Municipal Fiscal Policy Space and Fiscal Structure: Tools for Managing Spending Volatility

Abstract

In this research, we examine the impact of municipal governments' internal fiscal structure and external fiscal policy space on operational spending volatility and fund balances. We test our model using a system of two equations that is estimated with panel data consisting of 265 municipalities in the Chicago metropolitan region from 1997 to 2009. We find that these governments are managing spending volatility using tools available in both dimensions and that the fund balance is a critical tool for this purpose. We also find that the impact of a stringent versus relaxed set of options (home rule) for managing this financial problem is likely to be more complex than what is represented in prior research.