Local Fiscal Behavior Under State Provisions : Do Local Governments Smooth Revenue from Booms Across Busts?

In the study of state-local relations, interactions between the two layers in fiscal policy are an important area. States direct and exercise oversight over local governments, also provide substantial financial assistance. These have played into the state-local interactions in their fiscal policy. Research in this area has been increasing but inadequate, especially in regard to local policy options during a downturn. Localities are assumed or expected to adopt a counter-cyclical fiscal policy (CCFP) and practices. The questions are: Do they, can they? There has been an increasing literature on CCFP at the state level, but a much smaller one on the local level, especially in state-local interactions in this policy area. This paper is an attempt to move closer to consensus on the determinants of local savings and the effects of the savings. This paper uses the longest available, nationwide annual series county level data set for empirical analysis. The most important findings are: Localities save for future liabilities not recessions; they do not smooth from booms across busts; and state level fiscal institutions cast real impact on local finance. These findings shed light on local policy making and add to existing evidence for state level policy design