Forecast Bias and Fiscal Slack Accumulation in School Districts

Abstract

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.

The Role Of Cash Planning In Budget Absorption: Perception Testing

“…The results of the analysis show that budget quality variables have a positive and significant influence on budget absorption performance variables, namely the better the quality of the budget, the higher the budget absorption performance, and vice versa. The results of this research are in line with his research by (Barrett et al, 2019) which states that planning factors have a significant effect on the causes of budget accumulation.…”

Toward a Theory of Fiscal Slack

“…Similar to Gore () and Thompson et al (), we also expect that governments with more volatile revenues will hold higher reserves as a hedge against a relatively more uncertain fiscal future (H2). Unlike H1, which tests if the reserves are used for actual budget stabilization, this hypothesis tests if government saving is strategic (see also Barrett et al ). By the same logic, cities prone to extreme events, such as, for example, natural disasters, should encourage governments to store higher reserves (Kavanagh ).…”

“…Between 2005 and 2018, we have identified 20 empirical studies on the determinants and use of local fiscal reserves in the United States. Ten studies have been published at the city level (note the chronological listing: Marlowe ; Hendrick ; Gianakis and Snow ; Gore ; Marlowe ; Snow, Gianakis, and Haughton ; Hand, Pierson, and Thompson ; Arapis and Reitano ; Thompson et al ; Su and Hildreth ); six papers at the county level (Stewart , ; Wang and Hou ; Stewart, Hildreth, and Antwi‐Boasiako ; Stewart, Hamman, and Pink‐Harper ; Guo and Wang ); and four papers at the level of school districts (Ványolós ; Duncombe and Hou ; Arapis, Reitano, and Bruck ; Barrett et al ). Twelve, or 60 percent, of these studies, have been published in Public Budgeting & Finance .…”

Fiscal Shocks, Budgetary Pressures, and Public Education Expenditure Stabilization

“…The existing literature on how school districts accumulate reserves (propositions 1 to 3 in prior subsection) is sparse (Barrett et al, 2019;Duncombe and Hou, 2014;Hulpke and Watne, 1976;Kim and Ryu, 2017) 2 . The existing studies provide evidence that financial and socioeconomic characteristics, such as school district revenues, household income, and enrollment, are important factors influencing reserves accumulation.…”

“…The literature on fiscal reserves focuses mainly on U.S. subnational governments (Gorina et al, 2019), and there is a limited but growing knowledge about how U.S. educational administrators may accumulate and withdraw from their fiscal reserves (Duncombe and Hou, 2014). From the few existing studies, most focus on the accumulation of fiscal reserves, which is also referred to as fiscal slack in the context of U.S. school districts (e.g., Barrett et al, 2019;Duncombe and Hou, 2014). In contrast, 3 only one study that finds that U.S. school districts actually drained fiscal reserves to mitigate expenditure cuts during the Great Recession (Arapis et al, 2017).…”