Beyond Spending Levels: Revenue Uncertainty and the Performance of Local Governments

Revenue uncertainty is a common concern among public administrators, but little research examines its effects on service delivery. Using a novel empirical strategy to capture how revenues deviate from administrators' expectations, we estimate the impact of revenue uncertainty on Ohio public school districts' educational effectiveness. We find that errors in districts' revenue forecasts have a significant negative impact on student achievement, beyond what one would expect based on changes in spending levels. In particular, a one percentage point increase in error involving revenue shortfalls leads to a decline in student achievement growth of between 0.004 and 0.02 standard deviations during the following school year, which equates to about 2-8 days of learning. These effects are concentrated in urban school districts with low fund balances (below 22 percent of annual revenues) and high enrollments (more than 1,730 students). We also find that revenue shortfalls lead to teacher attrition and to districts placing new tax levies on the ballot.