The Intergovernmental Model of Budget Stabilization

• In Event: Intergovernmental Relations and Policy-Making in Federal Systems

Abstract

Overview:
This study finds that when making difficult budget decisions on what service to stabilize, cities choose to fund service areas that receive significant intergovernmental aid. Practicality tramps politics when cities face difficult budget decisions.

Abstract:
Cities maintain reserves to stabilize spending during economic recessions. The study examines the stabilization effect of unreserved undesignated fund balance on major services offered by cities with a population of 50,000 or more. It examines these effects during and immediately after the Great Recession. We develop three hypotheses on municipal budgetary decision making. The political hypothesis suggests that local decision makers will be prioritize highly visible electoral issues such as crime and safety and will thus prioritize "maintenance" services such as pol ice, fire protection, and waste collection. The inter-governmental hypothesis suggests that local decision makers will prioritize services that receive intergovernmental aid such as highways and community development. Finally, the constrained authority hypothesis argues that cities have constrained authority over services such as as health and hospitals, parks, and sewer, with the responsibility for provision shared by other types and levels of government. Consequently, these services are unlikely to be prioritized by cities. We use several robustness to strengthen our analysis, including Heckman two-step regression to address potential selection bias. Focusing on the years 2007 to 2012, we find that cities use their reserves to stabilize expenditures for highways, roads, and community development during downturns. Practicality tramps politics when cities face difficult budget decisions in times of fiscal stress.

Authors

• Eun Joo Kwon, Georgia State University

• Benedict S. Jimenez, Georgia State University