The Politics of Local Government Stabilization Funds

Abstract

The adoption, maintenance, and prudent use of budgetary stabilization funds are fundamental financial management precepts, yet the variables that influence the size of these funds are poorly understood. This article contributes to the stabilization fund literature by examining the extent to which variation in stabilization fund balances across municipalities and over time can be explained by a community's political culture and financial management capacity. The balanced panel research design includes archival data for 239 Massachusetts municipalities for each of 18 fiscal years. Stabilization fund balances are lower in communities with either an anti‐tax or a pro‐spending political culture. Stabilization fund balances are higher in communities that have the financial management capacity to accumulate budget surpluses that can be made available for appropriation to stabilization funds. Communities with the open town meeting form of government also have higher stabilization fund balances.

Toward a Theory of Fiscal Slack

“…Anti‐tax sentiments may lead localities to watch their general fund balances to keep them at politically palatable levels. This finding echoes evidence on the negative associations of TEL stringency for states (Maher et al ) and localities (Snow, Gianakis, and Haughton ). Cities with the council‐manager form of government have similar unassigned balances but significantly higher unrestricted net assets than mayor‐council cities.…”

The Effects of Political and Fiscal Incentives on Local Government Behavior: An Analysis of Fiscal Slack in China

“…Local governments do not use rainy day funds as widely as state governments (Hou 2008); instead, they primarily rely on fund balances as a buffer against natural disasters and revenue shortfalls to help stabilize tax and fee rates as well as public service levels (Coe 2007;Marlowe 2005;Shelton and Tyer 2000 There is a small, but growing, body of literature regarding the factors that affect the size of the fund balances of local governments in the United States. This literature is in its early stages (Snow, Gianakis, and Haughton 2015) and still needs to "develop a theoretical model that incorporates relevant managerial, organizational, and political features" (Hendrick 2006, p.43 Snow, Gianakis, and Haughton (2015) find that variations in stabilization fund balances can be explained by a community's political culture and financial management capacity.…”

“…4 Only in recent years have scholars begun to investigate the management of fiscal slack in local 3 governments. There is a growing body of literature on this topic, but the variables that influence the size of financial reserves are poorly understood (Snow, Gianakis, and Haughton 2015). Two decades after the overhaul of its fiscal system in 1994, China has finally set a timetable to finish major fiscal and tax reform tasks by 2016, and to establish a modern fiscal system by 2020 (China Daily 2014).…”

Guiding the Public Sector: Assessing the Use of Recommended Practices in the Budgeting Process

“…The low adherence rates and large number of "don't know" responses associated with stabilization fund policies is more puzzling, particularly given the emphasis placed on these funds by scholars of public budgeting (e.g., Marlowe, 2005;Snow, Gianakis, & Haughton, 2015;Stewart, 2005). One possible explanation is that some respondents may have been inclined to select "don't know" if they were unfamiliar with the specific term despite, perhaps, the presence of fund balance policies within their communities.…”