Budget Adjustments in Response to Spending Variances: Evidence of Ratcheting of Local Government Expenditures

Posted: 17 Dec 2007  

Tanya Lee

Robert Morris University

Elizabeth Plummer

Texas Christian University

Abstract

This paper examines the degree to which government administrators incorporate prior year spending variances into current year budgets. Government administrators have incentives to increase their budgets, and constraints on government spending are weaker than those found in the private sector. Therefore, we expect budget increases associated with prior year government overspending (actual exceeds budget) to be larger than decreases associated with underspending of the same amount. This differential response is called ratcheting. We examine budgets for 1,034 Texas school districts (1995 through 2002), and find budget ratcheting in operating expenditures and the subcategories of instructional and non instructional expenditures. Ratcheting is most pronounced for non instructional expenditures. We also find that budget ratcheting is more pronounced when controls on government spending are likely to be weaker. Specifically, budget ratcheting is more pronounced for school districts that operate in a less competitive environment and for districts that have less voter influence.

Keywords: budget ratcheting, budget variance, school expenditures, public sector, incentives

JEL Classification: M40, M41, M46, H72, H52, I22, M48

Suggested Citation

Lee, Tanya and Plummer, Elizabeth, Budget Adjustments in Response to Spending Variances: Evidence of Ratcheting of Local Government Expenditures. Journal of Management Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1075610

Tanya Lee

Robert Morris University ( email )

6001 University Blvd.
Moon Township, PA 15108
United States

Elizabeth Plummer (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States

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