GAO-04-736R Temporary State Fiscal Relief 

United States General Accounting Office

Washington, DC 20548 

May 7, 2004 

The Honorable Don Nickles 

Chairman 

Committee on the Budget 

United States Senate 

Subject: Federal Assistance: Temporary State Fiscal Relief

Dear Mr. Chairman: 

As part of the Jobs and Growth Tax Relief Reconciliation Act of 2003,1 the federal 

government provided $10 billion in temporary fiscal relief payments to states, the 

District of Columbia, and the U.S. commonwealths and territories (herein referred to 

as states). Generally, use of these funds is unrestricted in nature; the act authorizes 

funds to be used to “provide essential government services” and to “cover the costs 

... of complying with any federal intergovernmental mandate.” These funds were 

intended to provide antirecession fiscal stimulus to the national economy and to help 

close state budget shortfalls due to the recession that began in March 2001.2 

According to the National Conference of State Legislatures (NCSL), in February 36 

states reported facing budget shortfalls with a cumulative budget gap of about $25.7 

billion.3

This report responds to your February 13, 2004, request and subsequent agreement 

with your office to provide information to help Congress assess the use of the 

temporary state fiscal relief payments. Specifically, we are reporting (1) what is 

known about the potential impacts of unrestricted fiscal relief on the fiscal behavior 

of states, (2) how the temporary fiscal relief payments were distributed among the 

states relative to their fiscal circumstances, and (3) how state budget officials report 

these funds were used. The temporary fiscal relief payments reviewed in this report 

were designed to provide assistance to help state and local governments address 

cyclical deficits prompted by the recent economic downturn. These payments were 

 

1

 Pub. L. No. 108-27, Title VI, May 28, 2003. 

2

 A recession begins just after the U.S. economy reaches a peak of activity and ends as the economy 

reaches its trough. The National Bureau of Economic Research identified the period of the recession 

from the peak to the trough month (March 2001–November 2001). 

3

 National Conference of State Legislatures, State Budget Update: February 2003. 
Page 2 GAO-04-736R Temporary State Fiscal Relief

not intended to address longer term structural fiscal challenges facing state 

governments, and accordingly our report does not address these issues.4

To respond to this request, we used findings from our and other reports on 

unrestricted federal aid to describe the known potential impacts of such funds on the 

fiscal behavior of states. We obtained data on the distribution of fiscal relief funds 

from the Department of the Treasury and compared this information with indicators 

of state fiscal circumstances we selected from our and other reports on grant design. 

We also discussed the use of fiscal relief funds with senior budget officials from 12 

states with varying fiscal circumstances. We conducted our review from February to 

April 2004 in accordance with generally accepted government auditing standards. 

For a more complete discussion of our approach, see the scope and methodology 

section. 

Results in Brief 

Temporary state fiscal relief funds share common characteristics with similar 

programs enacted in the 1970s that provided unrestricted funds to state and local 

governments. Past analyses of these programs can provide insights into the potential 

impacts unrestricted funds can have on the fiscal behavior of state governments. For 

example, previous studies have noted that the effectiveness of unrestricted aid on 

stabilizing state finances during economic downturns can be limited if this aid is 

delayed beyond the trough of the downturn, or if the aid is not targeted to entities 

most affected by the recession and with the fewest available resources. Past studies 

have also shown that unrestricted federal funds are fungible and can be substituted 

for state funds, and the uses of such funds are difficult or impossible to track. One 

study suggested that states could come to rely on federal aid in order to close budget 

gaps during economic downturns instead of taking actions, such as setting aside 

budgetary reserves, to stabilize their own finances. 

We examined the distribution of fiscal relief funds under the Jobs and Growth Tax 

Relief Reconciliation Act of 2003 in terms of its timing relative to national economic 

trends and its targeting relative to each states’ fiscal circumstances. From the 

perspective of the national economy, the first distribution of fiscal relief funds 

occurred about 19 months after the end of the recession. However, employment 

levels continued to decline and this was reflected in continuing fiscal stress facing 

many states during this period. The funds were not targeted to take into account 

significant differences among states in the impact of the recession, fiscal capacity, 

and cost of expenditure responsibilities. Rather, the funds were allocated to the 

states on a per capita basis, adjusted to provide for minimum payment amounts to 

smaller states. 

 

4

 A fiscal system is said to have a structural imbalance if it is unable to finance an average (or 

representative) level of services by taxing its funding capacity at average (or representative) rates. 

U.S. General Accounting Office, District of Columbia: Structural Imbalance and Management Issues, 

GAO-03-666 (Washington, D.C.: May 22, 2003). 
Page 3 GAO-04-736R Temporary State Fiscal Relief

According to NCSL, in April 2004 states reported facing a cumulative budget gap of 

$720 million, down from $21.5 billion at the same time the previous year.5 In all of the 

states we contacted with the exception of New Mexico, budget officials indicated that 

they had used their own reserve funds, to varying degrees, to address budget 

shortfalls. States reported deploying fiscal relief funds in state fiscal year 2003, 2004, 

or planned to in future years. Many of the 12 states we contacted reported using the 

funds as general revenue available to support broad state purposes. The one-time 

federal fiscal relief funds were available to help close budget gaps and reduce the 

pressure for tax increases or spending cuts. 

Past Experiences with Fiscal Relief Programs Provide Key Insights 

Federal funding provided under the General Revenue Sharing (GRS) and 

Antirecession Fiscal Assistance (ARFA) programs enacted in the 1970s share 

common characteristics with the temporary fiscal relief funds provided under the 

Jobs and Growth Tax Relief Reconciliation Act of 2003.6

 Primarily, the temporary 

fiscal relief funds and the funds provided under GRS and ARFA were unrestricted. 

State or local recipient governments could choose to use the funds entirely at their 

own discretion. GRS funds were provided as general financial assistance to state and 

local governments. ARFA program funds, just as the temporary fiscal relief funds, 

were in part intended to stabilize the finances of state governments that had recently 

experienced budgetary stress due to an economic downturn. 

Analyses of these programs can provide insights into the potential impacts 

unrestricted funds can have on state fiscal behavior. Previous studies have noted 

that the effectiveness of unrestricted aid on stabilizing state finances during 

economic downturns can be limited if this aid is delayed beyond the trough of the 

recession, or if the aid is not targeted to entities most affected by the recession and 

with the less available resources. 

A Treasury study found that the timing of the ARFA funding disbursements was a key 

element toward the goal of stabilizing state finances during a recession.7

 The purpose 

of this program was to stabilize state budgets and discourage state governments from 

enacting tax increases or spending cuts because such budgetary actions would 

exacerbate the recession.8

 The Treasury study showed that the ARFA funds were 

poorly timed. They came late, after the trough of the recession, and did little to 

 

5

 National Conference of State Legislatures, State Budget Update: April 2004. 

6

 Title I of the State and Local Fiscal Assistance Act of 1972 (Pub. L. No. 92-512) authorized general 

revenue sharing. Title II of the Public Works Employment Act of 1976 (Pub. L. No. 94-369) authorized 

antirecession payments to states and local governments. 

7

 U.S. Department of the Treasury, Federal-State-Local Fiscal Relations: Report to the President and 

the Congress (Washington, D.C: September 1985). 

8

 The general argument is that increasing state taxes or reducing state spending can work to offset the 

economic effects of federal countercyclical stimulus, such as the “automatic stabilizers” built into the 

federal budget that automatically reduce revenue and increase spending during economic downturns. 
Page 4 GAO-04-736R Temporary State Fiscal Relief

forestall state decisions regarding tax increases or spending cuts that could have 

contributed to the recession. Further, because the economy had already entered a 

period of strong recovery, the ARFA funds may have contributed to inflationary 

pressure. 

Our and CBO studies noted that targeting unrestricted funds is also a key 

consideration in achieving effective fiscal stabilization.9 Because recessions affect 

states unevenly, targeting unrestricted funds to states most affected and with less 

available resources could yield better results. Changes in employment rates can 

serve as an indicator for the magnitude of fiscal impact of the recession in that sales 

and income tax receipts are closely tied to employment levels. A recent Economic 

Policy Institute (EPI) paper noted that indicators of a state’s fiscal capacity (a state 

government’s ability to raise revenue through its taxable resource base), such as 

Gross State Product (GSP) or Total Taxable Resources (TTR), can also be 

considered.10 Some states, relative to others, have more available resources to draw 

upon. States differ in their need for assistance due to variations in job losses, tax 

bases, and expenditure responsibilities. 

We have previously reported that unrestricted funds, such as those provided under 

the GRS program are fungible, and easily substituted for state funds.11 Within the 

context of stabilizing state budgets during recessions, the EPI paper noted that fewer 

restrictions governing the use of federal funds is appropriate because such funds do 

little to interfere with state spending priorities and can be mobilized more quickly. 

However, the ease with which unrestricted funds can be substituted for state funds 

suggests that timing and targeting issues take on a greater importance. If 

unrestricted federal funds are granted to a state with little need, the funds could be 

substituted for own source revenues and allow the state to lower taxes, increase 

spending, or place the funds in state reserves. Under these circumstances, the funds 

would do little to stabilize state budgets. 

We have also previously reported that it is difficult or impossible to identify the 

states’ uses of unrestricted federal funds.12 Budget decisions are typically based upon 

total resources available to a state government. A state government can identify the 

amount of available unrestricted federal funds, as well as the amounts and sources of 

all other revenues. Once funds from different sources are commingled for budgeting 

purposes, it is difficult or impossible to identify the source of the dollars that fund 

 

9

 U.S. General Accounting Office, Antirecession Assistance-An Evaluation, PAD-78-20 (Washington, 

D.C: Nov. 29, 1977) and Congressional Budget Office, Countercyclical Uses of Federal Grant 

Programs (Washington, D.C.: Nov. 1978). 

10 Economic Policy Institute, An Idea Whose Time Has Returned: Anti-recession Fiscal Assistance for 

State and Local Governments (Washington, D.C.: October 2001). 

11 U.S. General Accounting Office, Revenue Sharing: An Opportunity For Improved Public Awareness 

of State And Local Government Operations, GGD-76-2 (Washington, D.C.: Sept. 9, 1975). 

12GGD-76-2. 
Page 5 GAO-04-736R Temporary State Fiscal Relief

specific expenditures. Reporting on or tracking the use of funds can be somewhat 

meaningless where revenue sources can be used interchangeably for the same 

expenditures. 

The potential availability of countercyclical federal funds could discourage state 

actions to prepare for the fiscal pressures associated with a recession. States can 

prepare their finances for fiscal stress and budget uncertainty, primarily through 

establishing budgetary reserves. Budgetary reserves (sometimes referred to as 

budget stabilization funds or “rainy day” funds) are available revenues set aside to 

provide a cushion that could be used in times of fiscal stress. According to a Center 

on Budget and Policy Priorities report, at the end of state fiscal year 2001 many states 

had accumulated substantial reserves, others modest reserves, and others none at 

all.13 A Treasury study noted concerns that the availability of federal aid could 

discourage states from setting aside budgetary reserves to prepare for budgetary 

uncertainty. Unintended consequences such as this (sometimes referred to as a 

“moral hazard”) are not new to federal-state relations when budgeting for uncertain 

events. For example, state budgeting for natural disasters provides an illustration of 

these unintended consequences. In 1999, we reported that while natural disasters 

and similar emergencies had an impact on state finances, states were less concerned 

about these situations because they relied on the federal government to provide most 

of the funding for recovery efforts.14 For example, at the time, although California had 

experienced many catastrophic natural disasters over the prior 10 years, California 

did not provide any advance reserve funding for disaster costs. Instead, the state 

included in its budget only the estimated state share of funds needed for prior years’ 

disasters. 

The Timing and Targeting of Fiscal Relief Funds 

The distribution of fiscal relief funds under the Jobs and Growth Tax Relief 

Reconciliation Act of 2003 occurred after the economy began to recover from the 

recession, but while the states were still struggling with revenue shortfalls. From the 

perspective of the national economy, the first distribution of fiscal relief funds 

occurred about 19 months after the end of the recession. In looking at three 

indicators of states’ fiscal circumstances, we found large differences in indicators of 

the impact of the recession, fiscal capacity, and cost of expenditure responsibilities. 

The funds were not allocated according to these differences; rather, they were 

allocated on a per capita basis, adjusted to provide for minimum payment amounts to 

smaller population states. Consequently, the allocation of fiscal relief funds was not 

related to the state’s relative need for antirecession aid. 

 

13 Center on Budget and Policy Priorities, Heavy Weather: Are States Rainy Day Funds Working?

(Washington, D.C.: May 13, 2003). 

14 U.S. General Accounting Office, Budgeting for Emergencies: State Practices and Federal 

Implications, GAO/AIMD-99-250 (Washington, D.C.: Sept. 30, 1999). 
Page 6 GAO-04-736R Temporary State Fiscal Relief

Payments Were Made After the National Economy Was in Recovery, but States Were 

Experiencing Lags in Employment Growth

The fiscal relief payments were first distributed to the states in June 2003, about 19 

months after the end of the recession as measured by gross domestic product (GDP), 

but prior to recovery of employment levels (see figure 1). The National Bureau of 

Economic Research (NBER) determined that a peak in business activity occurred in 

the U.S. economy in March 2001.15 This peak marked the end of an expansion and the 

beginning of a recession. NBER indicated an end of the recession in November 2001; 

however, employment levels continued to decline even after the economy entered an 

expansion period. 

Figure 1: Levels of Real GDP & Nonfarm Employment, 2000 to 2004Q1

The Allocation of Fiscal Relief Funds Does Not Appear to Have a Systematic 

Relationship with State Fiscal Circumstances 

In looking at states’ fiscal circumstances, we found large differences in indicators of 

the impact of the recession and fiscal capacity. Indicators of expenditure 

responsibilities, the level of public services provided by the average state fiscal 

system, are not readily available. We were able to draw upon employment and gross 

state product (GSP) data as indicators of the impact of the recession and state fiscal 

capacities, respectively. Changes in employment can serve as indicators of the 

magnitude of fiscal impact of the recession in that sales and income tax receipts are 

 

15 NBER, Business Cycle Dating Committee, The Business-Cycle Peak of March 2001 (Cambridge, 

Mass.: Nov. 26, 2001). 
Page 7 GAO-04-736R Temporary State Fiscal Relief

closely tied to employment levels. GSP serves as an indicator of the ability of states 

to raise revenues from their own sources. 

As figure 2 shows, the allocation of fiscal relief funds does not appear to be related to 

the indicators of impact of the recession on states or their ability to generate 

revenues from their own economic resources. For example, the recession had the 

least relative impact on Wyoming, as indicated by its percentage change in nonfarm 

employment, and it has a relatively strong tax base, as indicated by GSP per capita, 

however it received a larger fiscal relief payment per capita than the U.S. average. 

Other states, such as Indiana, Kentucky, and Michigan had much greater impacts 

from the recession and weaker tax bases than the U.S. average. These states all 

received slightly less than the U.S average per capita fiscal relief payment. 
Page 8 GAO-04-736R Temporary State Fiscal Relief

Figure 2. Comparison of Employment, Fiscal Relief, and GSP by State 

Note: The figure does not include the commonwealths and territories due to the lack of available 

employment and economic data. 

a Percentage change in nonfarm employment was calculated for the identified period of the recession, 

March 2001 to November 2001. 

There are large differences in the impact of the economic downturn among the states. 

The Bureau of Labor Statistics’ (BLS) data on nonfarm employment is regarded as the 

only timely and high-quality state-level indicator for assessing economic downturns, 

although it has limitations. To assess the impact of the recession across states and 

identify those states most affected, we compared the percentage change in nonfarm 

employment by state during the national recession (see enclosure 1). 16 This indicator 

 

16 The National Bureau of Economic Research defines expansions and recessions in terms of whether 

aggregate economic activity is rising or falling, and it views real GDP as the single best measure of 
Page 9 GAO-04-736R Temporary State Fiscal Relief

shows that the downturn was greater in some states when compared to others. For 

example, Alaska had a 1 percent gain in nonfarm employment during this period, 

whereas North Carolina experienced a 2.5 percent loss. However, Alaska received 

$79.75 in fiscal relief per capita whereas North Carolina received $34.01. 

There are large differences in the underlying strength of a state’s tax base. A second 

indicator to assist targeting fiscal relief funds is the strength of the state tax base, in 

other words, the state’s ability to generate revenues from its own economic 

resources. Leading indicators to measure state fiscal capacity are TTR and GSP. We 

chose per capita 2001 GSP to measure state fiscal capacity as it was the more recent 

and readily available data (see enclosure 2). The indicator shows that some states 

have a relatively greater ability to self finance than others. For example, Delaware 

had a per capita GSP of $51,696 whereas West Virginia had a per capita GSP of 

$23,429. However, Delaware received $63.81 in fiscal relief per capita payment while 

West Virginia received $34.01. 

The cost of delivering an average level of services per capita varies by state. A third 

indicator to assist targeting fiscal relief funds is the differences among states in 

funding the cost of an average basket of public services. This indicator can assist in 

targeting fiscal relief funds to states with a higher cost of providing public services. 

However, this type of information is not readily available due to the sophisticated 

economic modeling required. However, we recently analyzed the fiscal condition of 

the District of Columbia in relation to other states using a representative expenditure 

model.17 We reported that the District of Columbia and five states (New York, 

California, Massachusetts, Texas, and New Jersey) needed to spend more per capita 

than the 50-state average in order to fund an average basket of public services. 

Distribution Formula Provides Funds on a Per Capita Basis, with Minimum Payments 

to Smaller States

The Jobs and Growth Tax Relief and Reconciliation Act of 2003 appropriated $5 

billion for each of federal fiscal years 2003 and 2004. The act allocated funds to states 

on a per capita basis adjusted to provide for minimum payment amounts to smaller 

population states. The Treasury was responsible for making payments to states in 

two payments upon proper certification to the Treasury; the first was available in 

June 2003, and the second was available in October 2003. States were to certify to 

the Secretary of the Treasury that the use of the funds was consistent with the 

purposes of the act. These funds were only to be used for expenditures permitted 

under the most recently approved state budget. The minimum amount specified in 

the act for the states and the District of Columbia was $50 million and the minimum 

for the commonwealths and territories was $10 million. 

 economic activity. Real GDP has risen substantially since November 2001. However, this growth in 

real GDP took the form of productivity growth. As a result, the growth in real GDP has been 

accompanied by falling employment. 

17 U.S. General Accounting Office, District of Columbia: Structural Imbalance and Management 

Issues, GAO-03-666 (Washington, D.C.: May 22, 2003). 
Page 10 GAO-04-736R Temporary State Fiscal Relief

As table 1 shows, 12 states, the District of Columbia, American Samoa, Northern 

Mariana Islands, Virgin Islands, and Guam received minimum payments, which 

ranged from $38.64 to $174.55 per capita. The remaining 38 states and Puerto Rico 

received $34.01 per capita. Although smaller states received more per capita funding 

in relation to larger population states, the total amount is relatively small. A total of 

$690 million, about 7 percent of the $10 billion in fiscal relief funds, was allocated as 

minimum payments. 

 

Table 1: Total and Per Capita Fiscal Relief Payments, in Dollars 

State Total Per capita State Total Per capita

American Samoa 10,000,000 174.55 Kansas 91,420,224 34.01

N. Mariana Islands 10,000,000 144.46 Kentucky 137,441,212 34.01

Wyoming 50,000,000 101.26 Louisiana 151,968,477 34.01

Virgin Islands 10,000,000 92.07 Maryland 180,108,130 34.01

District of Columbia 50,000,000 87.40 Massachusetts 215,902,391 34.01

Vermont 50,000,000 82.13 Michigan 337,958,897 34.01

Alaska 50,000,000 79.75 Minnesota 167,287,927 34.01

North Dakota 50,000,000 77.86 Mississippi 96,733,199 34.01

South Dakota 50,000,000 66.24 Missouri 190,266,337 34.01

Guam 10,000,000 64.60 Nebraska 58,191,861 34.01

Delaware 50,000,000 63.81 Nevada 67,951,153 34.01

Montana 50,000,000 55.42 New Jersey 286,131,757 34.01

Rhode Island 50,000,000 47.70 New Mexico 61,857,045 34.01

Hawaii 50,000,000 41.27 New York 645,298,446 34.01

New Hampshire 50,000,000 40.46 North Carolina 273,718,596 34.01

Maine 50,000,000 39.22 Ohio 386,065,934 34.01

Idaho 50,000,000 38.64 Oklahoma 117,340,221 34.01

Alabama 151,224,579 34.01 Oregon 116,345,399 34.01

Arizona 174,468,230 34.01 Pennsylvania 417,619,847 34.01

Arkansas 90,909,534 34.01 Puerto Rico 129,512,591 34.01

California 1,151,812,577 34.01 South Carolina 136,429,319 34.01

Colorado 146,265,293 34.01 Tennessee 193,465,275 34.01

Connecticut 115,806,960 34.01 Texas 709,070,563 34.01

Florida 543,484,155 34.01 Utah 75,939,386 34.01

Georgia 278,382,071 34.01 Virginia 240,706,404 34.01

Illinois 422,320,693 34.01 Washington 200,430,835 34.01

Indiana 206,768,182 34.01 West Virginia 61,493,121 34.01

Iowa 99,510,268 34.01 Wisconsin 182,392,906 34.01

 

United States 10,000,000,000 35.01 

Source: Prepared by GAO with data from the Department of the Treasury and the Census Bureau. 

Allocation of federal assistance based on population is not a novel concept and is 

used, at least in part, in some grant programs to apportion funding. Some advantages 

of using an allocation formula based on population is that the data are readily 

available and is meant to provide political equity among the states. However, as we 

have cited in previous work, using population alone in a grant formula is not an 
Page 11 GAO-04-736R Temporary State Fiscal Relief

effective indicator of the relative economic circumstances of states or their fiscal 

capacity.18

State Budget Officials Report Using Fiscal Relief Funds in a Variety of Ways 

The one-time federal fiscal relief funds provided by the Jobs and Growth Tax Relief 

Reconciliation Act of 2003 were available to help close budget gaps and reduce the 

pressure for tax increases or spending cuts. According to NCSL, state budget 

outlooks are improving, however, many states are continuing to face budget 

shortfalls.19 In all of the states contacted, with the exception of New Mexico, budget 

officials indicated that they had already used their own reserve funds to help close 

budget gaps. 

Some state budget officials interviewed indicated they were able to deploy these 

funds in state fiscal year 2003, but others planned to use these funds in state fiscal 

year 2004 or beyond. For example, in five states (Alabama, Louisiana, Maryland, New 

Jersey, and Ohio), budget officials indicated that they used their first disbursement in 

June 2003 to substitute for unrealized revenue or for other purposes in their state 

fiscal year 2003 budgets. Although North Dakota officials reported drawing upon 

state reserve funds in state fiscal year 2003, they were unable to budget any fiscal 

relief funds. Due to its biennial legislative session and accompanying budget, the 

North Dakota state fiscal year 2003-2005 budget was passed prior to the Jobs and 

Growth Tax Relief Reconciliation Act of 2003. As of our interview, the legislature 

was next scheduled to meet in January 2005. 

In two states budget officials reported disagreement about whether the legislature or 

the governor could determine how the funds were to be used. Legislative budget 

officials in both Colorado and New Mexico indicated that the governor has not made 

the fiscal relief funds available to the legislature for appropriation in the respective 

states. In Colorado, subsequent to a State Supreme Court ruling and legislation 

passed by the General Assembly, the issue has been resolved. New Mexico officials 

have not indicated to us that the dispute has been resolved. 

Most state budget officials we surveyed reported that the fiscal relief funds were 

placed in the General Fund, although others, such as Massachusetts and New Mexico, 

created a new account specifically for these funds. Some officials indicated that they 

dedicated funds for a specific purpose, while others told us that they have used the 

funds as general revenue. For example, state budget officials in Alabama indicated a 

portion of the funds was allocated for children’s services and education. Maryland 

official reported some fiscal relief funds were dedicated for state police expenditures 

and Louisiana officials designated funds for the state’s Minimum Foundation 

Program, a program that provides local fiscal assistance to support K-12 education. 

 

18 U.S. General Accounting Office, Federal Grants: Design Improvements Could Help Federal 

Resources Go Further, GAO/AIMD-97-7 (Washington, D.C.: Dec. 18, 1996). 

19 National Conference of State Legislatures, State Budget Gaps Shrink, NCSL Survey Finds, 

http://www.ncsl.org/programs/press/2004/040428.htm (Denver: April 28, 2004). 
Page 12 GAO-04-736R Temporary State Fiscal Relief

However, as we cited previously, budget decisions are typically based upon total 

resources available to a government and once funds from different sources are 

commingled for budgeting purposes, it is difficult to verify the source of the dollars 

that fund an expenditure category or specific expenditures. Of the states we 

contacted, only Washington budget officials indicated they had allocated a portion of 

their fiscal relief funds directly to localities for use at their own discretion. Budget 

officials informed us that about $10 million of their $200 million was allocated to 

some localities for unrestricted use. 

Table 2 provides a brief summary of state budget officials’ responses to our questions 

about the timing of fiscal relief funds. 

Table 2: State Budget Timing 

State State budget cycle 

and 

fiscal year 

Legislative approval 

of the state fiscal year 

2004 budget 

State fiscal year in which 

relief funds were used 

Alabama 

Annual 

October 1 – Sept. 30 September 2003 2003 and 2004 

Colorado 

Annual 

July 1 – June 30 April 2003 2004 and future 

Illinois 

Annual 

July 1 – June 30 May 2003 2004 

Louisiana 

Annual 

July 1 – June 30 June 2003 2003 and 2004 

Maryland 

Annual 

July 1 – June 30 April 2003 2003 and 2004 

Massachusetts 

Annual 

July 1 – June 30 June 2003 2004 and future 

New Jersey 

Annual 

July 1 – June 30 July 2003 2003 and future 

New Mexico 

Annual 

July 1 – June 30 March 2003 2004 

New York 

Annual 

April 1 –March 31 May 2003 2004 

North Dakota 

Biennial 

July 1 – June 30 April 2003 Not budgeted yet 

Ohio 

Biennial 

July 1 – June 30 June 2003 2003 and 2004 

Washington 

Biennial 

July 1 – June 30 June 2003 2004 and 2005 

Source: National Association of State Budget Officials (for state budget cycles and fiscal years) and 

interviews with state budget officials. 

Note: Massachusetts officials indicated the date the Governor approved the budget. 

Concluding Observations 

The $10 billion provided to states by the Jobs and Growth Tax Relief Reconciliation 

Act of 2003 can be assessed from two perspectives–whether it provided fiscal 

stimulus that contributed to the nation’s economic recovery and whether it helped 

states address budgetary shortfalls. It is too soon to fully assess the complete 

impacts of these payments. However, several observations are in order. 
Page 13 GAO-04-736R Temporary State Fiscal Relief

• The first fiscal relief payments were distributed to states when the economy 

was beginning to expand as measured by GDP growth. Consequently, it is 

doubtful that these payments were ideally timed to achieve their greatest 

possible economic stimulus. 

• Employment growth lagged behind the economic recovery measured by GDP 

and state income and sale tax receipts are closely linked to employment levels. 

From the start of the recovery to receipt of the first fiscal relief payment 

overall, nonfarm employment continued to decline and therefore the fiscal 

relief payment likely helped resolve ongoing budgetary problems. 

From an economic perspective, the allocation of relief payments among the states 

was less than optimal. The magnitude and timing of cyclical downturns in the 

economy affect states unevenly. Further, due to variations in their underlying fiscal 

capacities, states differ in their ability to weather economic downturns. Ideally, 

countercyclical fiscal assistance should take into account when and how severely 

states are effected by a recession and their fiscal capacities. Failure to take these 

differences in account reduces the effectiveness of such assistance in terms of 

facilitating economic recovery or in moderating fiscal distress at the state level. 

Even if countercyclical assistance was well timed and targeted, its provision could 

have adverse consequences for how states manage their finances. Prior to the recent 

recession many states put away reserves which they were able to draw upon in order 

to help meet revenue shortfalls. However, several states put away little or no 

reserves. If states now believe that in response to any future recession the federal 

government will again provide unrestricted fiscal assistance, they could be less apt to 

fund budgetary reserves. 

Agency Comments 

We provided segments of this draft report to the state agency officials we interviewed 

and incorporated their comments in the report as appropriate. 

Scope and Methodology 

We used findings from our and other reports on unrestricted fiscal aid to describe the 

known potential impacts of such funds on the fiscal behavior of states. We also 

obtained data on the distribution of fiscal relief funds from the Department of the 

Treasury and compared this information to the selected indicators of state fiscal 

circumstances. We identified these indicators based on our and other reports on 

grant design. 

Our selection of 12 states for this report was based in part on the indicators for fiscal 

capacity and impact of the recession, as well as some consideration of state 

population, geography, and fiscal relief minimums. However, this selection of states 

is not meant to be representative of the entire population and may not be 
Page 14 GAO-04-736R Temporary State Fiscal Relief

extrapolated to all the states. We discussed the use of fiscal relief funds with senior 

budget officials from the following state offices: 

• Alabama Executive Budget Office 

• Colorado Joint Budget Committee and the Office of State Planning and 

Budgeting 

• Illinois Governor’s Office of Management and Budget 

• Louisiana Office of Planning and Budget 

• Maryland Department of Budget and Management 

• Massachusetts Executive Office for Administration and Finance 

• New Jersey Office of Legislative Services and the Office of Management and 

Budget 

• New Mexico Legislative Finance Committee and the Department of Finance 

and Administration, Budget Division 

• New York State Division of the Budget 

• North Dakota Office of Management and Budget 

• Ohio Office of Budget and Management and the Legislative Service 

Commission 

• Washington Office of Financial Management, Budget Division 

We conducted our review from February to April 2004 in accordance with generally 

accepted government auditing standards. 

- - - - 

As arranged with your office, unless you publicly announce its contents earlier, we 

plan no further distribution of this report until 30 days from its issue date. At that 

time, we will send copies of this report to the Chairmen and Ranking Minority 

Members of the Senate Committee on Finance, House Committee on the Budget, and 

House Ways and Means Committee. We will also make copies available to 

appropriate congressional committees and to other interested parties on request. In 

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If you or your staff have any questions about this report, please contact me at 

(202) 512-6737 (daltonp@gao.gov) or Michael Springer at (202) 512-7035 

(springerm@gao.gov). Jack Burriesci, Keith Slade, Robert Dinkelmeyer, and Jerry 

Fastrup made key contributions to this report. 

Sincerely yours, 

Patricia A. Dalton 

Director, Strategic Issues 

Enclosures 
Page 15 GAO-04-736R Temporary State Fiscal Relief

Enclosure 1

Table 4: Percentage change in Nonfarm Employment, March 2001 through November 2001. 

State Percentage change State Percentage change 

Alabama -1.2% Nevada -1.7%

Alaska 1.0% New Hampshire -1.7%

Arizona -1.2% New Jersey 0.1%

Arkansas -1.0% New Mexico 0.2%

California -1.7% New York -2.4%

Colorado -2.4% North Carolina -2.5%

Connecticut -0.4% North Dakota -0.4%

Delaware -2.2% Ohio -1.9%

District of Columbia 0.9% Oklahoma -0.5%

Florida -0.4% Oregon -2.4%

Georgia -2.0% Pennsylvania -1.2%

Hawaii -2.0% Rhode Island -1.0%

Idaho -1.3% South Carolina -1.7%

Illinois -2.0% South Dakota -0.3%

Indiana -1.9% Tennessee -1.9%

Iowa -1.5% Texas -1.1%

Kansas -0.7% Utah -1.0%

Kentucky -1.4% Vermont -0.4%

Louisiana -1.0% Virginia -1.2%

Maine -0.7% Washington -2.0%

Maryland -0.1% West Virginia -0.5%

Massachusetts -2.5% Wisconsin -1.8%

Michigan -2.2% Wyoming 1.3%

Minnesota -1.2% American Samoa n/a

Mississippi -1.1% Guam n/a

Missouri -1.2% N. Mariana Islands n/a

Montana -0.3% Puerto Rico n/a

Nebraska 0.3% Virgin Islands n/a

United States -1.5%

Source: GAO analysis of BLS data.

Note: BLS employment data are not available for the commonwealths and territories. Percentage 

change in nonfarm employment was calculated for the NBER identified period of the recession, 

March 2001 to November 2001. 
Page 16 GAO-04-736R Temporary State Fiscal Relief

Enclosure 2

Table 5: Gross State Product (GSP) Per Capita, 2001. 

State GSP per capita State GSP per capita

Alabama $27,319 Nevada $39,645

Alaska $45,589 New Hampshire $38,181

Arizona $31,319 New Jersey $43,424

Arkansas $25,403 New Mexico $30,470

California $40,130 New York $43,553

Colorado $40,400 North Carolina $34,241

Connecticut $48,792 North Dakota $29,594

Delaware $51,696 Ohio $32,917

District of Columbia $112,679 Oklahoma $27,199

Florida $30,752 Oregon $35,089

Georgia $36,631 Pennsylvania $33,252

Hawaii $36,078 Rhode Island $35,236

Idaho $28,521 South Carolina $28,715

Illinois $38,291 South Dakota $32,127

Indiana $31,234 Tennessee $32,080

Iowa $31,077 Texas $36,633

Kansas $32,434 Utah $31,529

Kentucky $29,756 Vermont $31,452

Louisiana $33,273 Virginia $38,577

Maine $29,374 Washington $37,826

Maryland $36,818 West Virginia $23,429

Massachusetts $45,330 Wisconsin $33,066

Michigan $32,245 Wyoming $41,350

Minnesota $38,226 American Samoa n/a

Mississippi $23,597 Guam n/a

Missouri $32,437 N. Mariana Islands n/a

Montana $25,089 Puerto Rico n/a

Nebraska $33,289 Virgin Islands n/a

 

United States $35,492

Source: GAO analysis of Bureau of Economic Analysis (BEA) and Census data. 

Note: BEA gross state product data are not available for the commonwealths and territories. 

(450299) 
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