Association for Public Policy Analysis & Management

The general fund is the most important and largest fund used to finance the general operations of state and local governments. As such, the general fund expenditures should be stable, and not subject to fluctuations of government revenues over business cycles. At the state level, scholars find that budget stabilization funds can stabilize expenditures, especially general fund expenditures in downturn years.

While a few states allow local governments to create and accumulate resources in the budget stabilization funds (Gianankis and Snow, 2007), most local governments use unreversed fund balances, primarily in general fund, as their primary source of savings (Domcombe and Hou, 2014). The existing literature finds that fiscal structure factors affect general fund expenditure volatility, but has not examined the effects of legal, institutional and political factors on the volatility of general fund expenditure for cities nationwide. For example, Marlow (2005) and Wang and Hou (2012) report that fiscal slack resources in the form of unreserved general fund balances have little impact on stabilizing general fund expenditures for cities in Minnesota or counties in North Carolina. Hendrick (2014) finds that fund balance and revenue diversification have contributed to expenditure volatility for 265 municipalities in the Chicago metropolitan region.

There is a need for systematic examination on how institutional, fiscal, political, legal, and socioeconomic factors collectively affect general fund expenditure volatility at city level across states. This research intends to fill in this gap in the literature. The research applies the fiscal policy space (FPS) framework to explain general fund expenditure volatility using data of 100 large American cities from 1995 to 2012. The FPS framework encompasses cities’ economic base, political culture, service demands, institutional and legal context that constitute the environment within which municipal governments make fiscal decisions, and therefore limit, shape, or provide opportunities for fiscal policy tools to be made by municipal policy makers. The fiscal policy space framework provides a more comprehensive theoretical model for evaluating expenditure fluctuations for cities nationwide than what has been done in previous studies. For example, we will not only evaluate how such fiscal tools as unreserved general fund balance and revenue diversification would affect general fund expenditure volatility, but also examine the effects of local legal constraints (e.g., local TELs), political culture, and other institutional factors (e.g., fiscal decentralization). The empirical analysis will utilize the trend methodology and panel techniques to measure and explore general fund expenditure volatility for the 100 largest American cities from 1995 to 2012.

The objective is to contribute to the limited local public finance literature on this topic by focusing on the attributes of fiscal policy space framework and in particular the role of fiscal savings may play in stabilizing general fund expenditures. Overall, the research will provide a more comprehensive analysis of general fund expenditure volatility than has been done, and improve our understanding of how internal and external factors would affect municipal fiscal behaviors within their existing and constrained fiscal policy space.