Association for Public Policy Analysis & Management

There are numerous works, either academic or practitioner, on the impact of fiscal monitoring and intervention on financial performance of monitored local governments. However, very few of them examine these effects in a causal sense. This paper contributes to this literature by studying a fiscal monitoring and intervention system in Illinois. This program was implemented by Illinois State Board of Education (ISBE) and named “School District Financial Profile” (SDFP). Every fiscal year since 2003, SDFP calculates a total financial score for each school district based on fiscal data from their prior fiscal year annual financial reports. The calculation is determined using a weighted average score for five financial indicators: Fund Balance to Revenue Ratio (FBRR), Expenditure to Revenue Ratio (EXRV), Days Cash on Hand (DCOH), Percent of Short-Term Borrowing Ability Remaining (STB), and Percent of Long-Term Debt Margin Remaining (LTD). The total score is employed to provide an overview of school district finances, and to measure the fiscal health by placing each district into one of four categories. ISBE will monitor districts with the two worse designations (indicating more serious financial difficulties) tightly and provide intensive fiscal intervention and technical assistance.

In this paper, I use district-level administrative data from ISBE to examine the causal effect of state monitoring and intervention on financial performance of school districts. Instead of using difference-in-differences approach which has been mostly employed in studying this topic (e.g., Thompson, 2016, 2017; Spreen & Cheek, 2016), I design a RD framework by using the exogenous variation in State intervention generated by the cutoffs for each of the five financial indicators. Taking advantage of the design of SDFP and the high-quality data, this study is the first to use the natural thresholds of financial indicators to investigate how state intervention influences future fiscal performance of monitored school districts.

I begin by documenting the descriptive relationship between State intervention and school districts future fiscal health. I show that on average receiving intervention is associated with better future performance. However, OLS estimates are biased due to omitted variables and mean reversion. I next consider the causal effects of State intervention. I find that the magnitudes of RD estimates are small and precisely close to zero effects. These results are robust with different bandwidths on either side of the cutoff.

Surprisingly, I document statistically significant positive impacts on financial indicators reflecting long-run fiscal health in a relatively long term for districts with certain characteristics. Splitting by types of school districts, I find that elementary school districts witness significant gains in LTD three to four years since the intervention: the intervention increases the long-term debt capacity remaining by 14-15 percentage points more on average for districts just receiving the intervention, compared to those just not. Similarly, with respect to accrual basis school districts, State intervention leads to greater improvement in EXRV for treated districts relative to untreated: the intervention decreases the value of EXRV by 0.035-0.050 unit more on average for districts barely receiving the intervention.