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

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.