Association for Public Policy Analysis & Management

Well-documented studies on fiscal slack have exclusively focused on state budget stabilization and rainy day funds. Like state governments, municipal governments have fiscal slacks which are accumulated in the unreserved fund balance during good times and are used to offset revenue declines during bad times. Unlike state governments, cities do not have separate funds such as rainy day fund to build reserves. Prior research on state fiscal slack resources have indicated that rainy day fund can ease financial crises and improve fiscal performance of state governments during the period of economic recessions (Sobel and Holcombe, 1996; Douglas and Gaddie, 2002; Poterba, 1994). However, there are very little empirical analyses about fiscal slack at the city level. In particular, little is known about the fiscal slack resources used by other large American cities and whether slack resources provide certain levels of flexibilities to municipal governments, especially how the state and city fiscal structures and the way in which state fiscal regimes do or do not create a fiscal, economic, political environment that makes it easy or difficult for cities to build reserves and use them with flexibilities.

Our research is intended to examine municipal fiscal slack within a newly developed Fiscal Policy Space (FPS) framework (Pagano and Hoene, 2010). The FPS is characterized by cities’ economic base, state and local fiscal structure, political culture, service demands, institutional and legal context that constitute the decision- making constraints on municipal governments, and limit, shape, or provide opportunities for policy choices (e.g., budget and service cut, property tax rate increases, and the use of slack resources) to be made by municipal policy makers. Our empirical analysis links the five attributes of fiscal policy space of municipalities and three measures of fiscal slack to explain the usage of fiscal slack resources by 100 large American cities from 1990s to 2010s. Specifically, this research is interested in exploring the revenue and expenditure decisions with a focus on fiscal slack at city level within a more or less constrained fiscal policy space.

This research estimates the empirical models for 100 large American cities using data from 1992 to 2012 (with five-year intervals) that correspond to exogenous shocks and one period of sustained growth (1997). We test the impact of variables from each attribute of fiscal policy space on three measures of fiscal slack, separately. The three measures of fiscal slack are (a) unreserved general fund balance as a percentage share of total general fund expenditure, (b) the percentage of capital expenditure of total expenditure and (c) general fund debt service expenditure as a percentage of total general fund expenditure. Among the FPS attributes, the state and city fiscal structures are particularly important because they provide or constrain fiscal autonomy and flexibilities to municipalities and hence determine the amount of fiscal reserves and policy choices that can be made by municipal government officials. Specifically, the empirical model will be estimated with the pooled data using fixed effects for years with robust standard errors.