State Aid Cuts, First‐Round Cutback Management, and Organizational Performance: Evidence From School Districts

ABSTRACT

Cuts in state aid impose fiscal stress on local governments and require cutback management strategies whose short‐run fiscal and performance implications remain uncertain. This study examines the school districts' first‐round fiscal and performance responses to the elimination of adjustment aid for 126 New Jersey school districts during the 2018–19 school year. Using a panel data set of 2,190 district‐year observations from 2013–14 to 2018–19 and a differences‐in‐differences research design, the study finds that the elimination of adjustment aid is associated with reductions in fund balance and modest reductions in current expenditures, but no evidence of an increase in local revenues. The findings also suggest that districts experiencing the loss of adjustment aid increased student‐to‐teacher ratios, while showing no practically significant changes in standardized test scores. Overall, the findings suggest that districts responded to the elimination of adjustment aid through short‐run fiscal buffering strategies while maintaining district‐wide student achievement during the study period.