Equity Implications of Fiscal Adaptation to Negative Revenue Shocks

How do public organizations adapt to unanticipated disruptions and what are the implications of those adaptations on social equity? An enduring debate in public administration pertains to the promise of adaption for innovative and scalable solutions as opposed to its potential unintended consequences on agency performance, racial minorities, and low-income households. In this paper, I critically examine fiscal adaptations to negative revenue shocks and investigate the impact of three distinct channels of fiscal adaptation on social equity. The empirical strategy leverages a quasi-experimental setting and exploits exogenous shocks to local revenues that result from passage vs. failure of local tax and bond referendums to identify direct and mediated effects. I estimate dynamic regression discontinuity models using 2,600 distinct local ballot measures, and over three decades of data (1991-2018). I find that while the direct causal effect of negative revenue shocks is associated with decrease in service expenditures, when mediated by political or fiscal pressure, fiscal adaptation occurs through increase in non-tax regressive revenues as well as decline in fiscal solvency. This pattern of findings reveals that the distributive consequences of fiscal adaptation are especially salient when internal pressures coincide with unanticipated fiscal disruptions. These findings inform policy discussions on fiscal governance, crisis management and social equity in local public finance