Fiscal Slack Research Articles

Local Fiscal Response to State Preemption: A Case Study of Massachusetts’ Proposition 2½ Tax Referendum

Abstract State preemption in the form of tax and expenditure limits significantly limits local revenue-raising capacity. To gain insights into how local governments respond to fiscal preemption through direct democracy, this study focuses on tax referenda that override the levy limit set by Proposition 2½ in Massachusetts. Analyzing a sample of 320 municipalities from 2010 to 2021, we investigate the influence of fiscal slack resources and tax burden on the levy limit overrides and exclusions. Our analysis breaks down the tax referendum process into two stages, highlighting the involvement of different decision-makers: local officials proposing the referendum and individual voters approving it. We find that municipalities are motivated to seek tax referenda due to diminishing fiscal slack resources, yet the tax burden on residents can discourage such pursuits.

Horizontal and vertical interactions in local fiscal slack: a spatial analysis of local governments in New York state

ABSTRACT With the recurring economic crises, the literature on fiscal savings behaviour has expanded its scope from state governments relying on budget stabilisation or rain-day funds to local governments mainly using general fund balances. While many studies have explored the determinants of local savings behaviour, few have taken fiscal interactions among local governments into account. To fill out this gap, this study explores whether spatial interdependence in fiscal slack exists horizontally between counties and vertically across counties and municipalities through the unreserved fund balance of local governments in New York State from 1996 to 2016. The empirical findings indicate that horizontal interdependence in fiscal slack among county governments exists in the short-run, while vertical interdependence is observed across counties and municipalities in the long-run.

Explaining Sustainability Innovation in City Governments: Innovation Mechanisms and Discretion Types in Multi-Level Governance

While existing studies have examined the separate effects of local governments’ internal conditions and external environment on local innovation, few have paid attention to their interactive effects. This study examines whether state-level rules regarding local discretion moderate the effects of city governments’ slack resources and learning, using local sustainability innovation as an example. We distinguish two types of discretion (fiscal and statutory) granted by state governments. Applying a difference-in-differences (DDD) approach with a longitudinal dataset of 238 U.S. cities, we find that fiscal discretion strengthens the positive effect of fiscal slack while statutory discretion enhances the positive effect of learning. The findings uncover the complex interactions between multilevel institutional arrangements and local innovation mechanisms.

Normalized Austerity in Germany

There seems to be broad consensus that the German fiscal state has witnessed a ‘golden decade’ after the financial crisis, symbolized by rapidly growing tax revenues and the ‘Black Zero’ fiscal policy, i. e. balanced public budgets. The paper scrutinizes this ‘golden decade’ through a geographically sensitized austerity lens, asking in what ways German state finance has been characterized by conjunctural and normalized austerity. The paper extends austerity frameworks developed since the 2008 financial crisis with recent innovations in fiscal geography, critically adding to established literatures through a German perspective. The paper shows that researchers need to pay closer attention to both the interscalar and the intertemporal dimensions of the fiscal state and austerity policies. Empirically, the paper scrutinizes multiscalar fiscal processes in the 2010 s in Bund and Bundesländer. It does so through a methodological framework around the concept of fiscal slack, using fiscal indicators like the Fiscal Democracy Index or the tax interest quota. This perspective reveals that the ‘golden’ 2010s were characterized by several austere and contra-austere tendencies that interlocked in spatially uneven patterns. On the one hand, the multiscalar German fiscal state in total - and especially the Bund and the fiscally potent Bundesländer - gained fiscal slack, thereby moving beyond austerity. On the other hand, the Bundesländer that traditionally had to struggle with chronic fiscal crisis, continued on a trajectory of normalized austerity.

Impact of the Accumulation Rule of Fiscal Slack and Mimicking Behavior on Local Public Finance

Impact of the Accumulation Rule of Fiscal Slack and Mimicking Behavior on Local Public Finance

Learning from the Joneses: The professional learning effect of regional councils of government on municipal fiscal slack in suburban Chicago

AbstractFiscal slack scholars have sought to identify the primary generators of unreserved fund balance (UFB) within local governments, including economic, organizational, demographic, institutional, and political factors. Guo and Wang extend this endeavor spatially; however, geography may mask the professional learning impact of subregional councils of governments (COGs). This study examines 265 Chicago suburban municipalities to reveal through a pairing approach that municipalities who belong to the same subregional COG generally have more similar UFB levels, independent of geographical proximity. Policymakers can therefore utilize COGs when making decisions regarding a municipality's most vital resource for strategic investments and fiscal stress.

Fiscal Slack, Rule Constraints, and Government Corruption

Abstract This article examines the effect of fiscal slack on government corruption using the US states in the period from 1998 to 2012 as a research sample. Fiscal slack in the US states is commonly referred to as “rainy day funds” (RDFs), which are intended as countercyclical reserve funds for government‐wide purposes. Theoretically, bureaucracy models predict that fiscal slack might catalyze the embezzlement or misuse behaviors of bureaucrats, who are considered to be budget maximizers. However, formally established and rules‐bound RDFs may function as a “strongbox” that curbs officials’ discretionary power, reduces uncertainty in fiscal slack management, and ultimately restrains embezzlement and misuse behaviors. Empirically, we use the incidences and durations of natural hazards as instrumental variables for RDF balances to address the potential endogeneity problems. We find that state RDFs help reduce government corruption, especially when they are regulated by relatively looser deposit rules and stricter withdrawal rules. Evidence for Practice State RDFs function as a “strongbox” for governments’ unspent budgetary resources and negatively affect the degree of government corruption. A one‐standard‐deviation increase in per capita RDF balances reduces corruption‐related convicted officials per million population by approximately 3 or, measured in an alternative way, reduces corruption‐related convicted officials per thousand government employees by approximately 44–50. The efficacy of state RDFs in curbing government corruption is contingent on the associated rules of operation. Specifically, RDFs bound by relatively looser deposit rules and stricter withdrawal rules reduce government corruption to a greater extent.

Exploring local government fiscal slack in a political-budgetary-managerial framework

ABSTRACT This research examines U.S. local governments’ fiscal slack in a framework involving the political, budgetary, and managerial dimensions, each of which is operationalized by an indicator. We use an unbalanced panel of Massachusetts municipalities as the research sample and collect data from the state government and through five rounds of local government surveys. We find that voters’ pro-spending preferences negatively affect the size of local government fiscal slack and that governments’ budgetary gaps exert a positive impact. Moreover, the effects of voters’ pro-spending preferences and governments’ budgetary gaps are moderated by a professional managerial structure inside government.

Managing Fiscal Volatility: An Empirical Analysis of California County Governments’ Saving Behavior

The increase in the importance of countercyclical behavior has expanded the research on fiscal saving behavior to local governments. In particular, the Great Recession has shown that local governments are not immune to economic shocks, spurring interest in local savings behavior. County governments are particularly vulnerable to negative economic shocks, as they rely more on intergovernmental revenues. With a focus on the determinants of fiscal slack, we empirically examined the relationship between tax revenue volatility and unassigned fund balance in 57 California counties over the period of 2004 to 2014. Employing spatial regression models, our empirical analysis revealed that revenue volatility is positively associated with general unassigned fund balance in California counties, and revenue diversification has partially positive effects on the fund balance. We infer that tax revenue volatility threatens the stabilized delivery of local services, which suggests that local governments should look to the factors that potentially affect revenue stability to improve their capacity for financial management. The spillover effects from the findings suggest that spatial effects need to be taken into account in analyzing the determinants of local fiscal slack.

Toward a Theory of Fiscal Slack

Though the fiscal slack literature has advanced over the past decade, more research is needed for a systematic understanding of the determinants and uses of fiscal reserves at the local level. This paper reviews theory and empirical evidence on the determinants of municipal fiscal reserves offers a conceptual framework for analyzing fiscal reserves accumulation and tests a series of hypotheses using a panel of 2007–2012 financial data for 145 U.S. cities from 21 states. Generalized least squares models show that unassigned general fund balances and unrestricted net assets are positively associated with general fund surpluses in the previous year and with local household incomes, while not being related to measures of fiscal risk, revenue effort, and voter characteristics. Overall, the findings suggest a relatively stronger influence of the capacity to save than the need to save on local fiscal reserves.

Economic resilience after the Great Recession: an examination of unreserved fund balance in Michigan counties

ABSTRACT This paper examines fiscal slack, in the form of unreserved fund balance, as a tool used by local governments to enhance economic resilience. It adapts ecological, engineering, and organisational definitions of economic resilience and investigate their relevance to local financial management in the United States after the Great Recession in 2008. Using group-based trajectory modelling, we identify different strategies of fund balances used by Michigan counties. The change of fund balance does not delineate any pattern theorised by the resilience concepts. We also find different factors that motivate local officials to manage their fund balances differently. The study suggests a nuanced understanding of fiscal slack used by local governments for economic resilience that goes beyond unreserved fund balance.

Fiscal slack or environmental pressures: which matters more for technological innovation assimilation? A configurational approach

Prior studies suggest that fiscal slack may positively affect technological innovation in the public sector but yield inconsistency between theoretical expectations and empirical findings. To address this research gap, this study develops a configurational explanation combining fiscal slack and environmental pressures by employing fs-QCA in the context of Chinese provincial governments’ online public service provision. The findings reveal that the role of fiscal slack is environmentally dependent on explaining technological innovation and that environmental pressures seem to be more important. That is, fiscal slack is likely irrelevant to a high degree of technological innovation assimilation, while the demanding environments of multiple environmental pressures matter. Relative fiscal scarcity may be somewhat relevant to a low degree of technological innovation assimilation only when combined with a more relaxed environment. Several theoretical and practical implications are discussed.

Forecast Bias and Fiscal Slack Accumulation in School Districts

The years during and after the Great Recession constrained revenue across all levels of government. Revenue shortfalls in states decreased intergovernmental transfers, which compounded the plight of local governments already facing large declines in own-source property taxes. Among the many casualties of this economic downturn were school districts, which responded by implementing a variety of financial management strategies to continue providing educational service provision to more than 50 million students across the United States. One strategy school districts continue to utilize is countercyclical stabilization of expenditures with fiscal slack, which raises an important—and, to date, largely unanswered—question of how school districts manage to accumulate fiscal slack, given both volatility and decreases in revenues in the years following the Great Recession. One approach is to use implicit slack from biased forecasts to generate explicit fiscal slack in the unassigned fund balance. This article provides evidence for this strategy by empirically testing it with data from Kentucky school districts from school years 2001-2002 to 2013-2014. The findings indicate that school districts are engaged in strategic planning with implicit fiscal slack, which allows them to accumulate explicit fiscal slack, a cornerstone of prudent financial management that can provide budgetary flexibility during financial uncertainty. The relationship between implicit and explicit fiscal slack is heterogeneous over the business cycle, providing further evidence of strategic planning. Practitioners can also use the findings of this article to support the strategic use of forecasts to help accumulate unassigned fund balance, particularly in the years after the Great Recession.

Fiscal slack, budget shocks, and performance in public organizations: evidence from public schools

ABSTRACTSome scholars equate fiscal slack with organizational inefficiency, while others argue that it is a useful environmental buffer. This study takes the first step in reconciling these opposing views, by classifying fiscal slack as absorbed and unabsorbed slack in public organizations. In a sample of 1,000 Texas public school districts over 17 years, fund balance (unabsorbed fiscal slack) does not seem to affect student performance, unless there is a major downward budget shock. In the absence of a negative budget shock, non-instructional spending per pupil (absorbed fiscal slack) has a negative impact on performance change in an average school district, but no meaningful impact on student performance during a major budget shock.

The Effects of Political and Fiscal Incentives on Local Government Behavior: An Analysis of Fiscal Slack in China

ABSTRACTThis study examines the determinants of fiscal slack from the perspective of Chinese local government officials. Given China's rapid economic growth over the past 30-plus years, Chinese local governments reportedly hold huge slack resources that attract public scrutiny. In an effort to improve their fiscal performance, some localities recently established budget stabilization funds, following a top-down initiative. However, it remains unclear to what extent fiscal slack has accumulated and which factors affect slack resource levels of Chinese local governments. By employing a panel dataset (249 prefecture-level cities, 1999–2009), this study finds that political and fiscal factors exert significant influence over local officials’ decisions about slack resource levels. The findings of the study bear implications for establishing fiscal rules and improving the performance of sub-national governments in China and other countries.

Local Government Amalgamation and Financial Sustainability: The Case of England and Wales

Proponents of local government amalgamation in the UK argue that it improves the financial sustainability of organizations by reducing overall expenditure levels and improving fiscal health. However, critics suggest that structural change is beset with disruptive and unanticipated costs that can take years to overcome. This paper reviews what is already known about these issues in the English and Welsh contexts, before going on to analyze whether the amalgamations of several English counties undertaken in 2009 have led to improved financial sustainability. This analysis suggests that the costs of restructuring have not been recouped by the amalgamated governments, and that those governments perform poorly against indicators of fiscal slack and balance. The implications of these findings are discussed.

The Impact of Decentralization on Subnational Government Fiscal Slack in Indonesia

Since Indonesia began implementing its decentralization program in 2001, subnational unspent balances have grown rapidly and have reached levels that many officials find unreasonably high. But the extent to which subnational government reserves are excessive, in general, is not obvious. A not implausible decrease in the price of oil would reduce transfers to subnationals significantly and, if sustained, could possibly eliminate reserves in a relatively short time. Central government should not take any immediate action to reduce subnational slack resources directly but should instead focus on removing the underlying causes of such.

From Local Experiments to National Policy: The Origins of China's Distinctive Policy Process

China's national policy formulation undergone economic transformation and shaped the making of policies in promotion of private business and stock market regulation. China's distinctive process of central-local interaction in policy generation is one of its core strengths in reforming its economy.

Fiscal Slack and Counter‐Cyclical Expenditure Stabilization: A First Look at the Local Level

There is a rich literature on how state governments use slack fiscal resources—most often in the form of rainy day funds and budget stabilization funds—to minimize the effect of economic downturns. This paper presents the first known examination of whether slack resources have the same counter‐cyclical effects at the local level. It uses a panel data set to determine whether one particular form of local fiscal slack, general fund balance, stabilizes current annual expenditures among a sample of 103 Minnesota cities from 1990 to 2000. The findings suggest different fund balance portions have marginal but nonetheless important effects on expenditures.

Government Policy, the Local State, and Gentrification: The Case of Prenzlauer Berg (Berlin), Germany

ABSTRACT:Since reunification, Berlin planners have sought to find a niche for a post-industrial New Berlin integrated into Europe. While great scholarly attention has focused on the grand projects that have dominated the reconstruction of the city’s government and downtown commercial districts, only lesser attention has been paid to the city’s housing and social policies. This article seeks to identify the extent to which Berlin planners have permitted unabated market-led redevelopment to proceed and to what extent local policy has sought more balanced redevelopment and the “European city” ideal. The article looks at gentrifying Prenzlauer Berg, in eastern Berlin, to assess the extent to which public policy measures can be expected to constrain and temper, and not just promote, gentrification. The role played by community development organizations in mediating development is observed. The impact of the city’s fiscal crisis and slack housing market are also noted.