Effects of intergovernmental revenue on local government draw on fiscal reserves: evidence from COVID-19 fiscal stress

Abstract

This study investigates the effects of receipt and anticipation of intergovernmental revenues on local governments draw on accumulated fiscal reserves to cushion the impacts of COVID-19-related fiscal stress. Several studies have been conducted on determinants of fiscal reserves accumulation. However, little is known about the determinants of government draw on fiscal reserves, beyond revenue shortfall, in times of fiscal stress. Dwelling on the premise that government's draw on fiscal reserves is influenced by factors beyond revenue shortfall and controlling for the effects of revenue shortfalls and other factors, we analysed local government survey data to determine the effects of intergovernmental revenue on government draw on fiscal reserves. Results show that draw on fiscal reserves is significantly constrained by percent of FY 2020 revenue received from federal and state governments, but significantly and positively inluenced by revenue losses and percent of FY 2021 revenue anticipated from federal government.