The Great Recession, Fiscal Federalism and the Consequences for Cross-District Spending Inequality

Abstract

abstract:We examine the correlates of district spending and revenue losses following the onset of the Great Recession and the role of fiscal federalism in mitigating these losses. We estimate whether spending and revenue declines were driven primarily by local labor market conditions or the degree of state fiscal centralization. Utilizing population level data for all public-school districts in the continental United States and a difference-in-differences strategy that models pre-recession resource trends, we find that local labor market conditions explain district spending loss in the wake of the Great Recession; in contrast, the degree of centralization in a state's education finance system is uncorrelated with declines in total district spending. Resource poor districts located in states with greater state fiscal centralization were ill-equipped to offset district spending loss, and federal fiscal stimulus did little to mitigate—and, in some cases, exacerbated—differential declines in spending resulting from local labor market shocks. These findings highlight the potentially unintended role that fiscal federalism might play in widening district spending inequality in the wake of recessionary events.