Unintended Consequences of Fiscal Governance Rules on the Long‐Term Financial Position of State Governments

Fiscal governance rules are viewed as prudent tools that promote balanced budgets, lower tax burdens, and ensure modest use of long‐term debt. However, these rules can create incentives that inadvertently worsen the government's long‐term financial position. Focusing on unfunded retiree benefits and long‐term debt, this study finds that states subject to political balanced‐budget requirements report higher unfunded pension benefit obligations and higher debt burdens. In contrast, anti‐deficit provisions and limits on taxing authority are associated with lower unfunded retirement benefits. Findings suggest fiscal rules can worsen a government's long‐term financial position in ways not visible in the operating budget.