Budgeting by priorities: Balancing stability with economic responsiveness

The Arkansas Revenue Stabilization Act (ARSA) is a formalized method of state budgeting by priorities. State funds are allocated and distributed according to priority levels established each year by the General Assembly and the Governor. This prioritization method of budgeting is unique to the State of Arkansas and has the stated purpose of stabilizing the impact of revenue fluctuations. If revenue collections fall short of expectations, then the lower priorities are not funded. In a study of the ARSA approach to budgeting by priority, we ask the research question: How do departmental budget priorities vary with changes in the economic condition?

Theories of incrementalism and decrementalism suggest that changes in the budget will take place across the board in small increments from the previous year. The theories suggest a lack of in depth budget consideration of priorities.  On the other hand, ARSA requires explicit prioritization for each department and has budget distribution contingent upon revenue flow.  Therefore, we hypothesize that the economy will have a significant impact on priority levels. Specifically, we hypothesize that the higher priority items will follow a more incremental pattern, while the economy has a greater impact on the lower priority items.

Arkansas departmental budget data are obtained from the state budget office for each priority level. The state’s personal income data are obtained from the U.S. Bureau of Economic Analysis. The unit of analysis is the state department expenditures changes for 11 departments from fiscal years 1992-2014.  Using panel data for 11 departments across 23 years, we use feasible generalized least squares (FGLS) to estimate three models: percent of department budget in priority level 1, percent of department budget in priority level 2, and percent of department budget in level 2 as a ratio to percent in level 1.  To test hypotheses about incre(decre)mentalism (stability) and economic responsiveness, our explanatory variables are previous year budget decisions and changes in economic condition. 

Because of ARSA’s stated purpose of stabilizing the budget, we expect incremental and decremental patterns of expenditure changes for high priority items.  However, for lower priority items, we expect the economy to have a larger impact.  We also expect there to be little differences across departments for the highest priority level (across the board), and we expect significant differences across departments for lower priority levels in order to reflect economy contingent prioritization.