Association for Public Policy Analysis & Management

Government fiscal slack is a salient issue relevant to budgetary transparency and the efficient management of public resources. Compared to states, local governments possess less fiscal autonomy because they are confronted with more stringent constraints from higher levels of government. Local governments’ revenue resources are usually concentrated and intergovernmental transfers comprise a large portion of those resources. The fiscal environment dynamics in past decades increased the vulnerability and volatility of local governments’ revenues. Additionally, local government fiscal slack size is usually large.

This research investigates the effect of government internal professional management on government fiscal slack size. This research constructs a three-dimensional framework to analyze local government fiscal slack size determinants, including the economic condition, citizens’ political preference, and government internal professional management. Factors of the three dimensions work interactively to determine local government fiscal slack size.

The research samples are an unbalanced panel of Massachusetts municipalities in fiscal years 1993-2011. Data are derived from the department of revenue of the Massachusetts state government and five municipal structure surveys conducted by the Internal City/County Management Association (ICMA). This research proposes appropriate indicators for the three dimensions. Unemployment rate is used to measure the external economic condition and the anti-tax sentiment is used to measure citizens’ political preferences. This research investigates the structural characteristics of Massachusetts municipalities to construct an index to measure the internal professional management of municipalities. The most important structural characteristics include the mayor-council or council-manager statutory form, the existence of a chief administrative officer (CAO), the allocation of budget developing authority, and so forth.

The empirical results from multiplicative interaction regression models with municipality and year fixed effects reveal that the government internal professional management can modify the positive effect of unemployment rate and negative effect of citizens’ anti-tax sentiment on government fiscal slack size. Moreover, external economic condition and citizens’ anti-tax sentiment can interact to modify the influence of municipal government internal professional management. An interesting finding is that municipal governments maintain similar levels of fiscal slack when government internal management is most professional, regardless of the external economic and political environment.