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Legislative Term Limits and Fiscal Uncertainty

As the Michigan Legislature's budget deadline neared in the summer of 2007 without any hint of an impending deal to cope with the immediate budget deficit or the long term 'structural deficit', many politicians began pointing fingers. However, instead of blaming the usual suspects' party leaders and the governor - a surprising scapegoat for the budget impasse emerged: legislative term limits. Both politicians and scholars have argued that term limited legislatures will be composed of less experienced and less knowledgeable legislators. In addition, term limits may undermine the ability of legislators to build relationships with one another, especially across party lines. These effects of term limits may make brokering deals and building consensus, especially on complicated issues like budgets and taxes, much more difficult. This study examines whether term limits impede the ability of legislators to effectively set fiscal policy by analyzing state bond ratings from 1996 to 2006. Bond ratings serve as an effective indicator of a state's fiscal performance, gauging the risk and uncertainty that investors face when buying state bonds. In addition, good bond ratings can also be seen as a policy end in itself. Results from a two-stage least squares model, which accounts for the endogeneity of legislative term limits, suggests that term limits negatively impact a state's fiscal performance and lead to lower bond ratings.