Intergovernmental Costs of Political Gridlock: Local Government Cash Flow Smoothing during State Budgetary Delays

Abstract

Political gridlock in state legislature often leads to a failure in adopting a budget by the start of a fiscal year. This article examines the intergovernmental implication of late state budgets, specifically the cash management problem faced by localities during the stalemate. Without legislative appropriations, the state government could delay expected transfers and payments to localities. Late intergovernmental transfers may force localities to smooth out cash flow for continued service provision through short-term borrowing. Using municipal bond market data, this article finds that when the state budget is late, the average locality’s likelihood of issuing short-term debt increases by 61 percent among those with end-of-fiscal-year short-term debt outstanding experience, and the amount of debt issuance increases by 76 percent. As short-term debt carries interest costs, state’s political gridlock and policy inactions impose direct costs on local governments.