The Stabilization Effect of Local Government Savings: The Case of Illinois Counties

Abstract

Studies find minimal evidence that general†purpose local governments draw down slack resources set aside during prosperous times to contend with economic downturns; although they maintain, in some cases, unrestricted fund balances well in excess of professionally recommended levels. Replicating divergence from the trend methodology in the state of Illinois that provides greater discretion to create and use savings, the analysis finds counties budget slack resources counter†cyclically (in downturn but not in upturn years) when controlling for political/institutional, revenue, economic, and demographic factors. This article discusses plausible alternative explanations for non†findings to explore in future studies.