Forecast Bias and Fiscal Slack Accumulation in School Districts

• Author: Jacob Fowles,Nathan Barrett,Peter Jones,Vincent Reitano
• DOI: 10.1177/0275074018804671
• Published date: 01 July 2019
• Date: 01 July 2019
• Subject Matter: Articles

https://doi.org/10.1177/0275074018804671

American Review of Public Administration

2019, Vol. 49(5) 601 –613

© The Author(s) 2018

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/0275074018804671

journals.sagepub.com/home/arp

Article

Introduction

Over the past decade, unexpected economic volatility con-

strained the ability of subnational governments to forecast

revenues accurately and respond to fiscal stress (The Pew

Charitable Trusts, 2015). At the state level, forecasters per-

formed their worst in over 20 years during the Great Recession

(Boyd & Dadayan, 2014; The Pew Charitable Trusts, 2015), a

situation compounded by inadequate fiscal stabilization funds

to mitigate the effects of revenue shortfalls (The Pew

Charitable Trusts, 2014). These crisis conditions forced more

than 43 states to cut funding to social services, with some of

the most severe decreases occurring in intergovernmental

transfers to school districts (Olif, Mai, & Palacios, 2012).

Given their dependence on state aid, school districts struggled

to maintain service provision for students, highlighting the

need for strategies to accumulate slack resources to mitigate

both ongoing and future fiscal crises (Arapis, Reitano, &

Bruck, 2017; Bruck & Miltenberger, 2013).

The literature on the accumulation of slack resources has

focused on states and municipalities, which have distinct

characteristics relative to school districts (Arapis et al.,

2017). As a type of special purpose government that provides

a single service and depends on intergovernmental revenue

sources, school districts face challenges in their ability to

build slack resources (Arapis et al., 2017; Duncombe & Hou,

2014). In particular, school districts do not usually have bud-

get stabilization funds (BSFs) with formal strict deposit and

withdrawal rules, such as states (Hou, 2004), and typically

lack revenue diversification strategies that general purpose

local governments use to build discretionary reserves, such

as unassigned fund balances (UFBs; Arapis & Reitano, 2018;

Bartle, Ebdon, & Krane, 2003; Hendrick, 2004, 2006). As a

result, strategies identified in the literature to build slack

804671ARPXXX10.1177/0275074018804671The American Review of Public AdministrationBarrett et al.

research-article2018

1Tulane University, New Orleans, LA, USA

2The University of Kansas, Lawrence, KS, USA

3University of Alabama at Birmingham, Birmingham, AL, USA

4Western Michigan University, Kalamazoo, MI, USA

Corresponding Author:

Vincent Reitano, Assistant Professor, School of Public Affairs and

Administration, Western Michigan University, 1903 W Michigan Ave,

Kalamazoo, MI 49008, USA.

Email: vincent.reitano@wmich.edu

Forecast Bias and Fiscal Slack Accumulation

in School Districts

Nathan Barrett1, Jacob Fowles2, Peter Jones3, and Vincent Reitano4

Abstract

The years during and after the Great Recession constrained revenue across all levels of government. Revenue shortfalls

in states decreased intergovernmental transfers, which compounded the plight of local governments already facing large

declines in own-source property taxes. Among the many casualties of this economic downturn were school districts, which

responded by implementing a variety of financial management strategies to continue providing educational service provision

to more than 50 million students across the United States. One strategy school districts continue to utilize is countercyclical

stabilization of expenditures with fiscal slack, which raises an important—and, to date, largely unanswered—question of how

school districts manage to accumulate fiscal slack, given both volatility and decreases in revenues in the years following the

Great Recession. One approach is to use implicit slack from biased forecasts to generate explicit fiscal slack in the unassigned

fund balance. This article provides evidence for this strategy by empirically testing it with data from Kentucky school districts

from school years 2001-2002 to 2013-2014. The findings indicate that school districts are engaged in strategic planning with

implicit fiscal slack, which allows them to accumulate explicit fiscal slack, a cornerstone of prudent financial management

that can provide budgetary flexibility during financial uncertainty. The relationship between implicit and explicit fiscal slack

is heterogeneous over the business cycle, providing further evidence of strategic planning. Practitioners can also use the

findings of this article to support the strategic use of forecasts to help accumulate unassigned fund balance, particularly in

the years after the Great Recession.

Keywords

financial management, budgeting, forecasting, strategic planning