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

Abstract

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.

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

“…Intuitively, fiscal slack generally increases during good fiscal times when operating surpluses are higher and decreases during downturns when revenues lessen; however, this may manifest itself in less fungible forms of slack such as capital and enterprise spending instead of more liquid “rainy day funds” or UFB (Dougherty & Song, 2003; Hendrick, 2004, 2006; Levine et al, 1981; Marlowe, 2012). Dependence on more volatile revenues, such as sales tax and intergovernmental transfers, require higher levels of UFB to act as a buffer; while municipalities with more diversified, stable revenue streams maintain less UFB (Gianakis & Snow, 2007; Hendrick, 2004, 2006; Hendrick & Crawford, 2014; Shon & Kwak, 2020; Su, 2019; Wang & Hou, 2012). UFB levels are lower in organizations that maintain other forms of fiscal slack (e.g., capital and enterprise spending) and those that avoid higher amounts of long‐term debt obligations and/or overreliance on personnel costs (Hendrick, 2004, 2006; Hendrick & Crawford, 2014; Stewart, 2009; Su, 2019; Wang & Hou, 2012).…”

“…UFB levels are lower in organizations that maintain other forms of fiscal slack (e.g., capital and enterprise spending) and those that avoid higher amounts of long‐term debt obligations and/or overreliance on personnel costs (Hendrick, 2004, 2006; Hendrick & Crawford, 2014; Stewart, 2009; Su, 2019; Wang & Hou, 2012). A more complex, opaque municipal fiscal structure is also associated with lower levels of UFB as fiscal slack is stored beyond the spotlight shining upon the general fund (Gorina et al, 2019; Shon & Kwak, 2020).…”

“…Also, more income per capita within the community has been associated with increased UFB (Hendrick & Crawford, 2014). Conversely, a large number of spending demands can reduce the revenue available to UFB, lessening its level; these include a greater proportion of residential properties, distance from a center city, larger and/or unstable population levels (and, by extension, larger organization size), higher birth rates, higher proportions of senior and youth populations, and higher unemployment (Gianakis & Snow, 2007; Gorina et al, 2019; Hendrick, 2006; Hendrick & Crawford, 2014; Shon & Kwak, 2020; Stewart, 2009; Wang & Hou, 2012). Ultimately, wealthier communities with lower spending needs generate the highest levels of UFB (Hendrick, 2006), but the size of the government is one of the biggest determinants of UFB.…”