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Stress Labels on DOI: 10.1177/10911421231199023
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Local Governments’
Financial
Management:
Evidence from
New York State
Fiscal Stress
Monitoring System

Hyewon Kang1
and Gang Chen2

Abstract
State government’s role in monitoring local governments’ fiscal distress
gained importance after several local financial crises. Although many states
have implemented state monitoring systems, the effectiveness of these sys-
tems has not been well understood. Using the case of the New York State,

1
Department of Public Policy and Administration, Steven J. Green School of International and
Public Affairs, Florida International University, Miami, FL, USA
2
Rockefeller College of Public Affairs & Policy, University at Albany, State University of
New York, Albany, NY, USA

Corresponding Author:
Hyewon Kang, Department of Public Policy and Administration, Steven J. Green School of
International and Public Affairs, Florida International University, Miami, FL, 33199-2156, USA.
Email: hykang@fiu.edu
2 Public Finance Review 0(0)

we conducted a regression discontinuity analysis to examine the effect of

fiscal stress labeling on local governments. We find some evidence to sup-
port that fiscal stress labels lead local governments to improve their fund
balance and cash positions. Specifically, school districts at the early stage
of fiscal stress are more responsive to the labels than districts under
more severe fiscal stress.

Keywords
financial condition, fiscal stress, financial management, state monitoring
system, regression discontinuity

Introduction
Maintaining sound fiscal health is one of the most important goals of state
and local government’s financial management. For some local governments,
maintaining good fiscal health is challenging due to demographic changes,
economic downturns, or other external shocks. In some extreme cases, local
governments in the United States may have to file Chapter 9 bankruptcy and
resort to the state government for protection. The repercussions of local gov-
ernment fiscal crises are not only limited to the damage to the local govern-
ment’s abilities to provide sustainable public services but also extended to
the state government’s financial condition and credit ratings (Honadle
2003; Pew Charitable Trust 2013). The aftermath of several local govern-
ment financial crises called for state governments to take a more active
role to preemptively prevent or mitigate local fiscal stress outbreaks.
In this vein, more than twenty state governments in the United States have
implemented some form of fiscal monitoring system (Pew Charitable Trust
2016; Kim and Park 2022). The core idea of such state monitoring systems
(SMS) is that state governments can regularly monitor the financial condition
of local governments and provide objective information to local administra-
tors and citizens. The monitoring results could be used to alert local officials
about the trends or the severity of local fiscal stress. State governments might
also require local governments to develop and implement a recovery plan,
appoint officials to oversee fiscally distressed local government’s financial
operations, and/or mandate state approval of local government budget or
debt issuance (Pew Charitable Trust 2016; Scorsone and Pruett 2020).
Despite the widespread implementation of SMS across states, there is still
more to unpack pertaining to the effects of SMS on local finances. Our
review of prior literature on SMS suggests that there is only a thin literature
Kang and Chen 3

on exploring the effectiveness of SMS. More importantly, most of the cases

were in states where SMSs are designed not only to inform local officials
about their objective financial status but also to intervene in local operations
once local fiscal stress is declared (e.g., Spreen and Cheek 2016; Gerrish and
Spreen 2017; Thompson 2017). Hence, evidence from such cases does not
explain whether merely informing the local officials could lead to changes in
local governments’ financial management.
To parcel out the effects of SMS on local financial management, we argue
that it is necessary to differentiate the types of SMS and discuss the mech-
anisms accordingly. For instance, if an SMS is designed only to identify pos-
sible fiscal stress and alarm local officials to take preemptive actions, the
impact of sharing information and providing monitoring results should be
the focus of empirical studies. If an SMS aims to assist troubled entities
by intervening in local financial operations after identifying those, then it
would be the direct state’s managerial and financial assistance that is affect-
ing local governments’ financial condition. Differentiating the types of SMS
is essential for suggesting practical guidance on how to design an effective
SMS because state governments differ in their authority over local govern-
ments, and thus, for a particular state, one type of SMS could be more per-
tinent than another type of SMS.
One way to investigate the effects of SMS is to study a case where the
SMS is designed to have a single purpose, such as New York State Fiscal
Stress Monitoring System (NYS FSMS). NYS FSMS is distinguishable
from other systems because the state government does not intervene directly
in localities’ financial operations based on the monitoring results. Instead,
the state government releases the results to the public in the form of four dif-
ferent types of fiscal stress labels. This institutional setting creates an oppor-
tunity to empirically test whether and how local officials respond to state
monitoring results.
Given the unique opportunity that NYS FSMS provides, our research
question is whether state governments make changes in local financial man-
agement only by adding labels. Findings from the regression discontinuity
design (RDD) generally indicate that the financial condition of labeled
local governments (including counties, cities, towns, villages, and school
districts) improved after the label receipt. Specifically, we find that state-
assigned fiscal stress labels positively influence the local government’s
year-end fund balance and cash positions but not short-term debt issuance
and debt service expenditures. We also find that the impact of state monitor-
ing results is more salient among the entities at the early stage of fiscal stress
(i.e., susceptible fiscal stress). Based on the findings, we suggest that state
4 Public Finance Review 0(0)

governments can induce changes in local governments’ financial conditions

by assigning fiscal stress labels that are publicly available. Moreover, the
study’s findings can also help state and local officials develop or amend
the system to be more efficient and effective in raising red flags and provid-
ing managerial assistance while being less intrusive to the local govern-
ment’s financial operations.

State’s Role in Monitoring Local Financial Condition

SMS are one of the many efforts for state governments to detect local govern-
ments’ fiscal stress. Depending on whether state intervention is entailed based
on the monitoring results, we suggest three types of SMS: Regular Review,
Early Warning System (EWS), and State Intervention System (SIS). The
first type of SMS is Regular Review—state government reviews local govern-
ments’ annual budget reports or audited financial statements on a regular basis
and attempts to identify fiscally troubling entities from the review process.
These systems do not have the authority to step into the troubling entities,
nor have they institutionalized a system independent from the regular
review process. States only work with financially troubling local governments
on an ad hoc and case-by-case basis. States of this type include Iowa,
Maryland, Minnesota, and New Hampshire (Pew Charitable Trust 2016).
The EWS refers to the systems where state governments evaluate local
governments’ financial indicators against pre-established benchmarks and
determine whether governments are at risk of fiscal stress or are currently
under fiscal stress. The primary goal of EWS is to inform local officials of
the objective financial status so they can take preemptive actions and
avoid more severe distress that may require states’ financial intervention.
California uses ten indicators to “identify local government agencies that
are at high risk for the potential of waste, fraud, abuse, or mismanagement,
or that have major challenges associated with their economy, efficiency, or
effectiveness” (Auditor of the State of California, n.d.).
Lastly, some state governments operate a SIS. In these systems, states not
only monitor local governments’ finance but also intervene in local govern-
ments’ financial operations when deemed necessary. For example, accord-
ing to the Fiscal Stability Act of 2010, the Rhode Island Department of
Revenue provides three tiers of state support. First, the department can
appoint a “fiscal overseer” who supervises and approves municipal opera-
tions and develops an operating and capital plan to attain financial stability
for the financially unstable municipalities. When the fiscal overseer cannot
resolve the situation, the state appoints a “budget commission” with
Kang and Chen 5

significantly broader powers than a fiscal overseer, including the authority to

exercise all powers of a municipality’s elected officials. If a budget commis-
sion cannot fix the situation, a “receiver” is appointed, who has all the
powers of the budget commission but also has the power to file a federal
Chapter 9 bankruptcy petition for the municipality. Other states of this
type include Kentucky, Louisiana, North Carolina, Ohio, and South
Dakota. This form of SMS is expected to be most effective in improving
local governments’ financial condition because the state intervenes directly
in the financial operation and local governments see consequences when
financially failing.
Among the thin literature on the effectiveness of SMS, one of the major
outcome variables of interest is local financial condition. For instance,
Gerrish and Spreen (2017) found that after implementing a benchmark
system in North Carolina, the financial indicators of local governments con-
verged toward the mean, explaining the pressure of isomorphism. Chung
and Williams (2021) focused on SMS in New York and found that a county
at the earlier stage of fiscal stress tends to improve its fund balance after the
receipt of a fiscal stress label. Likewise, Thompson (2017) found that Ohio
Municipalities reduced total and capital expenditures after they were labeled
as fiscally stressed by the state. Other outcome variables of SMS include
voting and housing prices. Fiscally stressed school districts in Ohio are
found to have a higher likelihood of tax referendum passage (Thompson
and Whitley 2017) and a greater turnover of school board members and admin-
istrators (Thompson 2019). Such mechanisms suggest the role of SMS in pro-
moting accountability. Studies also find a negative impact of fiscal stress labels
on housing prices. A study confirms that fiscal residential housing prices
decreased after the receipt of fiscal stress labels but increased once the district’s
financial situation improved (Thompson 2016). Yang (2021), on the other
hand, found that local governments labeled as significant fiscal stress by the
state experience housing prices decrease.
Built on the prior literature, this study makes two contributions to the lit-
erature on SMS. First, we exploit the case of NYS FSMS because it is a
single-purposed SMS, enabling us to identify the impact of non-intrusive
SMS on local financial conditions. An observation from the extant literature
is that most cases investigated thus far were in states that implemented both
EWS and SIS. For instance, North Carolina implemented a benchmarking
tool where users can compare financial conditions with their peers. The
state also annually collects, analyzes, and distributes financial data, provides
technical advice, and approves local government debt proposals and debt
issuance. Ohio operates both a monitoring and an intervention system
6 Public Finance Review 0(0)

(Scorsone and Pruett 2020). The Financial Health Indicator System assesses
thirteen financial indicators and assigns three labels: positive, cautionary, or
critical outlook. Based on the results, the State Auditor also examines local
governments’ finance and may place entities under fiscal caution, fiscal
watch, and fiscal emergency for intervention.
Findings from these states confirm the effectiveness of SMS when mon-
itoring is combined with direct intervention (e.g., Gerrish and Spreen 2017;
Thompson 2017, 2019; Thompson and Whitley 2017). However, one can
question how to parcel out the impact of merely providing additional infor-
mation to local officials with the impact of state intervention on local
finance. Can state governments induce changes in local financial manage-
ment only by signaling fiscal information? Or does state intervention have
to be in place? To answer the questions, we need to explore the non-intrusive
type of SMS where the system does not directly grant state governments the
legal authority to take over local governments’ financial operations.1
Second, the unique scoring scheme of FSMS outlined below allows us to test
the effects of FSMS on local finance using RDD. Prior studies tend to use the
difference-in-differences method or event study analysis to test the impact of
SMS. For instance, under the institutional setting of Ohio’s SMS, assigning
fiscal stress labels is regarded as the treatment, and studies compared the
treated with the control group, which consists of all municipalities not labeled
(e.g., Thompson 2017). This approach provides robust findings and valuable
insights, but RDD has its own merits given the concern of treating all unlabeled
equally. That is, if labeling is determined by an arbitrary cutoff point, entities
closer to the cutoff point are qualitatively more alike with the labeled entities
than the entities far from the cutoff. Using RDD, we can compare the effect of
fiscal stress labels on the two groups of entities just above and below the cutoff.
One study by Chung and Williams (2021) first attempted to test the labeling
effect of NYS FSMS using RDD, but our study is a substantial extension of the
study. Using one-year data of counties, they find that labeling improves total
fund balance. Our study spans from 2013 to 2017 and investigates the impact
of FSMS on all types of local governments—counties, cities, towns, villages,
and school districts, increasing the generalizability of findings and improving
the power issue. Moreover, we use a comprehensive set of financial indicators
to explore how local governments responded to the state monitoring results.

New York State Fiscal Stress Monitoring System

Since its establishment in 2013, the FSMS system’s primary objective has
been to “identify for local officials the need to take actions promptly that
Kang and Chen 7

change their financial trends for the better, with the least disruption and pain
to citizens” (DiNapoli 2016, 2). The Office of State Comptroller (OSC)
expects that providing comparable and trackable financial information to
local governments can help entities avoid fiscal distress by taking preemp-
tive actions. The OSC calculates the fiscal stress scores for each entity
(counties, cities, towns, villages, and school districts) based on the informa-
tion extracted from the Annual Update Documents (AUD) submitted by
general-purpose governments and Annual Financial Reports (AFR) submit-
ted by school districts. The calculation is based on indicators representing
year-end fund balance, operating deficits, cash positions, short-term cash
flow debt, and fixed costs.
Based on the calculated fiscal stress scores, ranging from 0 to 100, the
OSC designates one of the four labels to local governments—significant
fiscal stress, moderate fiscal stress, susceptible fiscal stress, or no designa-
tion. A higher fiscal stress score indicates a higher severity of fiscal stress.
The susceptible fiscal stress label means that entities are not experiencing
fiscal stress at the time but are headed toward it if no action is taken. No des-
ignation labels are assigned to those entities with scores below the fiscal
stress thresholds (DiNapoli 2016). No designation label is assigned to enti-
ties under 45, susceptible fiscal stress to entities between 45 and 55, moder-
ate fiscal stress to entities between 55 and 65, and significant fiscal stress to
entities above 65. The cutoff scores for school districts are 25, 45, and 65.
The OSC releases the labeling results to the public and gains attention
from local media. The labeling results are listed on the OSC website, and
residents can search and download the results using an online toolkit.

Local Governments Response to SMS

With fiscal monitoring systems, state governments expect local officials to
improve financial management in response to the monitoring results. Even
without direct interventions, theories suggest that information sharing can
improve local financial management. One possible account is through iso-
morphism (DiMaggio and Powell 1983), which suggests that organizations
under similar environments become more homogeneous. That is, organiza-
tional actors change their practices and outcomes to become more alike with
a successful organization to legitimize their actions (Gerrish and Spreen
2017). Isomorphic pressures can take different forms—coercive isomor-
phism, mimetic process, and normative pressures. When applied to our
research setting, local governments may respond to SMS results because
of the formal and informal pressures that they get from the state. Such
8 Public Finance Review 0(0)

coercive isomorphism can be more salient when local entities rely more on
the state government. Given the uncertainty and ambiguity on the “appropri-
ate” level for each financial indicator, local governments may also mimic
how other local governments perform. Lastly, information exchanges
among local government professionals relevant to financial management
establish a common understanding of managerial practices, increasing the
normative pressure. DiMaggio and Powell (1983) suggest that the three
forms of isomorphic pressures are not mutually exclusive in an empirical
setting. However, the implication is that local governments could be recep-
tive to state monitoring results, and the direction of such response to the
pressures would be improving the assessed financial indicators. Using the
isomorphism framework, a study finds that when local officials acknowl-
edge the financial status of their entity as well as their neighboring entities,
they may mimic the position of the average unit (Gerrish and Spreen 2017).
Another possible mechanism operates through accountability to the
public (Hopland 2014; Thompson and Whitley 2017; Kim and Park
2022). When a state government evaluates the local government’s financial
performance and releases the evaluation results, it can serve as a negative
signal to voters. Such information significantly reduces voters’ information
costs, and better-informed voters are more likely to participate in community
decision-making to hold the government accountable. Moreover, due to the
release of state monitoring results, citizens are more aware of an entity’s
financial challenges. Hence, the labels create a political environment for
the local officials to engage citizens and cultivate support for making hard
choices such as raising a tax or cutting expenditures (Thompson and
Whitley 2017). In other words, the additional information released by the
state government dampens the negative relationship between making
cutback management and reelection and, thus, creates a political environ-
ment that is more supportive of financial reforms. An official of the
New York State (OSC) comments that “what we want to do is bring infor-
mation out to the public so that a community can understand the challenges
that their local officials are facing … so that those conversations can take
place” (Pew Charitable Trust 2016, 5).
Having recognized the positive effect, it is also plausible to imagine that
local governments’ financial conditions might not change after implement-
ing SMS. Local governments with home rule provisions are likely to be
averse to state interventions (Kloha, Weissert and Kleine 2005; Coe
2008). While some states impose strict recovery plans on or require state
approval for debt issuance from fiscally stressed local governments, other
states have little authority to intervene in local government financial
Kang and Chen 9

operations. Unless the cost of ignoring the result of the state government
monitoring system is substantial, local officials may not be incentivized to
respond to the SMS results because the response would generally entail
political costs of making hard choices (e.g., raising taxes or cutting expen-
ditures). Coe (2008) points out that local governments labeled as fiscal emer-
gency remain in the category for an extended period because the state
government cannot force local governments on what they should do to
amend the financial status. While we recognize the conflicting accounts
on how local governments will respond to state monitoring results, we
still set up the hypothesis following the rationale of SMS and suggestive evi-
dence from prior studies:

Hypothesis 1. Fiscal stress labels from the state monitoring system will
lead a local government to improve its financial condition in the fol-
lowing year.

The SMS may have heterogeneous effects on local governments, depend-

ing on the localities’ severity of fiscal stress. Governments under significant
fiscal stress may have less leeway to improve their financial condition in the
short run (Gerrish and Spreen 2017). Especially for those local governments
experiencing chronic fiscal stress, the monitoring results may not surprise
local officials and the public and, therefore, cannot trigger behavioral
changes. Even if local officials feel the pressure to improve the financial con-
dition, the entity may not have enough resources to change the situation
(Spreen and Cheek 2016). Likewise, local governments can exhibit different
patterns in responding to different SMS labels. To test the heterogeneous
effects, we set up the second hypothesis as follows:

Hypothesis 2. State monitoring systems are more likely to affect local

governments in the early stage of fiscal stress than local governments
under severe fiscal stress.

Data and Methods

To test the hypotheses, we construct a dataset including variables of state
monitoring results from the NYS OSC, a set of financial indicators, and
entity-level characteristics from 2013 to 2017. We examine the effects of
FSMS on all types of local governments, including counties, cities, towns,
villages, and school districts. The impacts of FSMS on general-purpose gov-
ernments and school districts are estimated with separate models because the
10 Public Finance Review 0(0)

scoring schemes differ. Table 1 provides an overview of the operationaliza-

tion and sources of each variable.

Variables
The dependent variables are a set of financial indicators used by the FSMS.
Although various financial indicators can represent local government fiscal
stress, this study focuses on the indicators used in FSMS because it is plau-
sible to expect that local officials pay more attention to what is measured,
evaluated, and updated by the OSC. We used all indicators except the short-
term debt issuance trend for general-purpose governments because it
measures the previous three-year trend rather than the result of a one-year
financial operation. We examined all six indicators monitored by the OSC
for the school district sample. Note that the calculation of all indicators
follows the system manual published by the OSC (DiNapoli 2017).
For the year-end fund balance category, we used the assigned and unas-
signed fund balance ratio at the general fund level (unassigned fund balance
for school districts) and the total fund balance ratio. Both indicators are cal-
culated as ratios to total expenditures. Fund balance is the cumulative differ-
ence between assets and liabilities. Hence, a higher ratio means that a
government has more financial resources to continue providing public ser-
vices without interruption (Rivenbark, Roenigk and Allison 2010). The
surplus ratio, an indicator capturing budget solvency, is defined as
revenue surplus at the end of the fiscal year. To measure how much cash
an entity is holding to pay recurring bills, the FSMS uses two indicators,
cash ratio and cash to monthly expenditures. The cash ratio is operational-
ized as cash and short-term investments divided by net current liabilities.
For the general-purpose governments, we only use the cash to monthly
expenditures indicator as a measure of cash positions because most of the
towns and villages do not have net current liabilities. Short-term debt issu-
ance assesses whether an entity relies on borrowing to pay operating costs.
The indicator is calculated as changes in short-term debt issuance compared
to the previous fiscal year. For general-purpose governments, the FSMS also
monitors fixed costs to measure the degree of financial flexibility. The indi-
cators include personal services and employee benefits expenditures to total
revenues and debt services to total revenues. Local entities need to manage
fixed costs at a certain level as the fixed costs can crowd out public service
delivery expenditures. We examine how the current fiscal year’s financial
indicators changed when local governments received fiscal stress labels in
the prior year.
 Table 1. Descriptive Statistics and Data Sources.

Variables Description N Mean SD Min Max Source

General-purpose
governments
Assigned/Unassigned fund Assigned/Unassigned fund balance to gross 6,720 .40 .38 −1.12 3.93 OSC
balance ratio expenditures (general fund)
Total fund balance ratio Total fund balance to gross expenditures 6,720 .61 .49 −.33 4.69 OSC
(general fund)
Surplus ratio Surplus to gross expenditures (combined 6,720 .04 .11 −.71 1.63 OSC
funds)
Cash to monthly Cash and investments to monthly gross 6,720 6.16 4.63 −1.01 42.14 OSC
expenditures expenditures (combined funds)
Change in short-term debt Change in short-term debt issuance (all 6,720 −.01 .12 −1.00 1.00 OSC
funds)
Personal services and Personal services and employee benefits to 6,720 .47 .23 .03 7.84 OSC
employee benefits total revenues (all funds)
Debt service Debt service to total revenues (all funds) 6,720 .07 .13 0 6.19 OSC
Population Log (population) 6,720 8.17 1.43 2.40 14.22 OSC
% Tax base change Percent change of full values 6,720 1.93 4.79 −63.1 135.8 OSC
% Age a Percent under 18 and over 65 6,720 38.73 5.26 5.80 90.00 ACS
Income a Log (median household income) 6,720 10.90 .23 10.57 11.59 SAIPE
Unemployment rate Unemployment rate (%) 6,720 5.83 1.22 3.7 9.0 BLS
Type of entity County = 0, City = 1, Town = 2, Village = 3 6,720 .48 OSC
School districts

(continued)

11
12
Table 1. (continued)

Variables Description N Mean SD Min Max Source

Unassigned fund balance ratio Unassigned fund balance to gross 2,644 .07 .08 −.07 1.00 OSC
expenditures
Total fund balance ratio Total fund balance to gross expenditures 2,644 .27 .16 −.003 1.35 OSC
Surplus ratio Surplus to gross expenditures 2,644 .03 .04 −.14 .34 OSC
Cash ratio Cash and investments to net current liability 2,640 −.04 .08 −.59 1.20 OSC
Cash to monthly Cash and investments to monthly gross 2,644 2.18 1.62 0 15.70 OSC
expenditures expenditures
Change in short-term debt Change in short-term debt issuance 2,644 −.03 .18 −1.00 1.00 OSC
% Tax base change Percent change of full values 2,644 2.12 4.33 −47.9 2.12 OSC
% Poverty Percentage of economically disadvantaged 2,644 40.82 20.00 0 40.82 NYSED
% Turnover Turnover rate of all teachers 2,644 9.22 4.93 0 80.00 NYSED
% ELL Percentage of English language learners 2,644 2.41 4.76 0 39.00 NYSED
Class size Common branch class size 2,644 19.52 3.18 2.00 30.00 NYSED
Note: OSC=Office of State Comptroller; SAIPE=Small Area Income and Poverty Estimates; ACS=US Census Annual Community Survey; BLS=Bureau
of Labor Statistics; NYSED=New York State Education Department.
a
City takes the value of the county in which it resides when city-level data is unavailable. All nominal values are adjusted to the value of the US dollar in
2017.
Kang and Chen 13

Our model controls for entity-level characteristics. For general-purpose

governments, we controlled for population, change in the tax base,
percent of the population under 18 and over 65, median household
income, and unemployment rate. Data sources are the OSC, US Census,
and Bureau of Labor Statistics. For school districts, changes in the tax
base, poverty rate, teacher turnover rate, the percentage of English language
learners, and class size are controlled. We extracted data from the NYS
Education Department School Report Card.

Estimation Strategy
Exploiting the fact that the FSMS assigns fiscal stress labels to local govern-
ments based on fiscal stress score cutoffs, we use a sharp RDD. We assume
that entities just above the fiscal stress score thresholds are comparable with
entities just below the thresholds, other than the fact that entities above the
cutoffs are labeled as fiscally stressed. Also, since fiscal stress labels are
assigned based on fiscal stress scores at different cutoffs, we use the multi-
cutoff design. The multi-cutoff design estimates the causal effect of assign-
ing labels at each cutoff separately, allowing us to investigate heterogeneous
effects (Cattaneo et al. 2016). To do so, we segmented the dataset around
each cutoff. For general-purpose governments, the fiscal stress score
cutoffs are 45, 55, and 65. Hence, the general-purpose governments’
dataset is divided into three segments around each cutoff: fiscal stress
score from 0 to 55, 45 to 60, and 55 to 100. Likewise, the school districts
dataset is compartmentalized into three: fiscal stress score from 0 to 45,
25 to 65, and 45 to 100.

Figure 1. Fiscal stress scores by types of local government.

Note: Histogram with kernel density.
14 Public Finance Review 0(0)

Once the dataset is segmented around each cutoff, we estimate the effect
of assigning fiscal stress labels by running a regression on both sides of the
cutoff point. When fitting the regression around the cutoff scores, we need to
make a set of decisions: (1) the size of bandwidths on both sides of the cutoff
point, (2) weights within the bandwidth, and (3) the polynomial order.
Bandwidths around each threshold are selected to fit regression because enti-
ties closer to a threshold are more likely to share similar traits. Bandwidths
for each cutoff are selected manually. Following Imbens and Lemieux’s
(2008, 625) suggestions, observations within a bandwidth are equally
weighted (i.e., rectangular kernel). Considering a relatively small sample
size, we use linear and quadratic regressions (Jacob et al. 2012; Gelman
and Imbens 2019). We report estimates obtained from model specifications
with different bandwidths and polynomial orders to check whether the find-
ings depend on the choices of bandwidths and polynomial orders. The base-
line model of linear regressions around each cutoff is specified as follows:
Yit = Xit β0 + β1 Lit−1 + f (Sit−1 ) + εit
where Yit is the dependent variable that measures the financial condition of
entity i in year t; Xit is a set of controls; Lit−1 is an indicator that equals one if
entity i in year t−1 is assigned to one of the fiscal stress labels, and zero oth-
erwise; Sit−1 is a running variable for entity i, centered at the cutoff fiscal
stress scores; f (Sit−1 ) is a smooth function of the running variable, modeling
with p-th order polynomial. To make a causal inference, we estimate the
effects of fiscal stress labels in the prior year on the current year’s
outcome variables (one-year lagged model). The coefficient β1 captures
the effects of the fiscal stress labels.

Validating Identification Assumptions

The internal validity of RDD is threatened if entities are aware of the cutoffs
and can manipulate their fiscal stress scores to be just below the thresholds.
Figure 1(a) and (b) illustrates the distribution of fiscal stress scores of
general governments and school districts, respectively (for more details,
see Appendix Figure A1 for the distribution of each type of general-purpose
government). The left-skewed distribution in Figure 1 illustrates how the
OSC developed a scoring scheme that is intentionally selective in designat-
ing any fiscal stress labels.
In Figure 1, we can visually inspect bunches at the first threshold of fiscal
stress scores of general-purpose governments and school districts. The
bunch before the first threshold may suggest a possibility of manipulating
Kang and Chen 15

fiscal stress scores to avoid labeling, invalidating the key assumption of

RDD. However, we argue that local governments cannot precisely manipu-
late fiscal stress scores. Fiscal stress labels are designated based on a
100-point scale fiscal stress score, which is a sum of points assigned to
the nine financial indicators. Each indicator is weighted differently and is
calculated using financial account data collected by OSC. Given such a
complex scoring scheme, it is hard to imagine that a local government
manipulates certain indicators to have a fiscal stress score that is just
below the first cutoff.
It is also plausible that local governments are aware of cutoffs after 2013
because the FSMS has not changed its scoring scheme since 2013. In addi-
tion, the OSC undergoes a verification process with entities before releasing
the labeling results to the public. Based on the AUD and AFR submitted by
all the local governments, OSC staff makes preliminary decisions about
which entities to designate fiscal stress labels. Subsequently, the staff con-
tacts those entities to confirm the accuracy of the information (DiNapoli
2017). The verification process functions as a tool to improve data accuracy
(DiNapoli 2017) than a tool for governments to manipulate their fiscal stress
scores because financial information on AUD and AFR cannot be manipu-
lated and should abide by accounting standards. The OSC follows the
scoring system to calculate indicators and fiscal stress scores without
discretion.
We further carried out McCrary’s Tests following Cattaneo, Jansson and
Ma (2019) to statistically determine manipulation at each cutoff. As illus-
trated in Appendix 1, we failed to reject the null hypothesis of no manipu-
lation, indicating a continuous density of the running variable or fiscal stress
score at all cutoffs.
We also investigated whether the underlying observable characteristics of
local governments are balanced around the cutoff scores. The observable
characteristics are equivalent to the controls used for baseline model speci-
fication. For both general-purpose governments and school districts, we
fitted linear regression before and after the cutoffs and checked for statisti-
cally significant jumps at all cutoffs. Population, tax base, and age distribu-
tion are equivalent on both sides of all cutoffs (Appendix Figure A3-(1)).
Local governments with significant fiscal stress labels, on average, have a
higher income and lower unemployment than governments with moderate
fiscal stress labels, but the differences are statistically insignificant. We
find a similar pattern with school districts’ baseline characteristics—the var-
iation of poverty, turnover rate, percent of English langue learners, and class
size are equivalent around the cutoffs (Appendix Figure A3-(2)). The
16 Public Finance Review 0(0)

percent change of full values tends to show a larger difference at the third
threshold, but the difference is within the confidence interval. Taken
together, the results from the discontinuity tests of covariates corroborate
the validity of RDD.

Results
Tables 2 and 3 summarize the estimates for general-purpose governments
and school districts, respectively, obtained from the local regression analy-
ses around each cutoff. We report estimates from linear and quadratic regres-
sions to show that polynomial orders do not dominate the results. Also,
Figures 2 and 3 present point estimates and confidence intervals yielded
from specifications with smaller sizes of bandwidths than the baseline
models. Note that control variables are included in all models but not
reported.

Effects of FSMS on General-Purpose Governments

Based on the estimates presented in Table 2, we find that fiscal stress labels
influence local governments’ financial indicators, especially those
entities that are on a trend toward fiscal stress. First, we find that entities
labeled as susceptible to fiscal stress significantly increased year-end fund
balance in the following year, regardless of the choice of the polynomial
order (columns 1 and 2). Specifically, for entities receiving susceptible
fiscal stress labels, the assigned/unassigned fund balance ratio and total
fund balance ratio in the following year are higher by 11 percentage
points and 24 percentage points than non-designated entities, respectively
(column 2). Figure 2 shows that the pattern is consistent in alternative spec-
ifications with smaller bandwidths. However, we failed to reveal the positive
impact of labels on year-end fund balance at other cutoffs, meaning that
FSMS has a limited effect on entities under relatively serious fiscal stress.
Columns 3 and 4 indicate that moderate fiscal stress labels did not impact
entities’ year-end fund balance, even with smaller bandwidths specifica-
tions. Regarding the significant fiscal stress labels, estimates show that
assigned/unassigned fund balance ratio and total fund balance ratio increase
by 12 and 11 percentage points, respectively (columns 5 and 6), but we
failed to find consistent evidence with alternative specifications (Figure 2).
Second, entities assigned with a susceptible fiscal stress label have a sig-
nificantly higher cash to monthly expenditure ratio than non-designated enti-
ties in the following year. For entities with the susceptible fiscal stress label,
 Table 2. RDD Results—General-Purpose Governments.

Susceptible fiscal stress Moderate fiscal stress Significant fiscal stress

[0, 55) [45, 65) [55, 100]

(1) (2) (3) (4) (5) (6)

Polynomial order Linear Quadratic Linear Quadratic Linear Quadratic

Assigned/Unassigned .1385** .1157** .0092 .0120 .1228** .1252**

fund balance ratio (.0595) (.0574) (.0531) (.0487) (.0539) (.0537)
Total fund .3128*** .2443** .0083 .0140 .1107** .1120**
balance ratio (.0912) (.0926) (.0608) (.0576) (.0459) (.0462)
Surplus ratio −.0001 .0355 −.0250 −.0195 .0708** .0682*
(.0363) (.0507) (.0393) (.0351) (.0344) (.0345)
Cash to monthly 2.3936** 1.9193** −.2964 −.3974 .7530* .6860
expenditures (.8141) (.7561) (.5448) (.4963) (.4279) (.4536)
Change in short-term .0169 .0484 −.0589 −.1337 −.3684 −.3510
debt issuance (.0502) (.0566) (.1846) (.2020) (.2291) (.2422)
Personal service and .0128 −.0433 −.0504 −.0287 −.2456** −.2471**
employee benefits (.0557) (.0803) (.0826) (.0897) (.1012) (.1010)
Debt service .2630 .0350* .0134 .0160 −.0312 −.0296
(.0214) (.0205) (.0351) (.0326) (.0250) (.0264)
Controls Yes Yes Yes Yes Yes Yes
Bandwidth (h) 5 5 5 5 5 5
N 6,593 6,593 190 190 127 127
Nh 177 177 97 97 66 66

Note: OLS estimations. Clustered standard errors in parentheses. Entity-level covariates included for all estimations. Cutoff scores are 45, 55, and 65.
For each cutoff, the sample size (N) is entities within each segment: [0, 55), [45, 65), and [55, 100]. Bandwidth (h) is selected manually. Nh indicates
observations within each bandwidth.
*p < .1, **p < .05, ***p < .01.

17
18
Table 3. RDD Results—School Districts.

Susceptible fiscal stress Moderate fiscal stress Significant fiscal stress

[0, 45) [25, 65) [45, 100]

(1) (2) (3) (4) (5) (6)

Polynomial order Linear Quadratic Linear Quadratic Linear Quadratic

Unassigned .1157*** .1130*** −.0027 −.0027 .0143 .0155

fund balance ratio (.0338) (.0334) (.0070) (.0070) (.0096) (.0107)
Total fund .2347*** .2617*** .0771** .0766** .0554*** .0617***
balance ratio (.0475) (.0491) (.0368) (.0368) (.0204) (.0227)
Surplus ratio .0317*** .0305*** −.0329** −.0328** .0176 .0181
(.0074) (.0081) (.0128) (.0128) (.0167) (.0173)
Cash ratio a 2.1740*** 2.2353*** .6109** .6130** .3562* .3676*
(.7803) (.7670) (.2410) (.2414) (.1862) (.1989)
Cash to monthly 2.0131*** 2.0986*** .5957** .5979** .0333 .0150
expenditures (.5066) (.5094) (.2831) (.2832) (.3385) (.3311)
Change in short-term −.0049 .0374 .1305 .1319 −.1403 −.1379
debt issuance (.0372) (.0413) (.0965) (.0969) (.1935) (.1870)
Controls Yes Yes Yes Yes Yes Yes
Bandwidth (h) 10 10 10 10 10 10
N 2,531 2,531 279 279 113 113
Nh 650 650 122 122 50 50

Note: OLS estimations. Clustered standard errors in parentheses. Entity-level covariates included for all estimations. Cutoff scores are 25, 45, and 65.
For each cutoff, the sample size (N) indicates number of observations within the following segments: [0, 45), [25, 65), and [45, 100]. Bandwidth (h) is
selected manually. Nh indicates observations within each bandwidth.
*p < .1, **p < .05, ***p < .01.
a
N = 2,627, Nh = 649.
Kang and Chen 19

Figure 2. Estimates by bandwidths—general-purpose governments.

Note: Point estimates and 95% confidence intervals obtained from model
specifications of different sizes of bandwidths and polynomial order of 1. The point
estimates are obtained from bandwidth sizes of 3, 4, and 5, respectively. Note that
point estimates with h(5) correspond with columns (1), (3), and (5) in Table 3. The
1st, 2nd, and 3rd cutoffs indicate fiscal stress scores of 45, 55, and 65, respectively.
20 Public Finance Review 0(0)

Figure 3. Estimates by bandwidths—school districts.

Note: Point estimates and 95% confidence intervals obtained from model
specifications of different sizes of bandwidths and polynomial order of 1. The point
estimates are obtained from bandwidth sizes of 4, 6, 8, and 10, respectively. Note
that point estimates with h(10) correspond with columns (1), (3), and (5) in Table 4.
The 1st, 2nd, and 3rd cutoffs indicate fiscal stress scores of 25, 45, and 65,
respectively.

cash to monthly expenditures doubled in the next year (columns 1 and 2),
and the relationship is consistent regardless of the size of bandwidths.
However, for entities labeled as moderate and significant fiscal stress, the
FSMS does not seem to improve liquidity (columns 3 to 6).
Kang and Chen 21

Lastly, for other indicators—surplus ratio, debt service ratio, change in short-
term issuance, and fixed cost (personal service and employee benefits expendi-
tures)—we failed to find consistent findings on whether local officials change
those indicators in response to the labeling results. Specifically, for surplus
ratio and fixed cost, the baseline model suggests that the surplus ratio increases
and the fixed cost decrease in response to the significant fiscal stress labels
(columns 5 and 6). Still, the relationships were not consistent when using alter-
native estimation strategies. Likewise, we found suggestive evidence that the
changes in short-term debt issuance decrease when entities are labeled as signif-
icant fiscal stress, but the relationship is only significant under smaller band-
width with polynomial order of 1 (Figure 2). At all cutoffs, the debt service
ratio for entities just above the cutoffs was not statistically different from
those just below the cutoffs, regardless of the size of bandwidths.

Effects of FSMS on School Districts

Findings shown in Table 3 suggest that fiscal stress labels effectively
improve the financial condition of fiscally stressed school districts. First,
the unassigned fund balance ratio increased by 11 percentage points when
local governments received susceptible fiscal stress labels, which is consis-
tent regardless of the choice of polynomial orders. However, school districts
under more severe conditions did not improve the unassigned fund balance
ratio. Figure 3 shows that such a pattern is consistent with smaller band-
widths. In contrast, the total fund balance ratio increased at all cutoffs.
We find that school districts assigned as fiscally stressed by the state govern-
ment try to accumulate fiscal reserves to detach from their negative labels.
We also note that the magnitude of improvements in the total fund
balance ratio tends to diminish as the fiscal stress score increases.
The results show that only the susceptible fiscal stress label positively
affects the surplus ratio regarding the surplus ratio. Columns 1 and 2
show that the surplus ratio jumps by three percentage points at the first
cutoff, and such a positive effect is consistent when bandwidths become
smaller (Figure 3). The surplus ratio tends to decrease for entities with the
moderate fiscal stress label, but the findings are not consistent when the
bandwidths are adjusted (Figure 3). This finding suggests that fiscal stress
labels can trigger local officials to improve the surplus ratio only when
the entities are in the early stage of fiscal stress.
Cash positions—cash ratio and cash to monthly expenditures—tend to
improve regardless of the specifications of models. For school districts with
the susceptible fiscal stress label, cash position indicators almost doubled in
22 Public Finance Review 0(0)

the following year (columns 1 and 2). However, columns 3 and 4 present that
the magnitude of the increase in cash positions decreases to 60 percentage
points. When school districts are under severe fiscal distress, evidence sug-
gests that they have difficulty improving liquidity solvency. This pattern of
findings is consistent with smaller bandwidth specifications (Figure 3).
Lastly, changes in short-term debt issuance are not affected by the state-
assigned fiscal stress labels. Regardless of the choice of polynomial orders
and bandwidths, the changes in short-term debt issuance do not decrease
for the districts with fiscal stress labels. Such findings suggest that state-
assigned fiscal stress labels are ineffective in altering school districts’ reli-
ance on debt to finance operating expenses.

Additional Analyses
We further conducted two additional analyses to examine the findings. The first anal-
ysis explores whether fiscal stress labels have lasting effects in t + 2. Appendix
Table A1-(1) shows that susceptible fiscal stress labels have a lasting influence on
the total fund balance ratio and cash to monthly expenditures. However, the positive
impact of significant fiscal stress labels disappeared in t + 2. In terms of the school
districts (Appendix Table A1-(2)), we find a positive impact of susceptible and sig-
nificant fiscal stress labels even after the immediate year of label designation.
Moreover, when districts are labeled as susceptible fiscal stress, their debt issuance
starts to decrease in t + 2. One caveat of this approach is that it does not account for
the accumulated impact of fiscal stress labels.
The second additional analysis accounts for the transition of labeling status
since local governments could behave differently depending on their prior
labeling status. We conducted RD with subsamples. One subsample consists
of local governments which remained the same as the prior year or worsened
than the prior year. Another subsample includes those that remained status
quo or improved. Appendix Table A2-(1) and Table A2-(2) indicate that
the findings from the baseline models are more salient among governments
that remained the same or transitioned from a worse labeling status.

Summary of Findings
Overall, the findings from both general-purpose governments and school
districts suggest that the effects of state-assigned fiscal stress labels on
local governments’ financial management behaviors are nuanced. When
the state government labels a local government as fiscally stressed, the
local government’s year-end fund balance, surplus ratio, and cash positions
Kang and Chen 23

improve in the following year (Hypothesis 1). However, labeled entities’

short-term debt issuance and debt service expenditures do not change signif-
icantly. Moreover, we find significant jumps are more likely to be detected at
the first threshold—the susceptible fiscal stress label (Hypothesis 2).
General-purpose governments with susceptible fiscal stress labels improved
year-end fund balance and cash positions in the following year, but such a
pattern was not revealed at other cutoffs. This finding is consistent with
Chung and Williams’s (2021) study using earlier data.
Our results also show a similar pattern with school districts: districts
designated to the susceptible fiscal stress category improve all financial
indicators except the changes in short-term debt issuance. Moreover,
the magnitude of the improvement in the total fund balance ratio is
more substantial when districts are under susceptible fiscal stress than
either moderate or significant fiscal stress. This result is plausible
because entities under more severe fiscal stress will have less leeway to
improve fiscal reserves in the short run than entities at the early stage of
stress. As such, the state fiscal stress labeling system has heterogeneous
effects on local government financial conditions, depending on the
severity of fiscal stress.

Discussion and Conclusion

SMS have become a popular tool for signaling the fiscal health of local gov-
ernments. The goal of this study was to examine whether SMS improves the
financial condition of local governments even without direct state interven-
tions. To do so, we examined the case of NYS FSMS and constructed a
dataset spanning from 2013 to 2017. The findings suggested that state-
assigned fiscal stress labels can affect local governments’ financial condi-
tion. Looking more closely, all types of local governments with fiscal
stress labels tend to improve year-end fund balance and cash positions in
response to label receipts. We also observe that such impact is more
salient among the entities at the early stage of fiscal stress, supporting the
heterogeneous effects of FSMS.
Overall, the findings suggest that FSMS serves as an EWS and allows
entities to take proactive actions to circumvent possible fiscal distress. We
can infer that the early warnings effectively raise red flags to local entities
entering the track toward fiscal distress. The positive impact of EWS
could operate through either direct interventions from state governments
or indirect accountability pressure for better performance (Hopland 2014;
Pew Charitable Trust 2016). Focusing on the case of FSMS, where the
24 Public Finance Review 0(0)

state does not intervene in the local operations, allowed us to narrow down
the possible impact of EWS—state governments can trigger changes in man-
agerial behaviors at the local level only by monitoring and releasing the
results. This suggests a great opportunity for the states where local govern-
ments have great autonomy over local finance.
Another important finding is that SMS have a limited role in assisting
local governments that are already experiencing severe fiscal stress. That
is, monitoring systems can alert local governments about potential fiscal
stress but are inadequate in mitigating realized severe fiscal distress. For
entities under significant fiscal stress, the labels can have limited effects
because entities are already aware of the dire situation. Or entities under sub-
stantial fiscal stress may not have many options left to improve their finan-
cial status. If the objective of an SMS goes beyond raising flags and aims at
mitigating actual financial hardships, the state government may need to
develop a range of tools to assist local governments in accordance with
the monitoring results.
Our study is not without limitations. First, many state governments are
equipped with more than one type of SMS. Future studies can further con-
tinue the discussion by assessing whether SMS with more intrusive systems
substantially impacts local governments’ financial condition. For instance,
we can speculate that for a state with both EWS and SIS, EWS alone may
not have a substantial impact. Second, our study does not explore the accu-
mulated impact of fiscal stress labels on local governments. Future study can
investigate how local governments’ responses to consecutive years of label-
ing are different from the initial labeling.
Despite the limitations, our study opens the ground for future studies
on SMS. Since labeling effectively signals the entities’ financial status
to the public, future research can examine citizens’ responses to fiscal
stress labels. How would additional information through labeling
change citizen behaviors? Hopland (2014) and Thompson and Whitley
(2017) have started to address such questions and investigate whether
negative signals about local governments’ financial status from the state
government change citizens voting behaviors. Studies from this strand
deserve further attention to understand the causal mechanism of SMS.
Moreover, we can further ask how the local government’s specific reve-
nues and expenditures change in response to the monitoring results. For
instance, a local entity could have improved its fund balance to meet
the standards of the state government by reducing public service expendi-
tures or increasing local taxes. As such, the effects of SMS can be further
examined in future studies.
Kang and Chen 25

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research,
authorship, and/or publication of this article.

Funding
The authors received no financial support for the research, authorship, and/or publi-
cation of this article.

ORCID iD
Hyewon Kang https://orcid.org/0000-0002-1382-3511

Note
1. We used the STATA command rddensity to test the density of the fiscal stress
score around each cutoff. When the manipulation around the first cutoff is tested
against all types of local governments, the result indicates that the density on each
side of the cutoff is statistically different (p-value .007). However, when the
manipulation test is conducted separately for counties, cities, towns, and villages,
the density is not statistically different around the cutoff—with the p-values of
.894, .436, .256, and .689, respectively.

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28 Public Finance Review 0(0)

Appendix

Figure A1. Fiscal stress scores by types of general-purpose government.

Kang and Chen 29

Figure A2. Manipulation test results.

Note: We constructed the manipulation test for each type of general-purpose
government at all cutoffs. The graphs illustrate the manipulation test results with all
types of general-purpose governments.
30 Public Finance Review 0(0)

Figure A3-(1). Discontinuity tests of covariates—general-purpose governments.

Note: Discontinuity testing of covariates. Figures illustrate the linear prediction at
each cutoff with 95% confidence intervals within the bandwidth of 5 (Nh = 5), which
is the same as the baseline specification from Table 3. (a) Population (logged) (b)
Percent change of tax base (c) Percent of population age below 18 and above 6 (d)
Median household income (logged) (e) Unemployment rate
Kang and Chen 31

Figure A3-(2). Discontinuity tests of covariates—school districts.

Note: Discontinuity testing of covariates. Figures illustrate the linear prediction at
each cutoff with 95% confidence intervals within the bandwidth of 10 (Nh = 10),
which is the same as the baseline specification from Table 4. (a) Percent of change of
tax base (b) Percent of economically disadvantaged students (ECDIS) (c) Turnover
rate of all teachers (d) Percent of english language learners (ELL) (e) Class size
32
Table A1-(1). RDD Results—General-Purpose Governments (t + 2).

Susceptible fiscal stress Moderate fiscal stress Significant fiscal stress

[0, 55) [45, 65) [55, 100]

(1) (2) (3) (4) (5) (6)

Polynomial order Linear Quadratic Linear Quadratic Linear Quadratic

Assigned/Unassigned .0554 .0436 .0986 .0519 .0478 .0518

fund balance ratio (.0619) (.0641) (.0748) (.0648) (.0171) (.0776)
Total fund .2268*** .1682* .0056 −.0306 .0153 .0158
balance ratio (.0861) (.0919) (.0778) (.0698) (.0478) (.0485)
Surplus ratio −.0633* −.1106* .0365 .0092 −.0394 −.0396
(.0340) (.0641) (.0392) (.0349) (.0289) (.0292)
Cash to monthly 1.9817** 1.5226* .3692 .0344 −.0535 −.0787
expenditures (.9300) (.9133) (.5342) (.5186) (.4776) (.4545)
Change in short-term .0126 −.0256 .1070 .3373* −.0235 −.0244
debt issuance (.0634) (.0603) (.1536) (.1775) (.2128) (.2135)
Personal service and −.0184 −.0612 .0181 .0925 −.2036* −.2045*
employee benefits (.0612) (.0804) (.0871) (.0986) (.1048) (.1055)
Debt service .0334 .0567 .0305 .0195 −.0304 −.0305
(.0362) (.0482) (.0383) (.0373) (.0282) (.0285)
Controls Yes Yes Yes Yes Yes Yes
Bandwidth (h) 5 5 5 5 5 5
N 5,145 5,145 154 154 106 106
Nh 144 144 75 75 58 58

Note: OLS estimations. Clustered standard errors in parentheses. Entity-level covariates included for all estimations. Cutoff scores are 45, 55, and 65.
For each cutoff, the sample size (N) is entities within each segment: [0, 55), [45, 65), and [55, 100]. Bandwidth (h) is selected manually. Nh indicates
observations within each bandwidth.
*p < .1, **p < .05, ***p < .01.
 Table A1-(2). RDD Results—School Districts (t + 2).

Susceptible fiscal stress Moderate fiscal stress Significant fiscal stress

[0, 45) [25, 65) [45, 100]

(1) (2) (3) (4) (5) (6)

Polynomial order Linear Quadratic Linear Quadratic Linear Quadratic

Unassigned .1112*** .1127*** .0005 .0000 −.0010 .0007

fund balance ratio (.0333) (.0333) (.0113) (.0112) (.0110) (.0117)
Total fund .2066*** .2412*** .0514 .0513 .0601*** .0689***
balance ratio (.0462) (.0484) (.0346) (.0351) (.0225) (.0248)
Surplus ratio .0341*** .0378*** −.0185* −.0195* −.0103 −.0126
(.0089) (.0098) (.0098) (.0101) (.0148) (.0138)
Cash ratio 2.3520*** 2.4415*** .7146 .6862 −.0258 .0015
(.8519) (.8360) (.6041) (.5711) (.3169) (.2901)
Cash to monthly 2.0952*** 2.1680*** .5770 .5430 −.4601 −.4659
expenditures (.4877) (.4930) (.4278) (.4067) (.3952) (.3772)
Change in short-term −.1097*** −.1036** .1623** .1572** −.0230 −.0069
debt issuance (.0422) (.0517) (.0712) (.0710) (.1543) (.1560)
Controls Yes Yes Yes Yes Yes Yes
Bandwidth (h) 10 10 10 10 10 10
N 1,880 1,880 223 223 101 101
Nh 510 510 91 91 46 46

Note: OLS estimations. Clustered standard errors in parentheses. Entity-level covariates included for all estimations. Cutoff scores are 25, 45, and 65.
For each cutoff, the sample size (N) indicates number of observations within the following segments: [0, 45), [25, 65), and [45, 100]. Bandwidth (h) is
selected manually. Nh indicates observations within each bandwidth.
*p < .1, **p < .05, ***p < .01.

33
34
Table A2-(1). RDD Accounting for Transitions—General-Purpose Governments.

Susceptible fiscal stress Moderate fiscal stress Significant fiscal stress

[0, 55) [45, 65) [55, 100]

(1) (2) (3) (4) (5) (6)

Subsample Worsened Improved Worsened Improved Worsened Improved

Assigned/ .0217** .1073* .0092 .085 .1229** .0333

Unassigned
fund balance ratio (.0905) (.0622) (.0531) (.0701) (.0539) (.0631)
Total fund .4324*** .2547*** .0083 .0637 .1107** .0781*
balance ratio (.1445) (.0934) (.0608) (.0743) (.0459) (.0459)
Surplus ratio .0416 −.0018 −.0250 .0320 .0708** .0331
(.0555) (.0424) (.0393) (.0419) (.0344) (.0353)
Cash to monthly 2.2699* 2.1565** −.2964 .4922 .7530* .8331
expenditures (1.2160) (.8833) (.5448) (.6817) (.4279) (.5861)
Change in short-term −.0187 .0023 −.0589 −.2871 −.3648 −.2099
debt issuance (.0598) (.0570) (.1846) (.2496) (.2291) (.2656)
Personal service and −.0613 .0443 −.0504 −.0650 −.2456** −.2411*
employee benefits (.0812) (.0593) (.0826) (.0963) (.1012) (.1226)
Debt service .0308 .0275 .0134 −.0106 −.0312 .0020
(.0281) (.0231) (.0351) (.0516) (.0250) (.0314)
Controls Yes Yes Yes Yes Yes Yes
Bandwidth (h) 5 5 5 5 5 5
N 4,919 6,543 190 114 127 84

(continued)
 Table A2-(1). (continued)

Susceptible fiscal stress Moderate fiscal stress Significant fiscal stress

[0, 55) [45, 65) [55, 100]
(1) (2) (3) (4) (5) (6)
Subsample Worsened Improved Worsened Improved Worsened Improved

Nh 101 152 97 54 66 48

Note: OLS estimations. Polynomial order of 1. Clustered standard errors in parentheses. Entity-level covariates included for all estimations. Cutoff
scores are 45, 55, and 65. For each cutoff, the sample size (N) is entities within each segment: [0, 55), [45, 65), and [55, 100]. Bandwidth (h) is selected
manually. Nh indicates observations within each bandwidth.
*p < .1, **p < .05, ***p < .01.

35
36
Table A2-(2). RDD Accounting for Transitions—School Districts.

Susceptible fiscal stress Moderate fiscal stress Significant fiscal stress

[0, 45) [25, 65) [45, 100]

(1) (2) (3) (4) (5) (6)

Polynomial order Worsened Improved Worsened Improved Worsened Improved

Unassigned .1351*** .1208*** −.0131 −.0034 .0143 .0243*

fund balance ratio (.0385) (.0370) (.0115) (.0094) (.0096) (.0124)
Total fund .2666*** .2131*** .0530 .0550 .0553*** .0339*
balance ratio (.0581) (.0512) (.0689) (.0337) (.0204) (.0189)
Surplus ratio .0350*** .0288*** −.0154 −.0528*** .0176 .0051
(.0108) (.0077) (.0174) (.0149) (.0167) (.0159)
Cash ratio 2.8013*** 2.2228*** .5115 .6313** .3562* .4810**
(1.0707) (.8458) (.4210) (.2804) (.1862) (.2281)
Cash to monthly 2.1744*** 2.1252*** .4001 .8377* .0333 .4734
expenditures (.5831) (.5545) (.3005) (.4404) (.3385) (.3995)
Change in short-term .0065 −.0354 .1232 .1778 −.1403 −.1795
debt issuance (.0531) (.0366) (.1264) (.1395) (.1935) (.2483)
Controls Yes Yes Yes Yes Yes Yes
Bandwidth (h) 10 10 10 10 10 10
N 1,753 2,464 164 180 113 73
Nh 388 597 67 82 50 37

Note: OLS estimations. Polynomial order of 1. Clustered standard errors in parentheses. Entity-level covariates included for all estimations. Cutoff
scores are 25, 45, and 65. For each cutoff, the sample size (N) indicates number of observations within the following segments: [0, 45), [25, 65), and [45,
100]. Bandwidth (h) is selected manually. Nh indicates observations within each bandwidth.
*p < .1, **p < .05, ***p < .01.