Fiscal Shocks, Budgetary Pressures, and Public Education Expenditure Stabilization

ABSTRACT

Fiscal shocks exert budgetary pressures on school districts and constrain their ability to provide public education. An emerging literature examines the role of fiscal reserves to mitigate expenditure cuts in school districts. In the U.S. context, this article provides evidence that Kentucky school districts from school years 2001–2002 to 2013–2014 drained fiscal reserves and cut expenditures in response to revenue decreases. Further, school districts drained fiscal reserves to stabilize non-instructional expenditures, which have fixed costs. Collectively, the findings presented in this article build evidence that school districts strategically respond to budgetary pressures.

KEYWORDS:

• Budgeting
• financial management
• fiscal reserves
• school districts

Notes

1. See, for example, Barrett et al. (2019) for further discussion of different types of reserves in school districts.

2. As confirmed by a recent comprehensive review of the literature on subnational fiscal reserves, including school districts, from Gorina et al. (2019).

3. See Barrett et al. (2019) for a discussion of how fiscal reserves are a form of slack resources in school districts.

4. Reitano et al. (2019) show evidence that capital reserves are accumulated by Kentucky school districts, calling into question other types of reserves that might be accumulated. They do not, however, examine when these other reserves are drained and if this occurs in response to budgetary pressures.

5. There are different theories about stakeholder conflicts over slack resources in firms (e.g., Bourgeois, 1981; Cyert & March, 1963; Kuusela et al., 2017; Su, 2018). Given differences in theoretical expectations in previous articles, and a lack of data on stakeholders in school districts, this article instead focuses on theory from Levine (1978, 1979)) on the distribution of cutbacks.

6. Raudla et al. (2015, p. 442) state the following: “The fundamental question of cutback management is the contents of cutbacks: what should be cut.”

7. Non-instructional expenses include: support, administrative, food, communication, enterprise, and business services, plant operation, transportation, food, adult education, and other spending.

8. The data was developed by NCES and can be downloaded for all years from Lori Taylor’s webpage: https://bush.tamu.edu/research/faculty/Taylor_CWI/

9. Gorina et al. (2019) note that “data on fiscal reserves are difficult to collect” (p. 1).

10. States that do not have specified audit requirements for lower levels of government may allow “school districts to function outside of legal requirements and proper accounting procedures” (Carslaw et al., 2007, p. 313). Thus, audited data has higher accuracy than unaudited data.

11. Examining school district fiscal reserves data before, during, and after the Great Recession is consistent with Arapis et al. (2017).

12. For changes in revenue, approximately a third of the district-year observations had a revenue decrease of $100 or more, and half of the sample had a revenue increase of $100. The remaining 15% were evenly split above and below $0.

13. Values of -$100, $0, 100 were chosen for simplicity of reporting. For changes in UFB, approximately a third of the district-year observations in the sample had a change in UFB that was less than -$100, and a third of the sample had a change of UFB that was greater than $100. The remaining third of the sample was evenly split above and below $0.

14. The first row in Table 4 is calculated: $-49-\left(-100-\left(-100\right)\right)=-\mathrm{\Delta }OtherReserves$; 49