What Do States Do With Fiscal Windfalls? Evidence from the Pandemic

57 Pages Posted: 2 Mar 2024

See all articles by Jeffrey P. Clemens

Jeffrey P. Clemens

University of California, San Diego (UCSD)

Oliver Giesecke

Stanford University - Hoover Institution

Joshua D. Rauh

Stanford Graduate School of Business; Hoover Institution; National Bureau of Economic Research (NBER)

Stan Veuger

American Enterprise Institute

Date Written: February 28, 2024

Abstract

Using variation in federal pandemic-era fiscal aid to states driven by the strength of political representation, we find that incremental pandemic-era fiscal aid to states was most likely to end up in the categories of general administrative service spending and employee pension benefit funding. Spending on categories that motivated the aid in the first place, such as healthcare, education, and infrastructure, may also have responded but does not show robust patterns. Total state government revenues and expenditures had increased by around 70 cents per incremental windfall dollar of committed federal funds by 2022. Of this, the statistically significant categorical spending effects are 38 cents to general government expenditures (the residual that in principle excludes healthcare, education, infrastructure, and other functional categories) and 7 cents to pension funding, even though the latter use was inconsistent with the objectives of the legislation. The pension contribution increases are driven by the states where public employees have above-median representation on state pension fund boards, where over 14 cents of each marginal dollar went to pension funding.

Keywords: Pandemic fiscal aid, COVID-19, state and local governments, fiscal fundamentals, debt burden, pension funding, debt structure

JEL Classification: H55, H75, J26, J45

Suggested Citation

Clemens, Jeffrey P. and Giesecke, Oliver and Rauh, Joshua D. and Veuger, Stan, What Do States Do With Fiscal Windfalls? Evidence from the Pandemic (February 28, 2024). Stanford University Graduate School of Business Research Paper No. 4742072, Available at SSRN: https://ssrn.com/abstract=4742072 or http://dx.doi.org/10.2139/ssrn.4742072

Jeffrey P. Clemens

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
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Oliver Giesecke (Contact Author)

Stanford University - Hoover Institution ( email )

Stanford, CA 94305
United States

Joshua D. Rauh

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stan Veuger

American Enterprise Institute ( email )

1789 Massachusetts Ave NW
Washington, DC 20036
United States

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