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.

Is a Good Normative Model of Public Spending Run Backward a Good Positive Model?

“…There is lot of financial analysis left to do here (see Clair 2012;Hendrick and Crawford 2014;Marlowe 2012;Srithongrung and Kriz 2014). We have merely scratched the surface.…”

“…If the problem is defined, whether implicitly or explicitly, as stabilizing spending over time, the key issue to be dealt with is revenue growth, which is an inherently dynamic, stochastic process. That is the case whether the jurisdictions under consideration are nation states (Robinson, Torvik, and Verdier 2015), American state governments (Crain 2003;Holcombe and Sobel 1997;Kwak 2014Kwak , 2016, or local governments (Hendrick and Crawford 2014;Kriz 2002Kriz , 2015.…”

Does the Charter Form Improve the Fiscal Health of Counties?

“…Th e fi rst means by which a charter can infl uence a county's fi scal health is through an increase in its FPS. FPS refers to the set of parameters or internal arrangements within which government offi cials establish, amend, and implement fi nancial policy (Brien 2014;Hendrick and Crawford 2014;Pagano and Hoene 2010). While local governments have the opportunity to establish their own service programs and revenue policies, these governments are constrained by the state in their capacity to change them.…”

“…While local governments have the opportunity to establish their own service programs and revenue policies, these governments are constrained by the state in their capacity to change them. However, included in a government's FPS is the range of options available to it as a means to address fi nancial problems (Hendrick and Crawford 2014). Heller characterized this relationship as "the availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of government's fi nancial position" (2005,3).…”

Budgeting for Fiscal Uncertainty and Bias: A Federal Process Proposal

“…The absence of appealing financing alternatives has prompted states to save financial resources in "rainy day" or budget stabilization funds during normal times for use during economic slowdowns. 7 A robust finding of research in public budgeting is that state and local budget stabilization funds, in conjunction with other measures such as drawing down general fund balances, are useful in enabling governments to continue service levels during recessions without increasing tax rates or issuing general obligation debt (Bohn and Inman 1996;Sobel and Holcombe 1996;Douglas and Gaddie 2002;Wagner and Elder 2005;Marlowe 2005;Hou 2006;Hou and Moynihan 2008;Hou and Duncombe 2008;Hendrick and Crawford 2014). State budget stabilization funds could be more effective, however, if the amounts reserved were more closely related to the variance of fiscal shocks or revenue volatility and, more generally, if they were larger (Joyce 2001;Wagner and Elder 2007).…”