Slack resources, state rules, and local stability: evidence from New York school districts

Abstract

ABSTRACT State-imposed rules often define an allowable level of local slack resources, presuming that states can guide towards an appropriate level. Some local governments, however, may circumvent rules, seeking to determine slack resources locally. These contrasting views remain underexplored in existing research. Using New York State’s school districts, we bridge this gap by examining the effect of slack resources on fiscal stability, taking districts’ rule compliance into consideration. Through the Heckman two-stage procedure, we find that compliant districts use slack resources counter-cyclically, while non-compliant ones do not. The results suggest that state guidance could bolster the slack resource-local stability link.