using 
the cyclical components of the finance variables and GDP as estimated 
by linear detrending. All three methods produced similar results. 

Figure 7: State and Local Government General Expenditures, GDP, and 
National Recession Dates, 1977-2008 (Procyclical): 

[Refer to PDF for image: multiple line graph] 

Year: 1977; 
Percent deviation from long-run trend, GDP: 0.775; 
Percent deviation from long-run trend, General expenditures: 6.028. 

Year: 1978; 
Percent deviation from long-run trend, GDP: 0.973; 
Percent deviation from long-run trend, General expenditures: 5.803. 

Year: 1979; 
Percent deviation from long-run trend, GDP: 3.148; 
Percent deviation from long-run trend, General expenditures: 3.144. 

Year: 1980; 
Percent deviation from long-run trend, GDP: 2.884; 
Percent deviation from long-run trend, General expenditures: 1.154. 

Year: 1981; 
Percent deviation from long-run trend, GDP: -0.249; 
Percent deviation from long-run trend, General expenditures: 0.254. 

Year: 1982; 
Percent deviation from long-run trend, GDP: -1.224; 
Percent deviation from long-run trend, General expenditures: -2.762. 

Year: 1983; 
Percent deviation from long-run trend, GDP: -5.707; 
Percent deviation from long-run trend, General expenditures: -5.501. 

Year: 1984; 
Percent deviation from long-run trend, GDP: -4.132; 
Percent deviation from long-run trend, General expenditures: -6.553. 

Year: 1985; 
Percent deviation from long-run trend, GDP: -0.498; 
Percent deviation from long-run trend, General expenditures: -6.053. 

Year: 1986; 
Percent deviation from long-run trend, GDP: 0.442; 
Percent deviation from long-run trend, General expenditures: -3.66. 

Year: 1987; 
Percent deviation from long-run trend, GDP: 0.763; 
Percent deviation from long-run trend, General expenditures: -0.947. 

Year: 1988; 
Percent deviation from long-run trend, GDP: 1.021; 
Percent deviation from long-run trend, General expenditures: 0.408. 

Year: 1989; 
Percent deviation from long-run trend, GDP: 1.94; 
Percent deviation from long-run trend, General expenditures: 0.181. 

Year: 1990; 
Percent deviation from long-run trend, GDP: 2.249; 
Percent deviation from long-run trend, General expenditures: 0.498. 

Year: 1991; 
Percent deviation from long-run trend, GDP: 0.861; 
Percent deviation from long-run trend, General expenditures: 1.843. 

Year: 1992; 
Percent deviation from long-run trend, GDP: -2.124; 
Percent deviation from long-run trend, General expenditures: 2.921. 

Year: 1993; 
Percent deviation from long-run trend, GDP: -1.895; 
Percent deviation from long-run trend, General expenditures: 4.192. 

Year: 1994; 
Percent deviation from long-run trend, GDP: -2.037; 
Percent deviation from long-run trend, General expenditures: 2.973. 

Year: 1995; 
Percent deviation from long-run trend, GDP: -1.229; 
Percent deviation from long-run trend, General expenditures: 1.636. 

Year: 1996; 
Percent deviation from long-run trend, GDP: -1.71; 
Percent deviation from long-run trend, General expenditures: 1.934. 

Year: 1997; 
Percent deviation from long-run trend, GDP: -1.039; 
Percent deviation from long-run trend, General expenditures: -0.061. 

Year: 1998; 
Percent deviation from long-run trend, GDP: 0.247; 
Percent deviation from long-run trend, General expenditures: -0.971. 

Year: 1999; 
Percent deviation from long-run trend, GDP: 1.488; 
Percent deviation from long-run trend, General expenditures: -0.649. 

Year: 2000; 
Percent deviation from long-run trend, GDP: 3.083; 
Percent deviation from long-run trend, General expenditures: 0.209. 

Year: 2001; 
Percent deviation from long-run trend, GDP: 3.825; 
Percent deviation from long-run trend, General expenditures: 1.369. 

Year: 2002; 
Percent deviation from long-run trend, GDP: 1.895; 
Percent deviation from long-run trend, General expenditures: 2.811. 

Year: 2003; 
Percent deviation from long-run trend, GDP: 0.694; 
Percent deviation from long-run trend, General expenditures: 3.705. 

Year: 2004; 
Percent deviation from long-run trend, GDP: 0.177; 
Percent deviation from long-run trend, General expenditures: 2.38. 

Year: 2005; 
Percent deviation from long-run trend, GDP: 0.585; 
Percent deviation from long-run trend, General expenditures: 0.354. 

Year: 2006; 
Percent deviation from long-run trend, GDP: 0.499; 
Percent deviation from long-run trend, General expenditures: -1.313. 

Year: 2007; 
Percent deviation from long-run trend, GDP: 0.011; 
Percent deviation from long-run trend, General expenditures: -2.965. 

Year: 2008; 
Percent deviation from long-run trend, GDP: -1.28; 
Percent deviation from long-run trend, General expenditures: -3.585. 

Source: GAO analysis of BEA, U.S. Census Bureau; NBER data. 

Note: Shaded areas indicate NBER recession months in 1980, 1982-83, 
1991, 2001-2002, and 2008. 

[End of figure] 

Figure 8: State and Local Government Current Expenditures on 
Elementary and Secondary Education, GDP, and National Recession Dates, 
1977-2008 (Procyclical): 

[Refer to PDF for image: multiple line graph] 

Year: 1977; 
Percent deviation from long-run trend, GDP: 0.775; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 8.85. 

Year: 1978; 
Percent deviation from long-run trend, GDP: 0.973; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 8.622. 

Year: 1979; 
Percent deviation from long-run trend, GDP: 3.148; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 5.846. 

Year: 1980; 
Percent deviation from long-run trend, GDP: 2.884; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 2.687. 

Year: 1981; 
Percent deviation from long-run trend, GDP: -0.249; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 0.823. 

Year: 1982; 
Percent deviation from long-run trend, GDP: -1.224; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -3.148. 

Year: 1983; 
Percent deviation from long-run trend, GDP: -5.707; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -6.24. 

Year: 1984; 
Percent deviation from long-run trend, GDP: -4.132; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -6.805. 

Year: 1985; 
Percent deviation from long-run trend, GDP: -0.498; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -6.585. 

Year: 1986; 
Percent deviation from long-run trend, GDP: 0.442; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -4.485. 

Year: 1987; 
Percent deviation from long-run trend, GDP: 0.763; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -1.423. 

Year: 1988; 
Percent deviation from long-run trend, GDP: 1.021; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -0.168. 

Year: 1989; 
Percent deviation from long-run trend, GDP: 1.94; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 1.085. 

Year: 1990; 
Percent deviation from long-run trend, GDP: 2.249; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 1.631. 

Year: 1991; 
Percent deviation from long-run trend, GDP: 0.861; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 1.929. 

Year: 1992; 
Percent deviation from long-run trend, GDP: -2.124; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 2.087. 

Year: 1993; 
Percent deviation from long-run trend, GDP: -1.895; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 0.454. 

Year: 1994; 
Percent deviation from long-run trend, GDP: -2.037; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 0.518. 

Year: 1995; 
Percent deviation from long-run trend, GDP: -1.229; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -0.839. 

Year: 1996; 
Percent deviation from long-run trend, GDP: -1.71; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -1.189. 

Year: 1997; 
Percent deviation from long-run trend, GDP: -1.039; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -2.007. 

Year: 1998; 
Percent deviation from long-run trend, GDP: 0.247; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -2.508. 

Year: 1999; 
Percent deviation from long-run trend, GDP: 1.488; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 0.177. 

Year: 2000; 
Percent deviation from long-run trend, GDP: 3.083; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 1.214. 

Year: 2001; 
Percent deviation from long-run trend, GDP: 3.825; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 2.41. 

Year: 2002; 
Percent deviation from long-run trend, GDP: 1.895; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 3.698. 

Year: 2003; 
Percent deviation from long-run trend, GDP: 0.694; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 2.72. 

Year: 2004; 
Percent deviation from long-run trend, GDP: 0.177; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 2.399. 

Year: 2005; 
Percent deviation from long-run trend, GDP: 0.585; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: 1.602. 

Year: 2006; 
Percent deviation from long-run trend, GDP: 0.499; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -0.208. 

Year: 2007; 
Percent deviation from long-run trend, GDP: 0.011; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -1.556. 

Year: 2008; 
Percent deviation from long-run trend, GDP: -1.28; 
Percent deviation from long-run trend, Current expenditures on 
Elementary and Secondary Education: -1.72. 

Source: GAO analysis of BEA, U.S. Census Bureau; NBER data. 

[End of figure] 

Note: Shaded areas indicate NBER recession months in 1980, 1982-83, 
1991, 2001-2002, and 2008. 

Figure 9: State and Local Government Current Expenditures on Public 
Welfare, GDP, and National Recession Dates, 1977-2008 
(Countercyclical): 

[Refer to PDF for image: multiple line graph] 

Year: 1977; 
Percent deviation from long-run trend, GDP: 0.775; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 12.395. 

Year: 1978; 
Percent deviation from long-run trend, GDP: 0.973; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 12.123. 

Year: 1979; 
Percent deviation from long-run trend, GDP: 3.148; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 8.608. 

Year: 1980; 
Percent deviation from long-run trend, GDP: 2.884; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 2.645. 

Year: 1981; 
Percent deviation from long-run trend, GDP: -0.249; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 1.025. 

Year: 1982; 
Percent deviation from long-run trend, GDP: -1.224; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 0.07. 

Year: 1983; 
Percent deviation from long-run trend, GDP: -5.707; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -4.042. 

Year: 1984; 
Percent deviation from long-run trend, GDP: -4.132; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -7.83. 

Year: 1985; 
Percent deviation from long-run trend, GDP: -0.498; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -8.095. 

Year: 1986; 
Percent deviation from long-run trend, GDP: 0.442; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -8.968. 

Year: 1987; 
Percent deviation from long-run trend, GDP: 0.763; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -10.251. 

Year: 1988; 
Percent deviation from long-run trend, GDP: 1.021; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -9.686. 

Year: 1989; 
Percent deviation from long-run trend, GDP: 1.94; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -10.563. 

Year: 1990; 
Percent deviation from long-run trend, GDP: 2.249; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -9.858. 

Year: 1991; 
Percent deviation from long-run trend, GDP: 0.861; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -6.388. 

Year: 1992; 
Percent deviation from long-run trend, GDP: -2.124; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 2.066. 

Year: 1993; 
Percent deviation from long-run trend, GDP: -1.895; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 13.292. 

Year: 1994; 
Percent deviation from long-run trend, GDP: -2.037; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 13.27. 

Year: 1995; 
Percent deviation from long-run trend, GDP: -1.229; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 13.188. 

Year: 1996; 
Percent deviation from long-run trend, GDP: -1.71; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 12.386. 

Year: 1997; 
Percent deviation from long-run trend, GDP: -1.039; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 5.914. 

Year: 1998; 
Percent deviation from long-run trend, GDP: 0.247; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 2.189. 

Year: 1999; 
Percent deviation from long-run trend, GDP: 1.488; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -1.784. 

Year: 2000; 
Percent deviation from long-run trend, GDP: 3.083; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -3.127. 

Year: 2001; 
Percent deviation from long-run trend, GDP: 3.825; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -2.191. 

Year: 2002; 
Percent deviation from long-run trend, GDP: 1.895; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 0.192. 

Year: 2003; 
Percent deviation from long-run trend, GDP: 0.694; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 2.091. 

Year: 2004; 
Percent deviation from long-run trend, GDP: 0.177; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 3.361. 

Year: 2005; 
Percent deviation from long-run trend, GDP: 0.585; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 4.404. 

Year: 2006; 
Percent deviation from long-run trend, GDP: 0.499; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: 3.168. 

Year: 2007; 
Percent deviation from long-run trend, GDP: 0.011; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -2.592. 

Year: 2008; 
Percent deviation from long-run trend, GDP: -1.28; 
Percent deviation from long-run trend, Current expenditures on Public 
Welfare: -7.171. 

Source: GAO analysis of BEA, U.S. Census Bureau; NBER data. 

Note: Shaded areas indicate NBER recession months in 1980, 1982-83, 
1991, 2001-2002, and 2008. 

[End of figure] 

Table 4: Correlations of the Cyclical Components of State and Local 
Government Revenues and Expenditures and GDP: 

General revenues: 
GDP: 3 years earlier: -0.29; 
GDP: 2 years earlier: 0.07; 
GDP: 1 year earlier: 0.50; 
GDP: Within the same year: 0.62; 
GDP: 1 year later: 0.43; 
GDP: 2 years later: 0.21; 
GDP: 3 years later: 0.09. 

Own-source revenues: 
GDP: 3 years earlier: -0.43; 
GDP: 2 years earlier: -0.13; 
GDP: 1 year earlier: 0.29; 
GDP: Within the same year: 0.49; 
GDP: 1 year later: 0.44; 
GDP: 2 years later: 0.32; 
GDP: 3 years later: 0.16. 

Tax revenues: 
GDP: 3 years earlier: -0.37; 
GDP: 2 years earlier: -0.05; 
GDP: 1 year earlier: 0.42; 
GDP: Within the same year: 0.64; 
GDP: 1 year later: 0.53; 
GDP: 2 years later: 0.28; 
GDP: 3 years later: 0.05. 

Intergovernmental revenues from the federal government: 
GDP: 3 years earlier: 0.29; 
GDP: 2 years earlier: 0.27; 
GDP: 1 year earlier: 0.14; 
GDP: Within the same year: -0.03; 
GDP: 1 year later: -0.16; 
GDP: 2 years later: -0.23; 
GDP: 3 years later: -0.11. 

General expenditures: 
GDP: 3 years earlier: 0.29; 
GDP: 2 years earlier: 0.52; 
GDP: 1 year earlier: 0.53; 
GDP: Within the same year: 0.34; 
GDP: 1 year later: 0.09; 
GDP: 2 years later: -0.14; 
GDP: 3 years later: -0.25. 

Current expenditures: 
GDP: 3 years earlier: 0.18; 
GDP: 2 years earlier: 0.31; 
GDP: 1 year earlier: 0.33; 
GDP: Within the same year: 0.23; 
GDP: 1 year later: 0.09; 
GDP: 2 years later: -0.05; 
GDP: 3 years later: -0.15. 

Capital outlays: 
GDP: 3 years earlier: 0.50; 
GDP: 2 years earlier: 0.88; 
GDP: 1 year earlier: 0.86; 
GDP: Within the same year: 0.50; 
GDP: 1 year later: 0.06; 
GDP: 2 years later: -0.32; 
GDP: 3 years later: -0.40. 

Current expenditures for elementary and secondary education: 
GDP: 3 years earlier: 0.35; 
GDP: 2 years earlier: 0.67; 
GDP: 1 year earlier: 0.78; 
GDP: Within the same year: 0.60; 
GDP: 1 year later: 0.29; 
GDP: 2 years later: -0.13; 
GDP: 3 years later: -0.39. 

Current expenditures for higher education: 
GDP: 3 years earlier: 0.41; 
GDP: 2 years earlier: 0.55; 
GDP: 1 year earlier: 0.53; 
GDP: Within the same year: 0.29; 
GDP: 1 year later: 0.05; 
GDP: 2 years later: -0.15; 
GDP: 3 years later: -0.27. 

Current expenditures for health and hospitals: 
GDP: 3 years earlier: -0.02; 
GDP: 2 years earlier: -0.14; 
GDP: 1 year earlier: -0.29; 
GDP: Within the same year: -0.36; 
GDP: 1 year later: -0.27; 
GDP: 2 years later: -0.08; 
GDP: 3 years later: 0.08. 

Current expenditures for highways: 
GDP: 3 years earlier: -0.08; 
GDP: 2 years earlier: 0.30; 
GDP: 1 year earlier: 0.49; 
GDP: Within the same year: 0.53; 
GDP: 1 year later: 0.46; 
GDP: 2 years later: 0.24; 
GDP: 3 years later: 0.06. 

Current expenditures for police and corrections: 
GDP: 3 years earlier: -0.12; 
GDP: 2 years earlier: 0.12; 
GDP: 1 year earlier: 0.27; 
GDP: Within the same year: 0.38; 
GDP: 1 year later: 0.40; 
GDP: 2 years later: 0.38; 
GDP: 3 years later: 0.27. 

Current expenditures for public welfare: 
GDP: 3 years earlier: 0.22; 
GDP: 2 years earlier: 0.03; 
GDP: 1 year earlier: -0.18; 
GDP: Within the same year: -0.31; 
GDP: 1 year later: -0.33; 
GDP: 2 years later: -0.23; 
GDP: 3 years later: -0.08. 

All other current expenditures: 
GDP: 3 years earlier: -0.10; 
GDP: 2 years earlier: 0.14; 
GDP: 1 year earlier: 0.33; 
GDP: Within the same year: 0.40; 
GDP: 1 year later: 0.32; 
GDP: 2 years later: 0.19; 
GDP: 3 years later: -0.02. 

Source: GAO analysis of BEA and U.S. Census Bureau data. 

Notes: We used data for the period 1977-2008 for the United States. To 
describe how state and local government revenues and expenditures 
change during national economic downturns, we first decomposed real 
state and local government revenues and expenditures and GDP into 
their (1) long-run trend and (2) business cycle components. The 
cyclical components of revenues, expenditures, and GDP are the percent 
deviations in revenues, expenditures, and GDP from their long-run 
trends. We then calculated the correlations of the business cycle 
components of state and local government revenues and expenditures 
with the business cycle component of GDP. A positive correlation 
indicates that expenditures are procyclical and a negative correlation 
indicates that expenditures are countercyclical. Our results may be 
sensitive to the method we used to estimate the business cycle 
components of expenditures and of GDP, may not generalize to other 
time periods, and may not apply to individual U.S. states. 

[End of table] 

We note several limitations of our analysis. Our results may not 
generalize to other time periods. Analysis of individual states may 
produce results that differ from those that we found by analyzing the 
United States as a whole. Our results may be sensitive to how we 
aggregated certain state and local finance variables. For example, 
current expenditures on health and hospitals are the sum of current 
expenditures on health and current expenditures on hospitals, and 
these variables may exhibit different behavior when analyzed 
separately than they do when aggregated. Our results may be sensitive 
to the methods we used to isolate the cyclical components of the 
finance variables and GDP. Our results may be sensitive to measurement 
error we introduced by treating the finance variables as if they were 
measured on a calendar year basis. In fact, state and local 
governments keep their financial accounts on a fiscal year basis, and 
the state and local government finance variables we use are collected 
so that they cover each government's own fiscal year period, rather 
than a standard calendar year-based reporting period that cuts across 
government fiscal years. Specifically, a survey year includes each 
individual government fiscal year that ended between July 1 of the 
previous year and June 30 of the survey year. The Census Bureau notes 
that it uses this methodology because it links directly to the manner 
in which governments maintain their financial records. Any attempt to 
standardize the time frame for more than 80,000 governments would 
create an insurmountable data collection challenge and would be cost 
prohibitive. 

We analyzed data from BEA NIPA table 3.3 "State and Local Government 
Current Receipts and Expenditures" to identify trends in state and 
local government tax receipts, net borrowing, investment and savings 
from 1973 to 2010. We used the GDP price index reported by BEA to 
deflate values to 2009 dollars. To assess how revenue declines varied 
between states during the most recent recession, we calculated year- 
over-year changes in states' quarterly tax receipt data from the U.S. 
Census Bureau. We calculated variation in state and local government 
debt per capita across states using fiscal year 2008 data from the 
U.S. Census Bureau. Finally, we reviewed economic and finance 
literature to better understand how state budgets are affected during 
national business cycles. 

To estimate the effects of economic downturns on state tax revenues, 
we analyzed quarterly data on state tax revenues and wages for the 50 
U.S. states and the District of Columbia for the second quarter of 
1992 through the first quarter of 2010. State tax revenues are from 
the U.S. Census Bureau's Quarterly Summary of State and Local 
Government Tax Revenue. State wage data are from the U.S. Bureau of 
Labor Statistics' Quarterly Census of Employment and Wages. We 
estimated the elasticity of state tax revenues with respect to wages--
our indicator of the amount of economic activity in a state. These 
elasticities are estimates of the percent changes in state tax 
revenues that occur when wages in a state increase by 1 percent. We 
estimated both short-run and long-run elasticities. We used 
generalized least squares regressions of the natural logarithm of 
state tax revenue on a constant term, quarterly indicators, and the 
natural logarithm of wages to obtain the long-run elasticities for 
each state. We used an error correction model based on the change in 
the natural logarithm of state tax revenues on a constant term, 
quarterly indicators, the change in the natural logarithm of wages, 
and the residual from the long-run regressions to obtain the short-run 
elasticities for each state. Table 5 summarizes the aggregate long-run 
and short-run elasticities we estimated for each state. We found that 
a one percent increase in wages leads, on average, to about a 1.04 
percent increase in state tax revenues in the short run and about a 
0.96 percent increase in state tax revenues over the long run. 

Table 5: Summary of Elasticities of State Tax Revenues with Respect to 
Wages: 

Long-run elasticity: 
Average: 0.96; 
Minimum: 0.16; 
Maximum: 1.78. 

Short-run elasticity: 
Average: 1.04; 
Minimum: -1.46; 
Maximum: 2.54. 

Source: GAO analysis of BEA, BLS, and U.S. Census Bureau data. 

Note: Averages are unweighted averages for the 50 U.S. states and the 
District of Columbia. 

[End of table] 

To describe state government tax changes and total year-end balances, 
we collected and analyzed states' general fund data from the National 
Governors Association (NGA) and National Association of State Budget 
Officers (NASBO) The Fiscal Survey of States (Fiscal Survey) for state 
fiscal years 1990 to 2010, the dates for which survey data were 
available on state revenue changes. We used data from the fall 
publications of the Fiscal Survey because the fall publications 
provide data on enacted tax changes, as opposed to estimated or 
proposed tax change data.[Footnote 68] We report each enacted tax 
change as a proportion of the total revenue for the fiscal year. Since 
the Fiscal Survey reports finance data by state fiscal year, we 
adjusted the National Bureau of Economic Research's (NBER) business 
cycle peak and trough dates into state fiscal years. According to 
NASBO, all but four states begin their fiscal years on July 1. We 
adjusted NBER recession dates in graphics containing Fiscal Survey 
data in relation to July being the first month of the fiscal year. For 
example, we illustrate the national recession beginning July 1990 and 
ending March 1991 as beginning in the first month of state fiscal year 
1991 and ending in the ninth month of state fiscal year 1991. 

Our analysis of state tax and fee changes and general fund balances is 
limited by a number of factors. First, we were unable to conduct an 
analysis of local government tax changes because no comprehensive 
source for this information exists. Second, NASBO's Fiscal Survey does 
not include all state revenues and spending. The survey provides 
aggregate and individual data on states' general fund receipts, 
expenditures, and balances. NASBO has stated that general funds are 
the predominant fund for financing a state's services and are the most 
important elements in determining the fiscal health of states. 

Fiscal Survey data are limited in that they are self-reported by state 
governments and NASBO does not verify the data by using checks against 
supporting documentation. However, NASBO officials provide multiple 
opportunities for state budget officials to review data during the 
survey period and to discuss data that may be outliers. Also, some 
states with biennial budgets do not necessarily isolate the effects of 
tax changes for each year, which could skew results. While the Fiscal 
Survey data have these limitations, we believe that these data are the 
best source available to understand each state's tax policy actions 
and total balances, and have found these data to be sufficiently 
reliable for this purpose. 

Identifying Federal Countercyclical Assistance Strategies and Design 
Considerations: 

To identify strategies for providing federal assistance to state and 
local governments during national recessions, we reviewed federal 
fiscal assistance programs enacted since 1973.[Footnote 69] We 
identified these programs and potential considerations for designing a 
federal assistance program by reviewing GAO, Congressional Research 
Service (CRS), and Congressional Budget Office (CBO) reports and 
conducting a search for relevant legislation. The federal fiscal 
programs we selected to review for this report were designed to help 
state governments address the fiscal effects of national recessions. 
This legislation was not intended to address long-term fiscal 
challenges facing state and local governments. We analyzed the 
legislative history and statutory language of past federal assistance 
programs, as well as any policy goals articulated in the statutes 
themselves. Finally, we interviewed analysts at associations and think 
tanks familiar with the design and implementation of federal fiscal 
assistance legislation. 

To identify factors policymakers should consider when selecting 
indicators to time and target federal countercyclical assistance, we 
reviewed reports from GAO, CBO, CRS, Federal Reserve Banks, the U.S. 
Department of the Treasury (Treasury), and academic institutions. We 
considered indicators' availability at the state level and timeliness 
(in terms of frequency and publication lag time) to identify 
indicators policymakers could potentially use to target and time 
countercyclical federal assistance during downturns. We used several 
decision rules to assess indicators' availability and timeliness. In 
terms of availability, indicators created by private sources were 
excluded because they may be available only for a fee, may not produce 
the data in the future, or their methodology may be proprietary, 
making analysis of the data's reliability difficult. In terms of 
timeliness, we selected indicators that were published at least 
quarterly and with less than a 6-month publication lag. Quarterly 
publication ensures the indicator covers time periods that are shorter 
than the length of the typical economic downturn, as indicators that 
cover more than 3 months may not be able to differentiate between 
phases of the business cycle. We selected indicators with a relatively 
short publication lag because indicators with publication lags greater 
than 6 months may not reveal the downturn until it is already over and 
the recovery has begun. For example, we did not include Treasury's 
total taxable resources--a measure of states' relative fiscal 
capacity--as a potential indicator because it is available on an 
annual basis with a 3-year lag. 

We also excluded indicators that may be influenced by state 
governments' policy choices. This includes indicators of fiscal 
stress, such as declines in tax receipts or budget gaps. For example, 
tax receipts reflect states' policy choices, as states may change tax 
rates in response to declining revenues in a recession. We excluded 
state governments' tax receipts from the table because this measure is 
heavily dependent on and reflects policy decisions within each state. 
In addition, by choosing an indicator independent of policy choices, 
policymakers may reduce the potential for unintended consequences such 
as discouraging states from preparing for budgetary uncertainty 
(sometimes referred to as moral hazard) when designing a federal 
fiscal assistance program. 

We also excluded data sources detailing state-level participation in 
intergovernmental benefit programs because program enrollment data may 
understate the number of individuals eligible for the program. For 
example, we did not include unemployment insurance claims data from 
the Department of Labor's Employment and Training Administration 
because the Bureau of Labor Statistics (BLS) has reported that 
unemployment insurance information cannot be used as a source for 
complete information on the number of unemployed. This is because 
claims data may underestimate the number of the unemployed because 
some people are still jobless when their benefits run out, some 
individuals are not eligible for unemployment assistance, and some 
individuals never apply for benefits. 

The indicators discussed in this report are not an exhaustive list of 
indicators available to time and target federal fiscal assistance to 
states. Depending on the specific policy strategy used, policymakers 
may want to combine the indicators with other information, such as 
data on increased demand for specific programs, to target assistance 
for specific programs or state circumstances. For example, GAO has 
reported on a policy strategy that combined information on the change 
in a state's unemployment rate with an index of the average level of 
Medicaid expenditures by state.[Footnote 70] 

We contacted representatives of state and local government 
organizations and public policy and research organizations to (1) gain 
insight into public policy strategies and potential indicators for 
timing and targeting assistance to states; (2) validate our selection 
of strategies and discuss considerations for designing federal fiscal 
assistance to state and local governments during national recessions; 
and (3) obtain views regarding the feasibility and potential effects 
of these strategies. The organizations we contacted included: 

* American Enterprise Institute, 

* Center for State & Local Government Excellence: 

* Center on Budget and Policy Priorities, 

* Federal Reserve Bank of Chicago, 

* Federal Reserve Bank of St. Louis, 

* National Association of State Budget Officers, 

* National Governors Association, 

* National Conference of State Legislatures, 

* National League of Cities: 

* The Nelson A. Rockefeller Institute of Government, and: 

* The Pew Center on the States. 

We assessed the reliability of the data we used for this review and 
determined that they were sufficiently reliable for our purposes. 

We conducted this performance audit from February 2010 to March 2011, 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Definitions of Selected Categories of State and Local 
Government Expenditures and Revenues: 

This appendix provides summaries of the U.S. Census Bureau's 
definitions of state and local government revenues and expenditures 
used in our analyses of how state and local government budgets are 
affected during national recessions. These summaries are adapted from 
U.S. Census Bureau, Government Finance and Employment Classification 
Manual, October 2006. We have excluded categories that were not 
discussed in this report. Employee and retiree health benefits and 
government pension contributions on behalf of current employees are 
accounted for in the sector (e.g., education) for which the employees 
work. 

General expenditures--All expenditures except those classified as 
utility, liquor store, or social insurance trust expenditures. 

1. Capital outlays--Direct expenditures for purchase or construction, 
by contract or government employee, construction of buildings and 
other improvements; for purchase of land, equipment, and existing 
structures; and for payments on capital leases. 

2. Current expenditures--Direct expenditures for compensation of own 
officers and employees and for supplies, materials, and contractual 
services except any amounts for capital outlay (current operations), 
amounts paid for the use of borrowed money (interest on debt), direct 
cash assistance to foreign governments, private individuals, and 
nongovernmental organizations neither in return for goods and services 
nor in repayment of debt and other claims against the government 
(assistance and subsidies), and amounts paid to other governments for 
performance of specific functions or for general financial support 
(intergovernmental expenditure), including the following categories: 

a. Elementary and secondary education--Current expenditures for the 
operation, maintenance, and construction of public schools and 
facilities for elementary and secondary education, vocational- 
technical education, and other educational institutions except those 
for higher education; operations by independent governments (school 
districts) as well as those operated as integral agencies of state, 
county, municipal, or township governments; and financial support of 
public elementary and secondary schools. 

b. Health and hospitals--Current expenditures for the provision of 
services for the conservation and improvement of public health, other 
than hospital care, and financial support of other governments' health 
programs; for a government's own hospitals as well as expenditures for 
the provision of care in other hospitals; for the provision of care in 
other hospitals and support of other public and private hospitals. 

c. Higher education--Current expenditures for higher education 
activities and facilities that provide supplementary services to 
students, faculty or staff, and which are self-supported (wholly or 
largely through charges for services) and operated on a commercial 
basis (higher education auxiliary enterprises) and for degree-granting 
institutions operated by state or local governments that provide 
academic training beyond the high school level, other than for 
auxiliary enterprises of the state or local institution (other higher 
education). 

d. Highways--Current expenditures for the maintenance, operation, 
repair, and construction of highways, streets, roads, alleys, 
sidewalks, bridges, tunnels, ferry boats, viaducts, and related non- 
toll structures (regular highways) and for highways, roads, bridges, 
ferries, and tunnels operated on a fee or toll basis (toll highways). 

e. Police and corrections--Current expenditures for residential 
institutions or facilities for the confinement, correction, and 
rehabilitation of convicted adults, or juveniles adjudicated, 
delinquent or in need of supervision, and for the detention of adults 
and juveniles charged with a crime and awaiting trial (correctional 
institutions); for correctional activities other than federal, state 
and local residential institutions or facilities (other corrections); 
and for general police, sheriff, state police, and other governmental 
departments that preserve law and order, protect persons and property 
from illegal acts, and work to prevent, control, investigate, and 
reduce crime (police protection). 

f. Public welfare--Current expenditures associated with Supplemental 
Security Income (SSI), Temporary Assistance for Needy Families (TANF), 
Medical Assistance Program (Medicaid) (public welfare--federal 
categorical assistance programs); cash payments made directly to 
individuals contingent upon their need, other than those under federal 
categorical assistance programs (public welfare--other cash assistance 
programs); public welfare payments made directly to private vendors 
for medical assistance and hospital or health care, including Medicaid 
(Title XIX), plus mandatory state payments to the federal government 
to offset costs of prescription drugs under Medicare Part D and 
payments to vendors or the federal government must be made on behalf 
of low-income or means-tested beneficiaries, or other medically 
qualified persons (public welfare--vendor payments for medical care); 
payments under public welfare programs made directly to private 
vendors (i.e., individuals or nongovernmental organizations furnishing 
goods and services) for services and commodities, other than medical, 
hospital, and health care, on behalf of low-income or other means-
tested beneficiaries (public welfare--vendor payments for other 
purposes); provision, construction, and maintenance of nursing homes 
and welfare institutions owned and operated by a government for the 
benefit of needy persons (contingent upon their financial or medical 
need), and veterans (public welfare--institutions); and all 
expenditures for welfare activities not classified elsewhere (public 
welfare--other). 

g. Other--Current expenditures for all other functions. 

General revenue--General revenue is all revenue except that classified 
as liquor store, utility, or insurance trust revenue. 

1. Intergovernmental revenue from the federal government--Amounts 
received directly from the federal government. For states, this 
includes federal grants and aid, payments-in-lieu-of-taxes on federal 
property, reimbursements for state activities, and revenue received 
but later transmitted through the state to local governments. For 
local governments, this category includes only direct aid from the 
federal government. 

2. Own-source revenue--Revenue from compulsory contributions exacted 
by a government for public purposes, other than for employee and 
employer assessments and contributions to finance retirement and 
social insurance trust systems and for special assessments to pay 
capital improvements (taxes), charges imposed for providing current 
services or for the sale of products in connection with general 
government activities (current charges), and all other general revenue 
of governments from their own sources (miscellaneous general revenue). 

[End of section] 

Appendix III: Examples of Congressional Responses to Assist State and 
Local Governments in Response to National Recessions Since 1973: 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Comprehensive Employment And Training Act 
of 1973 (CETA), Pub. L. No. 93-203; 
Key programs with state needs focus: TITLE II--Public Employment 
Programs. Title VI--Emergency Jobs Programs (Added by Title 1 of Pub. 
L. No. 93-567); 
Description or purpose statement: CETA--Provided job training and 
employment for economically disadvantaged, unemployed, and 
underemployed persons through a system of federal, state, and local 
programs. Titles II and VI--Provided transitional state and local 
government public service jobs in areas with high unemployment rates. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Emergency Jobs and Unemployment 
Assistance Act of 1974, Pub. L. No. 93-567; 
Key programs with state needs focus: Title III--Job Opportunities 
Program; 
Description or purpose statement: Provided emergency financial 
assistance to create, maintain or expand jobs in areas suffering from 
unusually high levels of unemployment. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Public Works Employment Act of 1976, Pub. 
L. No. 94-369; 
Key programs with state needs focus: Title I--Local Public Works 
Capital Development and Investment Act of 1976; 
Description or purpose statement: Authorized funds to establish an 
antirecessionary program and increased federal funding to states and 
localities to improve the nation's public infrastructure--roads, 
bridges, sanitation systems, and other public facilities. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Public Works Employment Act of 1976, Pub. 
L. No. 94-369; 
Key programs with state needs focus: Title II--Antirecession Fiscal 
Assistance (ARFA); 
Description or purpose statement: ARFA intended to offset certain 
fiscal actions taken by state governments during recessions, including 
raising taxes and layoffs. It was designed to achieve three 
objectives: to maintain public employment, maintain public services, 
and counter the November 1973--March 1975 recession. Under the ARFA 
program, state governments received one-third of the allocation, while 
local governments received two-thirds. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: State and Local Fiscal Assistance 
Amendments of 1976, Pub. L. No. 94-488; 
Key programs with state needs focus: Recession period: [Empty]; 
Description or purpose statement: Recession period: The State and 
Local Fiscal Assistance Act of 1972 intended to help assure the 
financial soundness of state and local governments through general 
revenue sharing. The Amendments of 1976 extended and modified this Act. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Economic Stimulus Appropriations Act of 
1977, Pub. L. No. 95-29; 
Key programs with state needs focus: Payments To State And Local 
Government Fiscal Assistance Trust Fund; 
Description or purpose statement: For payments to the State and Local 
Government Fiscal Assistance Trust Fund, as authorized by The State 
and Local Fiscal Assistance Act of 1972, which was intended to help 
assure the financial soundness of state and local governments through 
general revenue sharing. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Economic Stimulus Appropriations Act of 
1977, Pub. L. No. 95-29; 
Key programs with state needs focus: Antirecession Financial 
Assistance Fund; 
Description or purpose statement: See Antirecession Fiscal Assistance 
(ARFA) above. An additional amount for ARFA was to remain available 
until September 30, 1978. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Economic Stimulus Appropriations Act of 
1977, Pub. L. No. 95-29; 
Key programs with state needs focus: Employment And Training 
Assistance; 
Description or purpose statement: Made economic stimulus 
appropriations for employment and training. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Economic Stimulus Appropriations Act of 
1977, Pub. L. No. 95-29; 
Key programs with state needs focus: Temporary Employment Assistance; 
Description or purpose statement: Made economic stimulus 
appropriations for CETA. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Economic Stimulus Appropriations Act of 
1977, Pub. L. No. 95-29; 
Key programs with state needs focus: Local Public Works Program; 
Description or purpose statement: Made economic stimulus 
appropriations for the fiscal year ending September 30, 1977, as well 
as for other purposes. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Recession period: Public Works Employment 
Act of 1977, Pub. L. No. 95-28; 
Key programs with state needs focus: [Empty]; 
Description or purpose statement: Increased the authorization for the 
Local Public Works Capital Development and Investment Act of 1976 (see 
above) and provided funding for the improvement of public works 
projects which were to be performed by contracts awarded by 
competitive bidding. 

Recession period: Nov. 1973 to Mar. 1975; 
Countercyclical legislation: Tax Reduction & Simplification Act of 
1977, Pub. L. No. 95-30; 
Key programs with state needs focus: Title VI--Intergovernmental 
Antirecession Assistance Act; 
Description or purpose statement: Authorized additional appropriations 
to carry out the Anti-Recession Fiscal Assistance program, (see ARFA 
above) and amended the criterion for determining the state revenue 
sharing amount and the method of determining the unemployment rate of 
certain localities. 

Recession period: Jan. 1980 to July 1980; 
Countercyclical legislation: Did not include federal countercyclical 
fiscal assistance programs for the purpose of assisting state and 
local governments. 

Recession period: July 1981 to Nov. 1982; 
Countercyclical legislation: Did not include federal countercyclical 
fiscal assistance programs for the purpose of assisting state and 
local governments. 

Recession period: July 1990 to Mar. 1991; 
Countercyclical legislation: Federal countercyclical legislation 
enacted provided some local support, but programs were not directed at 
assisting state and local governments. 

Recession period: Mar. 2001 to Nov. 2001; 
Countercyclical legislation: Jobs and Growth Tax Relief Reconciliation 
Act of 2003, (JGTRRA), Pub. L. No. 108-27; 
Key programs with state needs focus: Title IV--Temporary State Fiscal 
Relief, (a) Temporary Increase of the Medicaid Federal Medical 
Assistance Percentage (FMAP); (b) Assist States in Providing 
Government Services; 
Description or purpose statement: Provided (1) fiscal relief through a 
temporary increase in federal Medicaid funding for all states, as well 
as (2) general assistance divided among the states for essential 
government services. The funds were allocated to the states on a per 
capita basis, adjusted to provide for minimum payment amounts to 
smaller states. 

Recession period: Dec. 2007 to June 2009; 
Countercyclical legislation: American Recovery and Reinvestment Act of 
2009, (Recovery Act) Pub. L. No. 111-5; 
Key programs with state needs focus: Division A, Title XIV: State 
Fiscal Stabilization Fund; Division B, Title V: State Fiscal Relief 
Fund (FMAP); 
Description or purpose statement: The purposes of this act include: 
(1) To preserve and create jobs and promote economic recovery; 
(2) To assist those most impacted by the recession; 
(3) To provide investments needed to increase economic efficiency by 
spurring technological advances in science and health; 
(4) To invest in transportation, environmental protection, and other 
infrastructure that will provide long-term economic benefits; 
(5) To stabilize state and local government budgets, in order to 
minimize and avoid reductions in essential services and 
counterproductive state and local tax increases. 

Recession period: Dec. 2007 to June 2009; 
Countercyclical legislation: Education Jobs and Recovery Act FMAP 
Extension, Pub. L. No. 111-226 (federal legislation enacted on August 
10, 2010, to amend the Recovery Act); 
Key programs with state needs focus: Title I: Education Jobs Funds; 
Description or purpose statement: Funds awarded to local educational 
agencies under this law may be used only to retain existing employees, 
to recall or rehire former employees, and to hire new employees, in 
order to provide educational and related services. These funds may not 
be used to supplement a rainy-day fund or reduce debt obligations 
incurred by the state. 

Recession period: Dec. 2007 to June 2009; 
Countercyclical legislation: Education Jobs and Recovery Act FMAP 
Extension, Pub. L. No. 111-226 (federal legislation enacted on August 
10, 2010, to amend the Recovery Act); 
Key programs with state needs focus: Title II: State Fiscal Relief and 
Other Provisions, Extension Of Recovery Act Increase In FMAP; 
Description or purpose statement: Provided for an extension of 
increased FMAP funding through June 30, 2011, but at a lower level. 

Source: GAO analysis of federal fiscal assistance public laws and 
pertinent legislative history. 

[End of table] 

[End of section] 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Stanley J. Czerwinski, Director, Strategic Issues, (202) 512-6806 or 
czerwinskis@gao.gov. 

Thomas J. McCool, Director, Center for Economics, (202) 512-2700 or 
mccoolt@gao.gov. 

Staff Acknowledgments: 

Michelle Sager (Assistant Director), Shannon Finnegan (Analyst-in- 
Charge), Benjamin Bolitzer, Anthony Bova, Amy Bowser, Andrew Ching, 
Robert Dinkelmeyer, Gregory Dybalski, Robert Gebhart, Courtney 
LaFountain, Alicia Loucks, Donna Miller, Max Sawicky, and Michael 
Springer also made key contributions to this report. 

[End of section] 

Related GAO Products: 

Medicaid: Improving Responsiveness of Federal Assistance to States 
During Economic Downturns. [hyperlink, 
http://www.gao.gov/products/GAO-11-395]. Washington, D.C.: March 31, 
2011. 

Recovery Act: Opportunities to Improve Management and Strengthen 
Accountability over States' and Localities' Uses of Funds. [hyperlink, 
http://www.gao.gov/products/GAO-10-999]. Washington, D.C.: September 
20, 2010. 

State and Local Governments: Fiscal Pressures Could Have Implications 
for Future Delivery of Intergovernmental Programs. [hyperlink, 
http://www.gao.gov/products/GAO-10-899]. Washington, D.C.: July 30, 
2010. 

Recovery Act: States' and Localities' Uses of Funds and Actions Needed 
to Address Implementation Challenges and Bolster Accountability. 
[hyperlink, http://www.gao.gov/products/GAO-10-604]. Washington, D.C.: 
May 26, 2010. 

Recovery Act: One Year Later, States' and Localities' Uses of Funds 
and Opportunities to Strengthen Accountability. [hyperlink, 
http://www.gao.gov/products/GAO-10-437]. Washington, D.C.: March 3, 
2010. 

State and Local Governments' Fiscal Outlook: March 2010 Update. 
[hyperlink, http://www.gao.gov/products/GAO-10-358]. Washington, D.C.: 
March 2, 2010. 

Recovery Act: Status of States' and Localities' Use of Funds and 
Efforts to Ensure Accountability. [hyperlink, 
http://www.gao.gov/products/GAO-10-231]. Washington, D.C.: December 
10, 2009. 

Recovery Act: Recipient Reported Jobs Data Provide Some Insight into 
Use of Recovery Act Funding, but Data Quality and Reporting Issues 
Need Attention. [hyperlink, http://www.gao.gov/products/GAO-10-223]. 
Washington, D.C.: November 19, 2009. 

Recovery Act: Funds Continue to Provide Fiscal Relief to States and 
Localities, While Accountability and Reporting Challenges Need to Be 
Fully Addressed. [hyperlink, http://www.gao.gov/products/GAO-09-1016]. 
Washington, D.C.: September 23, 2009. 

Recovery Act: States' and Localities' Current and Planned Uses of 
Funds While Facing Fiscal Stresses. [hyperlink, 
http://www.gao.gov/products/GAO-09-829]. Washington, D.C.: July 8, 
2009. 

Recovery Act: As Initial Implementation Unfolds in States and 
Localities, Continued Attention to Accountability Issues Is Essential. 
[hyperlink, http://www.gao.gov/products/GAO-09-580]. Washington, D.C.: 
April 23, 2009. 

American Recovery and Reinvestment Act: GAO's Role in Helping to 
Ensure Accountability and Transparency. [hyperlink, 
http://www.gao.gov/products/GAO-09-453T]. Washington, D.C.: March 5, 
2009. 

Update of State and Local Government Fiscal Pressures. [hyperlink, 
http://www.gao.gov/products/GAO-09-320R]. Washington, D.C.: January 
26, 2009. 

State and Local Fiscal Challenges: Rising Health Care Costs Drive Long-
term and Immediate Pressure. [hyperlink, 
http://www.gao.gov/products/GAO-09-210T]. Washington, D.C.: November 
19, 2008. 

Medicaid: Strategies to Help States Address Increased Expenditures 
during Economic Downturns. [hyperlink, 
http://www.gao.gov/products/GAO-07-97]. Washington, D.C.: October 18, 
2006. 

Federal Assistance: Temporary State Fiscal Relief. [hyperlink, 
http://www.gao.gov/products/GAO-04-736R]. Washington, D.C.: May 7, 
2004. 

[End of section] 

Footnotes: 

[1] For the purposes of this report, fiscal assistance to state and 
local governments refers to federal funding provided to state and 
local governments during economic downturns for the purpose of 
maintaining or increasing state and local government spending to 
stimulate macroeconomic activity. Such assistance reduces the 
likelihood that state and local governments will take contractionary 
measures, such as increasing taxes or decreasing spending, to 
stabilize their budgets. 

[2] Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009). 

[3] For example, see GAO, Update of State and Local Government Fiscal 
Pressures, [hyperlink, http://www.gao.gov/products/GAO-09-320R] 
(Washington, D.C.: Jan. 26, 2009); Medicaid: Strategies to Help States 
Address Increased Expenditures during Economic Downturns, [hyperlink, 
http://www.gao.gov/products/GAO-07-97] (Washington, D.C.: Oct. 18, 
2006); and Federal Assistance: Temporary State Fiscal Relief, 
[hyperlink, http://www.gao.gov/products/GAO-04-736R] (Washington, 
D.C.: May 07, 2004). See the list of related GAO products included in 
this report for additional relevant products. 

[4] GAO, Medicaid: Improving Responsiveness of Federal Assistance to 
States during Economic Downturns, [hyperlink, 
http://www.gao.gov/products/GAO-11-395] (Washington, D.C.: March 31, 
2011). 

[5] Although GAO's mandate refers to national economic downturns since 
1974, we extended our review to 1973 to capture the recession that 
began in November 1973. 

[6] We refer to national recessions throughout this report to 
distinguish recessions declared by the National Bureau of Economic 
Research (NBER) from state-level economic downturns. We use the term 
"national recession" to refer to the period between the business cycle 
peak and trough dates identified by NBER. We use the term "economic 
downturn" to refer more generally to reductions in output, income, and 
employment that occur at either the state or national level. Every 
national recession is a national economic downturn, but not every 
national economic downturn is a national recession. Similarly, state- 
level downturns in economic activity do not necessarily correspond 
with periods of national recession identified by NBER. 

[7] The NBER is a private, nonprofit, nonpartisan research 
organization dedicated to promoting a greater understanding of how the 
economy works. 

[8] The NBER dating committee weighs the behavior of various 
indicators because economic indicators do not typically move exactly 
in concert. For example, aggregate hours and employment have 
frequently reached their troughs at later dates than NBER's trough 
date in previous business cycles. In the 2007 recession, employment 
levels reached their trough 6 months after the NBER trough. 

[9] The unemployment rate represents the number unemployed as a 
percent of the labor force. People who are jobless, looking for jobs, 
and available for work are unemployed. People who do not have a job 
and are not looking for one are not considered part of the labor force. 

[10] For example, see Michael T. Owyang, Jeremy Piger, and Howard J. 
Wall, "Business Cycle Phases in U.S. States," The Review of Economics 
and Statistics 87(4) (November 2005): 604-616 and Theodore M. Crone, 
"What a New Set of Indexes Tells Us About State and National Business 
Cycles," The Federal Reserve Bank of Philadelphia Business Review (Q1 
2006):11-24. 

[11] For an overview of other policy options for responding to 
national recessions, see Congressional Budget Office, Policies for 
Increasing Economic Growth and Employment in 2010 and 2011 
(Washington, D.C.: Jan. 2010); and Congressional Budget Office, The 
State of the Economy and Issues in Developing an Effective Policy 
Response, Statement of Douglas W. Elmendorf before the Committee on 
the Budget, U.S. House of Representatives (Washington, D.C.: Jan. 27, 
2009). 

[12] Economic Stimulus Act of 2008, Pub. L. No. 110-185, 122 Stat. 613 
(Feb. 13, 2008). 

[13] GAO, Troubled Asset Relief Program: One Year Later, Actions Are 
Needed to Address Remaining Transparency and Accountability 
Challenges, [hyperlink, http://www.gao.gov/products/GAO-10-16] 
(Washington, D.C.: Oct. 8, 2009). 

[14] Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-
343, 122 Stat. 3765 (Oct. 3, 2008), codified at 12 U.S.C. §§ 5201-5261. 

[15] According to the National Association of State Budget Officers 
(NASBO), most states have balanced-budget requirements for general 
funds, which may include requirements such as (1) requiring governors 
to submit a balanced budget, (2) mandating that their legislatures 
pass a balanced budget, (3) directing governors to sign a balanced 
budget, or (4) requiring governors to execute a balanced budget. 
Although most states have balanced budget requirements, these 
requirements typically apply to enacted budgets or to the governors' 
proposed budgets. See NASBO, Budget Processes in the States 
(Washington, D.C.: Summer 2008). 

[16] However, during the three recessions where the federal government 
did not provide fiscal assistance, the federal response included 
increased spending for other programs such as unemployment insurance 
as well as increases in existing grants not administered by state and 
local governments. 

[17] For example, see [hyperlink, 
http://www.gao.gov/products/GAO-04-736R]; Advisory Commission on 
Intergovernmental Relations, Countercyclical Aid and Economic 
Stabilization, A-69 (Washington D.C.: December 1978); and Eileen 
Norcross and Frederic Sautet, "The American Recovery and Reinvestment 
Act: Is More Federal Grant Money What the States Need?" Mercatus on 
Policy, No. 36 (Washington, D.C.: Mercatus Center, January 2009). 

[18] For example, see Sherle R. Schwenninger, The American Social 
Contract: Lessons from the Great Recession, (Washington, D.C.: The New 
America Foundation, September 2010); Scott Lilly, Pumping Life Back 
into the U.S. Economy: Why a Stimulus Package Must Be Big and Targeted 
(Washington, D.C.: Center for American Progress, January 2009); Max 
Sawicky, "An Idea Whose Time has Returned: Anti-recession Fiscal 
Assistance for State and Local Governments," Briefing Paper 
(Washington, D.C.: Economic Policy Institute, October 2001). 

[19] General revenues comprise all revenue except that classified as 
liquor store, utility, or insurance trust revenue. General revenues 
collected by the state and local government sector in the United 
States are either collected from own-sources or are intergovernmental 
revenues received from the federal government. To describe how state 
and local government revenues change during national economic 
downturns, we used data from the Annual Survey of State and Local 
Government Finances and Census of Governments collected by the U.S. 
Census Bureau, as well as data from the National Income and Product 
Accounts produced by the Bureau of Economic Analysis. We analyzed data 
for the United States for the period 1977-2008. We first decomposed 
real state and local government revenues and GDP into their (1) long-
run trend and (2) business cycle components. We then calculated the 
correlations of the business cycle components of state and local 
government revenues with the business cycle component of GDP. The 
cyclical components of revenues and of GDP are the percent deviations 
in revenues and GDP from their long-run trends. In general, a positive 
correlation indicates that revenues are procyclical and a negative 
correlation indicates that revenues are countercyclical. Specifically, 
we identified revenues as procyclical if the correlation was greater 
than or equal to 0.2, and we identified revenues as countercyclical if 
the correlation was less than or equal to -0.2. Appendix I contains 
additional details on our methodology and its limitations, and 
appendix II contains definitions of state and local government 
revenues. 

[20] In our analysis of the magnitude of revenue declines during 
national recessions, we used state and local government tax receipt 
data from the Bureau of Economic Analysis for the first quarter of 
1973 to the third quarter of 2010. Unless otherwise stated, current 
tax receipts are presented in real 2009 dollars. 

[21] While it is not always clear which type of tax is most volatile, 
state governments that diversify their tax bases may see less 
volatility in their tax receipts than those that are more heavily 
dependent on fewer types of taxes. 

[22] Analysts have reported that capital gains income rose absolutely 
and as a share of individual income during the 1990s. Factors 
contributing to this trend include individuals generating taxable 
income by (1) selling financial assets as stock and bond prices rose 
and (2) exercising stock options, which had become a more common form 
of employee compensation. For example, see Tim Schiller, "Riding the 
Revenue Roller Coaster: Recent Trends in State Government Finance," 
Federal Reserve Bank of Philadelphia Business Review, Q1/2010. 

[23] This analysis covered the second quarter of 1992 through the 
first quarter of 2010. Data on total state tax revenues are from the 
U.S. Census Bureau's Quarterly Summary of State and Local Government 
Tax Revenue. State wage data are from the U.S. Bureau of Labor 
Statistics' Quarterly Census of Employment and Wages. 

[24] Our analysis of state and local government expenditures used data 
from the Annual Surveys of State and Local Government Finances and the 
Census of Governments collected by the U.S. Census Bureau, which were 
available for the years 1977 to 2008, as well as data from the 
National Income and Product Accounts produced by the Bureau of 
Economic Analysis for the same time period. General expenditures 
include all expenditures except those classified as utility, liquor 
store, or social insurance trust expenditures. See appendix I for a 
description of our methodology and its limitations. See appendix II 
for a description of state and local government expenditures. 

[25] If spending is growing, but growing at a rate that is slower than 
its long-term trend growth rate, then spending is declining relative 
to trend, even though the absolute level of spending is increasing. 

[26] Similarly, current expenditures on health and hospitals and on 
public welfare typically decrease relative to trend during national 
economic expansions. Spending on health and hospitals and public 
welfare now consume larger shares of state budgets relative to prior 
decades. See GAO, State and Local Governments: Fiscal Pressures Could 
Have Implications for Future Delivery of Intergovernmental Programs, 
[hyperlink, http://www.gao.gov/products/GAO-10-899] (Washington, D.C.: 
July 30, 2010). 

[27] For example, researchers have found that as unemployment 
increases during a recession, unemployed individuals may return to 
school to obtain additional skills, certifications, or degrees. See 
Julian R. Betts and Laurel L. McFarland, "Safe Port in a Storm: The 
Impact of Labor Market Conditions on Community College Enrollments," 
Journal of Human Resources 30(4), Autumn 1995, 741-765; Harris Dellas 
and Vally Koubi, "Business Cycles and Schooling," European Journal of 
Political Economy 19 (2003), 843-859; and Harris Dellas and Plutarchos 
Sakellaris, "On the Cyclicality of Schooling: Theory and Evidence," 
Oxford Economic Papers 55, January 2003, 148-172. 

[28] [hyperlink, http://www.gao.gov/products/GAO-07-97]. 

[29] [hyperlink, http://www.gao.gov/products/GAO-11-395] provides 
additional information regarding these variations. 

[30] For all descriptions of policy changes in this section, we 
analyzed aggregate changes in state policy choices by calculating the 
net sum of the tax and fee increases and decreases that states enacted 
during each fiscal year, and dividing the result by states' total 
general fund revenues. Calculations are based on figures presented in 
NGA and NASBO's The Fiscal Survey of States. We limited our review to 
state fiscal years 1990 to 2010 because these are the years data on 
enacted revenue changes are available in NGA and NASBO's The Fiscal 
Survey of States. The federal fiscal year begins on October 1 and ends 
on September 30. In contrast, state fiscal years begin on July 1 and 
end on June 30 for all but four states (Alabama, Michigan, New York, 
and Texas). We limited our review to state revenue actions, as NASBO 
has only included information on state program area cuts in its last 
four Fiscal Surveys. 

[31] It remains to be seen whether the aftermath of the 2007 recession 
will follow the same path to state and local government revenue 
recovery as prior recessions. Projections for continued unemployment 
rates of 9 percent or more through 2011 and constrained GDP growth for 
the next several years result in uncertainty regarding the number of 
years until revenues return to 2007 levels. 

[32] GAO, Budgeting for Emergencies: State Practices and Federal 
Implications, [hyperlink, http://www.gao.gov/products/GAO/AIMD-99-250] 
(Washington, D.C.: Sept. 30, 1999). 

[33] NGA and NASBO, The Fiscal Survey of States: June 2010 
(Washington, D.C.: June 2010). 

[34] NASBO states that total balances include both ending balances and 
the amounts in states' budget stabilization funds. Total balances 
reflect the funds that states may use to respond to unanticipated 
events after budget obligations have been met. 

[35] In our analysis of state and local government net investment, 
lending, or borrowing, we used data from BEA's National Income and 
Product Accounts from the first quarter of 1973 to the first quarter 
of 2010. Dollar amounts are adjusted for inflation and measured in 
constant 2009 dollars. Net lending occurs when total receipts exceed 
total expenditures and net borrowing occurs when total expenditures 
exceed total receipts. We also analyzed patterns in the difference 
between current receipts and current expenditures, and obtained 
similar results. See appendix I for additional information on our 
methodology. 

[36] Net investment is gross government investment minus consumption 
of fixed capital. 

[37] Our estimates for total debt per capita are derived from U.S. 
Census Bureau data for states and all local governments within the 
states' jurisdictions. Projects with longer time frames are typically 
budgeted separately from the operating budgets and financed by a 
combination of current receipts, federal grants, and the issuance of 
debt. About 60 percent of total state and local long-term debt 
outstanding is in the category of revenue bonds secured by a specific 
revenue-generating entity and provide no recourse to any other 
governmental assets or revenues in the event of default. The 
percentage composition of debt outstanding by type of debt is from 
U.S. Census Bureau data for fiscal year 2004, the last year in which 
these data were collected. Some revenue bonds finance public projects 
including toll roads and water and sewage treatment facilities. Others 
provide loans for private purposes--the states and localities 
essentially act as a conduit for reduced-rate financing of private 
projects and the debt has no claim on state and local revenues and 
assets. Such private purpose debt has been a fast-growing category 
over the past 30 years. In contrast to revenue bonds, general 
obligation bonds, which comprise about 40 percent of total state and 
local long-term debt outstanding, have payment of principal and 
interest secured by the full faith and credit of the issuer. Although 
secured by the full faith and credit of the issuer, general obligation 
bonds are not necessarily less risky than revenue bonds of the same 
issuer. Under certain conditions, the bond rating on an issuer's 
general obligation bonds could be lower than the rating on its revenue 
bonds. 

[38] Gross state product, also known as gross domestic product by 
state, is the sum of value added from all industries in the state. GDP 
by state is the state counterpart to the nation's gross domestic 
product. 

[39] For example, some states have securitized revenues from the 1998 
Master Settlement Agreement, an agreement between four of the nation's 
largest tobacco companies to make annual payments to 46 states in 
perpetuity as reimbursement for past tobacco-related health care costs. 

[40] Many governments have often contributed less than the amount 
needed to improve or maintain the funded ratios (actuarial value of 
assets divided by actuarial accrued liabilities) of their pension 
plans. Many experts consider a funded ratio of about 80 percent or 
better to be sound for government pensions. Low funded ratios would 
eventually require the government employer to improve funding, for 
example, by reducing benefits or by increasing contributions. See GAO, 
State and Local Government Pension Plans: Current Structure and Funded 
Status, [hyperlink, http://www.gao.gov/products/GAO-08-983T] 
(Washington, D.C.: Jul. 10, 2008) for details. 

[41] National Governors Association Center for Best Practices, Issue 
Brief: State Government Redesign Efforts 2009 and 2010 (Washington, 
D.C.: Oct. 18, 2010). 

[42] For example, see GAO, Update of State and Local Government Fiscal 
Pressures, GAO-09-320R (Washington, D.C.: Jan. 26, 2009); Advisory 
Commission on Intergovernmental Relations, Countercyclical Aid and 
Economic Stabilization (Washington, D.C.: Dec. 1978); and Douglas W. 
Elmendorf and Jason Furman, "If, When, How: A Primer on Fiscal 
Stimulus," The Hamilton Project Strategy Paper (Washington, D.C.: 
Brookings Institution, Jan. 2008). 

[43] Peterson-Pew Commission on Budget Reform, Getting Back in the 
Black (Nov. 2010). 

[44] See GAO, Temporary State Fiscal Relief, [hyperlink, 
http://www.gao.gov/products/GAO-04-736R] (Washington, D.C.: May 7, 
2004). 

[45] [hyperlink, http://www.gao.gov/products/GAO-07-97]. 

[46] For the purpose of this example, we excluded indicators from 
private sources because they may not be available in the future and 
because the methodology used to produce them may be proprietary, 
making analysis of their reliability difficult. The indicators we list 
in this report are not an exhaustive list of all indicators available 
to time and target assistance to states. Depending on the specific 
policy tool used, policymakers may want to combine the indicators with 
other information, such as data on increased demand for specific 
programs, to target assistance for specific programs or state 
circumstances. 

[47] Appendix I provides an additional discussion of our methodology 
for selecting potential indicators. 

[48] Richard H. Mattoon, Vanessa Haleco-Meyer, and Taft Foster, 
"Improving the impact of federal aid to states," Economic Perspectives 
3Q/2010 (Chicago, Ill.: Federal Reserve Bank of Chicago, 2010), 66-82. 

[49] See appendix III for a detailed listing of national recessions 
since 1973 and examples of federal responses to the question of 
whether and how to provide fiscal assistance to state and local 
governments during these periods. 

[50] Unrestricted or general-purpose fiscal assistance allows 
recipients to spend grant funds in the manner they choose with few, if 
any, federally imposed programmatic or administrative requirements. 

[51] See, for example, [hyperlink, 
http://www.gao.gov/products/GAO-04-736R]; and Congressional Budget 
Office, Countercyclical Uses of Federal Grant Programs (Washington, 
D.C.: Nov. 27, 1978). 

[52] For the most part, the federal grant system does not encourage 
states to use federal dollars as a supplement rather than a 
replacement for their own spending, nor is every grant intended to do 
so. See GAO, Federal Grants: Design Improvements Could Help Federal 
Resources Go Further, GAO/AIMD-97-7 (Washington, D.C.: Dec. 18, 1996). 

[53] Office of Revenue Sharing, U.S. Department of the Treasury, An 
Analysis of the Antirecession Fiscal Assistance Program (Title II of 
the Public Works Employment Act of 1976) (Washington, D.C.: April 1, 
1978). 

[54] Pub. L. No. 108-27, title IV, 117 Stat. 752 (May 28, 2003). 

[55] [hyperlink, http://www.gao.gov/products/GAO-04-736R]. 

[56] See GAO, More Benefits to Jobless Can Be Attained In Public 
Service Employment, [hyperlink, 
http://www.gao.gov/products/GAO-HRD-77-53] (Washington, D.C.: Apr. 7, 
1977); William Mirengoff and others, CETA: Accomplishments, Problems, 
Solutions, A Report, The Bureau of Social Science Research, Inc. 
funded by a grant from the Employment and Training Administration, 
U.S. Department of Labor (Washington, D.C.: 1982). 

[57] See [hyperlink, http://www.gao.gov/products/GAO-11-395]. The 
amount of federal funds states receive for their Medicaid programs is 
determined by the FMAP formula. In response to the 2007 recession, and 
the recession in 2001, Congress temporarily increased the FMAP to help 
states maintain their Medicaid programs, as well as provide states 
with general fiscal relief. 

[58] GAO, Recovery Act: Department of Justice Could Better Assess 
Justice Assistance Program Impact, [hyperlink, 
http://www.gao.gov/products/GAO-11-87] (Washington, D.C.: Oct. 15, 
2010). The Recovery Act JAG Program attempts to meet the overall 
purposes of the Recovery Act, which include stabilizing state and 
local government budgets. This report analyzed a nonprobability sample 
of 14 states. 

[59] For a broader discussion, see GAO, Medicaid Formula: Differences 
in Funding Ability among States Often Are Widened, [hyperlink, 
http://www.gao.gov/products/GAO-03-620] (Washington, D.C.: July 10, 
2003); and [hyperlink, http://www.gao.gov/products/GAO-07-97]. The 
term regular FMAP refers to the base FMAP, as defined under federal 
law, that is used to determine the percentage of federal assistance 
for each state's Medicaid service expenditures. The regular FMAP is 
determined annually by a statutory formula designed to account for 
income variation across the states. See 42 U.S.C. § 1396d(b). We use 
the term increased FMAP to refer to temporary FMAP increases above the 
regular FMAP, as authorized under federal law, that provided states 
with additional Medicaid funding during national recessions. 

[60] GAO, Recovery Act: One Year Later, States' and Localities' Uses 
of Funds and Opportunities to Strengthen Accountability, [hyperlink, 
http://www.gao.gov/products/GAO-10-437] (Washington, D.C.: March 3, 
2010). 

[61] However, during these recessions, the federal response included 
increased spending for other programs such as unemployment insurance 
and increases in existing grants not administered by state and local 
governments. Federal assistance in response to the recessions 
beginning in 1973 and 2001 represented a relatively small share of 
total federal grant funding to the sector. In contrast, the Recovery 
Act provided a significant increase in grant funding to the sector and 
helped offset the sector's tax receipt declines. 

[62] [hyperlink, http://www.gao.gov/products/GAO-04-736R]. 

[63] Advisory Commission on Intergovernmental Relations, 
Countercyclical Aid and Economic Stabilization, A-69 (Washington D.C.: 
Dec. 1978). 

[64] See [hyperlink, http://www.gao.gov/products/GAO-07-97]. We 
reviewed similar policy strategies in the context of helping states 
address increased Medicaid expenditures during economic downturns. 
These proposed strategies include a Medicaid-specific national rainy 
day fund and intergovernmental loans that would allow states to pool 
their resources to cope with increased Medicaid costs during economic 
downturns and could give states greater autonomy over their receipt of 
federal assistance. 

[65] Richard Mattoon, "Creating a National State Rainy Day Fund: A 
Modest Proposal to Improve Future State Fiscal Performance," State Tax 
Notes (2004): 271-288. The level of aid provided by such a fund could 
be scaled relative to the severity of the recession in a given state 
in an effort to address revenue declines related to the business cycle 
rather than responding to state budget practices or long-term 
structural declines in states' economies. Many states created their 
own rainy day or reserve funds in the wake of the 1980-1982 recessions 
as they were viewed as a good budget practice and were strongly 
encouraged by debt-rating agencies. States' own rainy day funds are 
designed to accumulate revenue during periods of strong economic 
performance with the intent of helping states use them to weather 
economic downturns. 

[66] Pub. L. No. 111-5, Div. B, title V, § 5008, 123 Stat. 115 (Feb. 
17, 2009). 

[67] We decomposed real state and local government revenues and 
expenditures and GDP into their (1) long-run trend and (2) business 
cycle components. The cyclical components of revenues, expenditures, 
and GDP are the percent deviations in revenues, expenditures, and GDP 
from their long-run trends. 

[68] However, data for state fiscal 2010 are estimated. 

[69] Although GAO's mandate refers to national economic downturns 
since 1974, we extended our review by 1 year to capture the recession 
that began in November 1973. 

[70] GAO, Medicaid: Strategies to Help States Address Increased 
Expenditures during Economic Downturns, [hyperlink, 
http://www.gao.gov/products/GAO-07-97] (Washington, D.C.: Oct. 18, 
2006). 

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