Financial capacity and organizational stability in U.S. local governments

ABSTRACT

Stabilizing local governments’ expenditures over time is essential to ensure the continuity of public service provision. However, there is little agreement on the managerial determinants of expenditure stabilization. We identify whether and which aspects of financial capacity are related to expenditure stabilization. Using a sample of local governments in New York State, we find that the ability to maintain fiscal reserves, the potential to borrow external financial resources, and the fiscal flexibility to run deficits reduce expenditure gaps. This study contributes to our understanding of the link between the financial capacity and local governments’ decisions on expenditures.

KEYWORDS:

• Financial management
• organizational capacity
• stability in public service provision
• expenditure stabilization

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. It is difficult to measure organizational performance for many reasons. For example, public organizations have multiple goals to achieve (Andersen and Mortensen 2009; Meier and O’Toole 2002). It is also very challenging to choose an appropriate performance measure among diverse criteria such as inputs, procedures, outputs, and outcomes (Talbot 2008). In this study, we focus on organization stability (or more specifically expenditure stability) as a measure of organizational performance in the context of public financial management (Hou and Moynihan 2008).

2. Despite the rich literature that supports the positive relationship between financial capacity and organizational stability, theoretical gaps on the relationship remain. For example, governments with better financial capacity may have less control on their expenditures to seek more efficient management of expenditures (Schick 1988), which could have negative impacts on expenditure stability.

3. Stewart, Hamman, and Pink‐Harper (2018) suspect that a stringent state fiscal oversight system coupled with the small fiscal discretion of local governments in North Carolina led Wang and Hou (2012) to fail to find a countercyclical role of fund balances.

4. The Office of the New York State Comptroller does not provide financial data for these governments.

5. New York local governments maintain a relatively high reliance on property taxes for their revenue sources. The property taxes account for 44.5 percent of total revenues of New York local governments, which is the 14th highest percentage among 50 U.S. states according to the 2017 U.S. Census State and Local Government Finances.

6. The panels (i.e., expenditure gaps) are stationary. We used the Fisher test (unbalanced panel) and the Levin-Lin-Chu test (after adjusting the dataset to a balanced panel) for both linear and nonlinear estimation of expenditure gaps.

7. The Doornik-Hansen test for bivariate normality rejects that the errors are jointly normally distributed with errors in the selection equation. Although it would have provided misleading information in small samples (Goldberger 1983), our sample size is very large, which includes all general-purpose local governments in New York State over twenty years. We are therefore less concerned about potential bias from this issue.

8. The first stage results are available from the authors upon request

9. Our instrument variables are also strong predictors of the level of fund balances (t-1). The Cragg-Donald Wald F statistic are 15,000 and 21,000 for upturns and downturns, respectively, which are higher than the rule-of-thumb threshold of 10 (Staiger and Stock, 1997). Thus, we are not concerned about potential bias from weak instruments.

Additional information

Notes on contributors

Young Joo Park

Young Joo Park is an assistant professor in the School of Public Administration at the University of New Mexico. She studies public financial management with particular focus on financial condition analysis, non-profit finance, and health care finance.

Youngsung Kim

Youngsung Kim is an Assistant Professor of Public Policy and Administration in the Department of Political Science at Colorado State University. His research focuses on public budgeting and finance, education finance, and local government management.

Gang Chen

Gang Chen is an Associate Professor in Public Administration at the University at Albany’s Rockefeller College of Public Affairs and Policy. His research focuses on state and local budgeting, public financial management, and public pension governance.