Budget Variance, Slack Resources, and Municipal Expenditures

Abstract

I develop and test a new explanation for the variation in slack resource levels. That explanation is based on the dynamic, or the claim that government budgets expand because past overspending is impounded in future budgeted expenditures. I test the salience of the ratcheting explanation with data from several hundred Minnesota cities from 1994-2007. The findings generally support the ratcheting explanation. I then argue that slack resources afford local governments the opportunity to slow the ratcheting process. That is, having slack available frees a city from having to build that slack into future budgeted expenditures, and from having to manage the budget execution process in ways that result in overspending. To test this I estimated the ratcheting effect for groups of cities defined by their slack resource levels. The results provide some, although not decisive support for this explanation. Consistent with this story, I find that the ratcheting effect is present for cities with low levels of total general fund balance and not present for those with high levels. However, findings for other types of slack suggest the opposite - that high slack levels actually increase the rate at which past overspending is impounded in future budgeted expenditures.