Eugenio Anessi-Pessina Ileana Steccolini

Catholic University, Milan, Italy Bocconi University, Milan, Italy

Mariafrancesca Sicilia
Bergamo University, Milan, Italy

Budgeting and Rebudgeting in Local Governments:

Siamese Twins?

The literature on budgeting in the public sector has
traditionally focused on the annual budgetary process.
Much less attention has been paid to rebudgetingthat
is, what governments do to revise and update their budg-
ets during the scal year. Because of its potentially large
impact on appropriations, rebudgeting seemingly deserves
more attention than it has been granted so far. This
article uses data from a sample of Italian municipalities
to test hypotheses on the main drivers of budget revisions.
According to the results, rebudgeting is strongly aected
by the degree of incrementalism in the initial budget-
ing process, as well as by several internal and external
determinants, such as political variables, organizational
features, nancial conditions, and the local socioeconomic
environment.
stance and testing some hypotheses on the potential
determinants of rebudgeting practices. To this end,
we use data for Italian municipalities over ve years
(20037).
The structure of the article is as follows: The next
section reviews the relevant literature and develops
the hypotheses. Then we oer a short background on
Italian municipalities, their accounting systems, and
their rebudgeting rules. The ensuing section species
data and methods, followed by a presentation of the
ndings. The nal section draws some conclusions
and implications for practice and further research.
Previous Studies and Hypothesis
Formulation
Eugenio Anessi-Pessina is full profes-
sor of public and health care management
at Catholic University in Milan, Italy. In
addition, he is senior fellow at the Wharton
School of the University of Pennsylvania
(Department of Health Care Systems) and
editor of Azienda Pubblica (a leading
Italian-language public management
journal). His research interests include
public sector budgeting and accounting,
health care management, and management
control in government and health care
organizations.
E-mail: eugenio.anessi@unicatt.it
Mariafrancesca Sicilia is assistant
professor of public budgeting at Bergamo
University and SDA Bocconi assistant
professor of Public Management and Policy.
Her research interests focus on public sector
budgeting, accounting, and performance
measurement.

I
n most public organizations, the main purpose of Compared with the initial budgeting process, budget E-mail: francesca.sicilia@unibocconi.it
the budget is to authorize (i.e., to limit) spend- execution and rebudgeting have received much less
Ileana Steccolini is associate professor
ing by nature and/or purpose (Anessi-Pessina attention. The few existing studies on rebudgeting, of public budgeting and performance
2000; Caperchione 2000). Traditionally, the litera- moreover, have predominantly adopted an exploratory measurement at Bocconi University in Milan,
ture has focused on the annual budgetary process and descriptive stance (Dougherty, Klase, and Soo Italy, and director of the Public Management
and Policy Department at SDA Bocconi
(Fenno 1966; Lu and Facer 2004; Rubin 1990, 2005; 2003; Forrester and Mullins 1992). They usually have School of Management. Her research
Wildavsky 1964), investigating such themes as the investigated the importance and magnitude of budget interests include public budgeting, account-
players involved, their roles, and the internal and revisions, the players who initiate the revision process ing and accountability, and performance
measurement in the public sector.
external factors that inuence budget characteristics. or are otherwise involved, and the contingencies, E-mail: ileana.steccolini@unibocconi.it
Approved budgets, however, often need to be revised events, and reasons that are more likely to cause it at
during the scal year in order to incorporate chang- the local and state levels.
ing priorities and face unexpected events (Caiden
and Wildavsky 1974; Wildavsky 1988). Rebudgeting According to these studies, not only does rebudget-
is thus allowed in most public organizations world- ing signicantly aect the original appropriations
wide, although within dierent sets of constraints. (Hoskins 1983), but also it inuences future budget
Rebudgeting, moreover, has a potentially large impact cycles (Dougherty, Klase, and Soo 2003; Lauth 1988;
on appropriations. So far, however, it has been the Lee and Plummer 2007). For example, the revi-
subject of remarkably little research. In addition, the sion of budgeted revenues during the scal year will
few existing studies (Dougherty, aect future revenue forecasts
Klase, and Soo 2003; Forrester The purpose of this article is to (Bretschneider, Straussman,
and Mullins 1992) have pre- and Mullins 1988). In addition,
dominantly been exploratory
enrich the existing literature by governments have been shown
and descriptive. adopting an explanatory stance to initially favor a conservative
and testing some hypotheses on underestimation of revenues
The purpose of this article is the potential determinants of to hedge against the risk of Public Administration Review,
Vol. 72, Iss. 6, pp. 875884. 2012 by
to enrich the existing literature rebudgeting practices. revenue shortfall (Bretschneider The American Society for Public Administration.
by adopting an explanatory and Schroeder 1985). This DOI: 10.111/j.1540-6210.2012.02590.x.

Budgeting and Rebudgeting in Local Governments: Siamese Twins? 875

conservative underestimation, coupled with economic growth, can processes, which are considered incremental when decision makers
produce surpluses that are added to budgetary appropriations and focus their attention on a relatively small number of alternatives as
may favor the parochial interests of legislators (Lauth 1988), thus a method of simplifying decision making; and (3) consideration of
creating a structural framework for rebudgeting. both processes and outputs.

Along these lines, Dougherty, Klase, and Soo (2003) investigated the
rebudgeting process in 15 West Virginia cities and found an increase-
then-decrease pattern, with statistically signicant mean dierences
between the original and the revised appropriations and between the
revised appropriations and the actual outlays, but not between the
original appropriations and the actual outlays. This pattern reects a
conscious strategy adopted by municipalities to ensure a buer against
unexpected events and to keep expenditures under their budgeted
levels.
Less attention has been paid to the implications of incrementalism
for budget execution and the need for rebudgeting. This is criti-
cal because focusing on initial budgeting leaves a large portion of
the overall, yearlong budgeting process virtually unexplored. Our
hypothesis is that an incremental approach to budgeting may not
fully capture the organizations needs and will consequently require
more rebudgeting during the scal year. We thus expect a positive
relationship between incremental budgeting on the one hand and
rebudgeting on the other.

As to the players involved and their roles and motivations, Forrester Hypothesis 2: Rebudgeting is aected by political variables.
and Mullins (1992) carried out a survey of 91 U.S. central cities.
According to their results, rebudgeting is generally less visible than An important body of literature suggests that budgeting is aected
budgeting to the general public and is driven more by administra- by political variables. Because rebudgeting revises the budget to
tive than political bodies. It can be stimulated by managerial neces- incorporate emerging priorities and needs, our hypothesis is that
sity, political concerns, or environmental pressures, and it aects the rebudgeting will also be aected by political variables.
various government services and functions to dierent extents.
Among political variables, the most obvious is the administrations
The purpose of our article is to go beyond the exploratory perspec- political orientation. The literature on political orientation sug-
tive and to adopt an explanatory approach. Our starting point is gests that left-wing parties will be more likely to raise tax revenues,
that rebudgeting cannot be studied indepen- while right-wing parties will prefer to cut
dently of budgeting. Budget approval is the Our starting point is that expenditures (see, e.g., Mulas-Granados 2003;
outcome of a decision-making process, but rebudgeting cannot be studied Tavares 2004). To the extent that this is not
it is also the starting point for a continuous incorporated into the initial budget, midyear
process of budget execution and revision. In
independently of budgeting. adjustments that increase revenues should
other words, budgeting can be viewed as a thus occur more frequently under left-wing
yearlong process composed of initial budgeting and rebudgeting. administrations, while midyear adjustments that decrease expendi-
As a consequence, when looking at rebudgeting, a fruitful avenue tures should be more likely under right-wing ones.
may be to test the explanatory potential of those variables that have
been identied as relevant by the literature on budgeting. This leads The description of an administration as being right- or left-wing,
us to formulate ve hypotheses, which are individually stated and however, is extremely stylized, especially in the Italian political
explained here. context. In reality, majority coalitions can be highly fragmented, and
this may have an impact on rebudgeting. According to the economic
Hypothesis 1: Rebudgeting is aected by the degree of incre- and scal reform literature (e.g., Alesina and Drazen 1991; Lora and
mentalism in the formulation of the initial budget. Olivera 2004; Mierau, Jong-A-Pin, and De Haan 2007), the tim-
ing of reforms depends on the distributional eects that they pro-
The concept of incrementalism has been interpreted in many duce. Rebudgeting can be likened to reforms in that it modies the
dierent ways (Berry 1990), not necessarily involving budgetary distribution of both benets and costs among stakeholders. Alesina
choices. According to Lindblom (1959), incrementalism is a way of and Drazen (1991) suggested that political fragmentation hinders
simplifying decision making by reducing the number of alternatives the adoption of reforms: political fragmentation could then also be
and their degree of innovativeness from policies presently in eect, expected to deter rebudgeting. At the same time, however, highly frag-
adopting a sequential consideration of alternatives, ignoring the full mented majority coalitions may be unable to nd a stable compro-
range of policy consequences, and increasing the dependency of mise and end up demanding continuous budget revisions. The impact
ends on means. Wildavsky, on the contrary, dened incrementalism of this variable on rebudgeting, therefore, cannot be signed a priori.
with specic reference to the budgeting process: a budget is incre-
mental when it is based on last years budget, with special attention Finally, the political budget cycle literature (e.g., Brender and Drazen
given to a narrow range of increases or decreases (1964, 15). 2005; Mink and De Haan 2006; Persson and Tabellini 2004; Shi
and Svensson 2006; Tujula and Wolswijk 2007) proposes that budget
Following Wildavsky, the theory of incrementalism has dominated choices are aected by electoral cycles. This is further reinforced by
budgeting studies for the last 60 years. Boyne, Ashworth, and Powell the budgets symbolic signicance (Lu and Facer 2004), whereby
(2001) identied three general uses of the term incrementalism budget choices are often adopted simply for their outward symbolism.
when applied to budgeting process research: (1) description of Thus, it seems natural to extend the same presumption to rebudget-
budgetary outputs, which are considered incremental if dierences ing, to the extent that such choices are not directly incorporated
from the previous year(s) are small; (2) description of budgetary into the initial budget. More specically, the literature suggests that
876 Public Administration Review November | December 2012
upcoming elections encourage greater decits and discourage s-
cal reforms, which, conversely, will often take place soon after the
election. Therefore, the time elapsed since the last election can be
expected to aect rebudgeting, with spending cuts and tax or fee hikes
becoming gradually less likely as the next election approaches. In
addition, unless elections are held toward the end of the scal year, the
incoming administration must operate for several months within the
budget approved by its predecessors. Therefore, a new mayor and/or
majority coalition can be expected to make large changes to the initial
budget. This is also consistent with Forrester and Mullins (1992), who
found that rebudgeting is encouraged by changed priorities and the
willingness to counteract previous decisions.
Hypothesis 3: Rebudgeting is aected by organizational
features.
The impact of organizational features on budgeting has been investi-
gated only to a small extent. However, these features can potentially
play an important role (Greenwood, Hinings, and Ranson 1977;
Forrester and Adams 1997; Lu and Facer 2004). On the one hand,
budgeting is associated with organizational structure and mecha-
nisms. On the other, it is part of the intangible side of organiza-
tions (Giroux el al. 1986), and it is shaped by the role of the various
players and the conguration of powers, values, rules, and rou-
tines (Bretschneider, Straussman, and Mullins 1988; Greenwood,
Hinings, and Ranson 1977).
An organizational variable that can be expected to aect budgeting
(and thus, supposedly, rebudgeting) is size. Bigger organizations
tend to be more complex and dicult to manage because of the
magnitude and variety of their activities. As a consequence, they
must rely on rules, procedures, and formal ways of doing things
that may make them slower to reach the consensus required to revise
the budget. At the same time, however, larger and more complex
governments are more likely to need midyear adjustments. The
impact of size on rebudgeting, therefore, cannot be signed a priori.
Another important set of organizational variables that can aect
budgeting (and, supposedly, rebudgeting) is the power and inuence
of the actors involved. Among them, the Financial Comptroller
Oce (CFO) can be expected to exert a great inuence, owing to its
responsibility for controlling spending and for reducing uncertainty
on the availability of resources for programs (Giroux, Mayper, and
Daft 1986). Once again, however, the impact of this inuence on
rebudgeting cannot be signed a priori: powerful CFOs may stress
ex ante programming (thus reducing the need for midyear adjust-
ments) or, rather, prefer conservative budgeting (keeping initial
appropriations low and hopefully increasing them during the scal
year as revenues are actually achieved).
Finally, each government will be characterized by its own values,
beliefs, rules, and routines for budgeting and rebudgeting, which
may encourage or discourage midyear adjustments.
Hypothesis 4: Rebudgeting is aected by the municipalitys
nancial conditions.
Another set of variables that may aect rebudgeting relates to the
governments nancial position and the availability of slack resources
(Lu and Facer 2004). In this regard, governments that have accumu-
lated larger surpluses in previous years should enjoy greater degrees
of freedom during the initial budgeting process and thus require
smaller midyear adjustments. The same should hold for govern-
ments (1) whose current revenues exceed current spending; (2)
whose current revenues include a larger share of own taxes and fees
as opposed to transfers from higher levels of government; (3) whose
expenditures include a smaller share of rigid, nondiscretionary items
such as personnel, interest, and loan repayment; and (4) that resort
to borrowing to a lesser extent.
A peculiarity of budgeting is that it occurs well before the prepara-
tion of the nancial statement for the previous year. For munici-
palities, therefore, it is not unusual to experience the emergence
of past-year surpluses or decits halfway through the scal year.
Obviously, the approximate size of the previous years surplus or
decit becomes common knowledge early in the new scal year,
but it can be incorporated into the budget only when formalized
through the preparation and approval of the previous years nancial
report. The emergence of past-year surpluses will generally stimu-
late rebudgeting in terms of higher capital spending (local govern-
ments usually have a list of relatively small capital projects awaiting
a source of funding to be implemented), possibly higher current
spending (although rules often exist that prevent or limit the use of
surpluses to cover current spending), or lower capital revenues (as
the newly discovered surplus can replace planned borrowing or asset
sales as a way of funding investments) (see also Dougherty, Klase,
and Soo 2003). Emerging past-year decits, on the other hand, will
have to be covered and, consequently, will induce budget adjust-
ments in terms of increased revenues and/or reduced expenditures.
Hypothesis 5: Rebudgeting is aected by the local socioeco-
nomic environment.
Finally, a large body of literature exists on the external factors that
aect organizational behavior in the public sector. The demographic
and cultural features of the community, for instance, can play a
signicant role (Brudney and Selden 1995; Forrester and Mullins
1992; Greenwood, Hinings, and Ranson 1977; Lu and Facer 2004).
Bingham (1978) recalled that the socioeconomic characteristics of
the community have been studied by many economists and political
scientists as factors aecting decision making and city policies.
In the Italian context, signicant regional dierences exist across a
wide range of dimensions, including local government openness to
public sector reforms (Putnam, Leonardi, and Nanetti 1993) and
accounting innovations (Anessi-Pessina, Nasi, and Steccolini 2008).
Local socioeconomic conditions can thus be expected to aect bud-
geting and rebudgeting practices.
Budgeting and Rebudgeting in Italian Municipalities
Italy has four levels of government: the central government, 20
regions, about 100 provinces, and approximately 8,100 municipali-
ties. Each level has jurisdiction over several policy areas.
With respect to municipalities, each has a mayor, a municipal
executive board, a city council, and a professional bureaucracy. The
executive structure of Italian local government is similar to the U.S.
model of mayor-council government in that the mayor and city
council are separate oces. Both the mayor and the city councilors
Budgeting and Rebudgeting in Local Governments: Siamese Twins? 877
are elected directly by the population. Elections are held every ve
years, usually between April and June.
The mayor appoints the members of the municipal executive board,
while the city council functions with legislative powers. In the last
two decades, the powers of the executive have been greatly increased
at the councils expense. The electoral system, moreover, is designed
to generally provide the mayor with a majority of seats in the city
council. Majorities, however, are often composed of highly frag-
mented coalitions. Majority city councilors are technically free to
withdraw their support and side with the opposition, which may
force the mayor to call an early election. Early elections may also
occur under other special circumstances, such as the mayors death,
resignation, or removal for major criminal violations.
In addition to the members of the municipal executive, the mayor
can also choose to appoint a chief executive ocer (or city man-
ager) with general management responsibilities. The CFO, on the
contrary, is a career civil servant and so are his or her subordinates.
Municipalities are allowed to raise local taxes and charge fees for the
services that they provide, but a signicant percentage of their revenues
is still accounted for by transfers from higher levels of government,
especially in low-income areas of the country. For municipalities with
populations above 15,000, between 2003 and 2007, own taxes, fees,
and transfers averaged 54 percent, 26 percent, and 20 percent of cur-
rent revenues, respectively. Current revenues, in turn, were 70 percent
of total revenues, the other components being capital revenues (sales of
noncurrent assets, capital transfers from other governments and private
entities, totaling 19 percent) and borrowing (11 percent). These funds
were used to cover current spending (65 percent), investments
(27 percent), and debt repayment (8 percent).
From an accounting viewpoint, municipalities still rely predomi-
nantly on cash and commitment-based budgetary accounting,
although they are technically expected to also publish an accrual-
based nancial statement (Anessi-Pessina and Steccolini 2007).
The budget, which is commitment based, must be approved by the
council and is required to balance. Budgeted revenues can include
borrowing, which, however, can only be used to cover capital
Table 1 Titles for Italian Municipal Budgets
Revenues
Surplus from previous year, if any
Title 1Tax revenues
Title 2Current transfers from other governments
Title 3Current nontax revenues
Title 4Disposal of fixed assets, capital transfers from other governments and private entities
Title 5Borrowing
Title 6Clearing entries (by definition identical to their expenditure counterparts)
Note: Current revenues include Titles 1, 2, and 3.
Table 2 Rules for Rebudgeting in Italian Municipalities
Types of Adjustments Definition
Virement Funds are transferred between spending items; total budgeted expenditures remain unchanged
Use of new or larger than Budgeted revenues are increased; budgeted expenditures can be increased by the same
expected revenues amount
Use of reserve funds Funds are moved from the reserve fund item to other spending items; total budgeted expendi-
tures remain unchanged
878 Public Administration Review November | December 2012
spending. Past-year surpluses may be added to budgeted revenues,
while past-year decits must be added to budgeted expenditures. The
scal year coincides with the calendar year. Revenues are classied
by nature, with titles as the most aggregate level. Expenditures are
classied by nature and purpose, once again with titles as the most
aggregate level. The list of titles is presented in table 1.
Rebudgeting rules (table 2) require the budget to remain balanced.
Therefore, increased budgeted expenditures for a given line item
must be oset by (1) decreased budgeted expenditures for other line
items, and/or (2) increased budgeted revenues. All revisions must
generally be approved by the council no later than November 30,
although exceptions do exist. Budget revisions occur throughout the
year, but they are particularly frequent in two specic periods: in
July, after the publication of the previous years nancial statement,
in order to revise the amount of surplus/decit carried over from the
previous year, and in November, just before the November 30 dead-
line, to make all of the remaining changes that are deemed necessary.
Methods
To test the hypotheses presented earlier, we used a panel data set of
657 Italian municipalities with populations consistently greater than
15,000 over a ve-year period (20037).
The data set was downloaded from the Department of the Interiors
Web site. For every year, the data set contains each municipalitys
initial budget, revised budget, and year-end statement.1 For the ini-
tial budget and the year-end statement, the data set is very detailed,
with expenditures broken down by both nature (e.g., personnel,
supplies) and purpose (e.g., education, social services). For the
revised budget, on the contrary, the data set provides only a very
broad break-down of expenditures by title, that is, among current
spending, capital spending, debt repayment, and clearing entries
(table 1). As a consequence, rebudgeting was analyzed separately
for current and capital spending. Debt repayment was disregarded
because its rebudgeting is entirely dependent on external circum-
stances such as changing interest rates, and clearing entries were
disregarded because of their purely technical nature. For each of
the two titles, the dependent variable was dened as the percentage
change between the revised and the initial budget.
Expenditure
Deficit from previous year, if any
Title 1Current expenditures
Title 2Capital expenditures
Title 3Loan repayments
Title 4Clearing entries (by definition identical to their revenue counterparts)
Body Responsible for Approval Deadline
Council Nov. 30
Council Nov. 30
Municipal Executive Board Dec. 31
Following the hypotheses presented earlier, the independent
variables were classied as internal and external, with the for-
mer including the degree of incrementalism in the initial budget
formulation, as well as another three sets of variables reecting
the municipalitys political situation, organizational features, and
nancial conditions.
The degree of incrementalism in the initial budget formulation
was measured by the variable BUDGET_CHANGE, dened as
the percentage change between the initial budget and the previ-
ous years actual expenditures. This is because an administration
can incorporate its policies into the initial budget or pursue them
through rebudgeting. The more a policy has been incorporated
into the initial budget, the less it usually will need to be pursued
through rebudgeting. The variable BUDGET_CHANGE, however,
only captures the average budgeted increase (or decrease) from the
previous year. To measure the degree of incrementalism in the initial
budget formulation, it seems important to verify whether any such
increase was uniformly applied to all items or, alternatively, whether
dierent items were treated dierently. As a consequence, the
variables SPENDING_CATEGORY_CHANGES and SPENDING_
PURPOSE_CHANGES were introduced to reect the variance of
the percentage change between the initial budget and the previous
years actual expenditures across dierent items, by nature and by
purpose, respectively. These two variables, however, were included
only in the analysis of current spending. For capital spending, they
were excluded because of extensive variability in nature and purpose
over time, especially in smaller municipalities, which tend to iden-
tify few capital projects per year.
As to political variables, political orientation was dened as a
dummy variable (POLITICAL_ORIENTATION) for the adminis-
trations right- or left-wing orientation. Because Italy has tradition-
ally been characterized by a very large number of political parties,
however, coalition government is the norm, and the reference to
right- or left-wing administrations becomes an oversimplication.
To capture the administrations political fragmentation, we intro-
duced the variable POLITICAL_FRAGMENTATION, dened as
the number of political parties in the majority coalition or, more
specically, the number of parties with at least one member serving
on the municipal executive board. Finally, the electoral cycle was
operationalized through a set of dummy variables (0_YRS_SINCE_
LAST_ELECTION, 1_YR_SINCE_LAST_ELECTION, 3_YRS_
SINCE_LAST_ELECTION, 4_YRS_SINCE_LAST_ELECTION)
reecting the number of years since the last local election, with year
4 as the maximum (as mentioned earlier, elections are scheduled
every ve years, although early elections may be called under par-
ticular circumstances) and middle-of-the-cycle year 2 as the baseline.
For organizational features, the municipalitys total spending on
sta (STAFF) was used as a proxy for size and complexity. This was
supplemented by two more specic variables. CFO_OFFICE_SIZE
is the municipalitys spending on its Financial Comptroller Oce,
scaled by the municipalitys population. The purpose of this vari-
able was to verify whether a larger (and supposedly more powerful)
Financial Comptroller Oce reduces the need for rebudgeting (e.g.,
because it can devote more resources to planning) or rather increases
it (e.g., because it can induce politicians to be more conservative in
the initial budget formulation and to increase authorized spending
through rebudgeting only when expected revenues are actually rec-
ognized). REBUDGETING_ON_OTHER_TITLE is the percent-
age change between the revised and the initial budget for the title
not used as the dependent variable (i.e., capital spending when the
dependent variable is rebudgeting for current spending, and vice
versa). As mentioned earlier, governments will be characterized by
dierent values, beliefs, rules, and routines for budgeting and rebud-
geting, which may encourage or discourage midyear adjustments.
The specic assumption behind the variable REBUDGETING_
ON_OTHER_TITLE is that municipalities may be characterized
by a certain inclination or aversion to rebudgeting that cuts across
dierent types of expenditures.
The last set of internal variables was intended to reect the munici-
palitys nancial conditions and presence of slack resources. All of
these variables were scaled by current revenues to control for the
municipalitys size. ACCUMULATED_SURPLUS is the munici-
palitys accumulated surplus from previous years; CURRENT_
SURPLUS is the budgeted excess of current revenues over current
expenditures; FINANCIAL_AUTONOMY is the municipalitys
degree of nancial autonomy, measured by the share of current rev-
enues accounted for by own taxes and fees (as opposed to transfers
from higher levels of government); EXPENDITURE_RIGIDITY is
the municipalitys degree of expenditure rigidity, measured by the
share of current revenues needed to cover personnel and interest
expenditures; and NET_BORROWING is budgeted borrowing, net
of budgeted debt repayment. The additional variable REVISION_
OF_PAST_SURPLUS was introduced so as to control for the mid-
year emergence of past-year net surpluses or decits, which clearly
can be expected to encourage rebudgeting.
As for the external variables, LOCAL_GDP reects provincial per
capita gross domestic product (GDP) (GDP data are not available
at the municipal level, and provinces are the equivalent of counties)
and was selected to capture the communitys overall economic con-
ditions; SOUTH is a dummy variable for whether the municipality
is located in northern or southern Italy and was expected to serve as
a more general proxy for the cultural, social, political, and economic
conguration of the municipalitys environment (e.g., Anessi-Pessina
and Steccolini 2007; Anessi-Pessina et al. 2008; Nasi and Steccolini
2008; Putnam, Leonardi, and Nanetti 1993).
Table 3 lists all of the variables with their specic denitions and
data sources. The data were analyzed using both a between-eects
and a xed-eects model. The between-eects model assumes that
the unobserved variables dier over time but are constant across
cases for the same time period. Conceptually, this is the same as tak-
ing the mean of each variable for each case across time and running
a regression on the collapsed data set. It consequently required the
exclusion of the dummies reecting the electoral cycle: because elec-
tions are usually held every ve years, the ve-year average of each
dummy was nearly identical across all municipalities. The xed-
eects model, on the other hand, controls for omitted variables that
dier between cases but are constant over time. It consequently
required the exclusion of the variables that are time-invariant
(SOUTH) or changing very slowly over time (STAFF).
Fixed eects were chosen over random eects on the basis of the
Hausman test (Wooldridge 2009). Further tests were performed for
Budgeting and Rebudgeting in Local Governments: Siamese Twins? 879
Table 3 Variables* and Data Sources
Variable
Internal variables
Degree of incrementalism in the initial budgeting process
Budget change: extent to which initial budgeted amounts differ
from the previous years actual amounts (BUDGET_CHANGE)
Budget changes by purpose and nature of spending (SPENDING_
PURPOSE_CHANGES; SPENDING_CATEGORY_CHANGES)
Political variables
Political orientation (POLITICAL_ORIENTATION)
Political fragmentation (POLITICAL_FRAGMENTATION)
Years since the last election (t_YRS_SINCE_LAST_ ELECTION)
Organizational features
Size (STAFF)
Relative size of Financial Comptroller Office (CFO_OFFICE_SIZE)
Rebudgeting for the title not used as the dependent variable
(REBUDGETING_ON_OTHER_TITLE)
Financial conditions
Accumulated surplus/deficit (ACCUMULATED_SURPLUS)
Current surplus/deficit (CURRENT_SURPLUS)
Financial autonomy (FINANCIAL_AUTONOMY)
Expenditure rigidity (EXPENDITURE_RIGIDITY)
Net borrowing (NET_BORROWING)
Revision of past-year surplus/deficit included in the budget (REVI-
SION_OF_PAST_SURPLUS)
External variables
Local socioeconomic conditions
Local economic conditions (LOCAL_GDP)
Geographic area (SOUTH)
* Some variables were transformed to better approximate a normal distribution (log for P_GDP and reciprocal of square root for STAFF).
heteroscedasticity (modied Wald test), serial correlation (Lagram-
Multiplier test), and cross-sectional dependence (Pasaran test). For
both current and capital spending, these tests did not reject the absence
of serial correlation and cross-sectional dependence, but rather con-
rmed the presence of heteroscedasticity. This was taken into account
by using robust standard error estimates. Another issue was multicol-
linearity, which stemmed to a large extent from the strong negative
correlation between SOUTH on the one hand and LOCAL_GDP and
FINANCIAL_AUTONOMY on the other. The issue was consequently
solved by dropping SOUTH from all specications.
Results
From a descriptive viewpoint (table 4), rebudgeting is generally
used to increase spending appropriations. The average increase
was 4.4 percent for current spending and 16.4 percent for capital
spending. Table 5 shows that, over the period 20037, 92.1 percent
of municipalities adjusted current spending upward, while the
remaining 7.9 percent adjusted it downward. For most municipali-
ties (63.5 percent), the revision did not exceed 5 percent of the
initial amount. For capital spending, upward revisions occurred in
81.4 percent of the municipalities, with the other 18.6 perform-
ing downward revisions. The size of capital spending revisions was
Table 4 Percentage Change between Revised and Initial Budget
Title Mean
Title 1Current expenditures 4.4%
Title 2Capital expenditures 16.4%
880 Public Administration Review November | December 2012
Measure Source of Data
(Initial budgeted amount, Title j, year t)/(Actual legal commitments, Title Department of the
j, year t 1 ) 1, j = current or capital expenditures, t = 20037 Interior, 20027
Variance of budget change by destination and by nature of spending
Dummy for left (1) or right (0) wing Department of the
Number of parties with at least one member serving on the Municipal Interior, 20037
Executive Board
Number of years elapsed since the last local election
Personnel expenditures Department of the
Per capita spending on Financial Comptroller Office Interior, 20037
Revised budget/Initial budget for current (capital) spending when capital
(current) spending is the dependent variable 1
Accumulated surplus or deficit from previous year/Total current revenues Department of the
(Budgeted current revenues Budgeted current expenditures Budgeted Interior, 20027
loan repayments)/Budgeted current revenues
(Tax revenues + Fee revenues)/Total current revenues
(Personnel + Interest expenditures)/Total current revenues
(Budgeted borrowing Budgeted debt repayment) / Budgeted current
revenues
(Past-year surplus or deficit included in the revised budget Past-year
surplus or deficit included in the initial budget)/Revised budgeted cur-
rent revenues
Provincial per capita GDP National Statistical Insti-
Dummy for north (0) or south (1) tute (Istat), 20037
much greater than for current spending. Upward revisions within
5 percent of initial appropriations occurred only in 23 percent of
municipalities, while 29.2 percent of municipalities increased their
initial appropriations by more than 20 percent. Similarly, downward
revisions within 5 percent of initial appropriations occurred only in
6.4 percent of municipalities, while 6.9 percent of municipalities
reduced their initial appropriations by more than 20 percent.
From an explanatory viewpoint, tables 6 and 7 report the regression
coecients and the signicance thresholds for the between-eects
and the xed-eects models, respectively.
Hypothesis 1that rebudgeting is aected by the degree of incre-
mentalism in the formulation of the initial budgetis generally
supported, in that BUDGET_CHANGE is negative and strongly
signicant (p < .01) across all specications. This is consistent with
rebudgeting being a complement to the initial budget formula-
tion and playing a smoothing role that increases the incremental
nature of the yearlong budgeting process. The more a policy has
been incorporated into the initial budget, the less it needs to be
pursued through rebudgeting. In fact, rebudgeting can be a way to
repeal some policies that the administration introduced in the initial
budget and, consequently, to realign the budget to the previous
years situation. Contrary to expectations, however, the variable
SPENDING_CATEGORY_CHANGES is never signicant, while
Std. Dev.
the variable SPENDING_PURPOSE_CHANGES is insignicant in
4.7% the xed-eects model and signicant but positive in the between-
37.8%
eects model. In other words, governments that formulate the
Table 5 Distribution of Municipalities by Sign and Magnitude of Percentage Change between Revised and Initial Budget, 20037
2003 2004 2005 2006 2007 Average, 20037
Current Capital Current Capital Current Capital Current Capital Current Capital Current Capital
Spending Spending Spending Spending Spending Spending Spending Spending Spending Spending Spending Spending
Upward 0%5% 55.9% 22.4% 59.5% 24.6% 55.2% 21.5% 54.7% 23.0% 60.3% 23.7% 57.1% 23.0%
revisions 5%10% 28.2% 14.8% 23.5% 12.5% 28.0% 12.1% 22.6% 13.0% 26.1% 12.9% 25.7% 13.1%
10%15% 6.0% 11.7% 4.9% 10.8% 7.4% 8.1% 6.1% 10.7% 5.7% 7.9% 6.0% 9.8%
15%20% 2.9% 5.6% 2.1% 6.4% 2.2% 7.6% 2.7% 5.3% 1.7% 6.1% 2.3% 6.2%
> 20% 1.1% 33.0% 0.8% 30.5% 1.3% 31.6% 0.7% 24.2% 1.3% 26.8% 1.0% 29.2%
94.2% 87.4% 90.7% 84.8% 94.0% 81.0% 86.8% 76.3% 95.0% 77.4% 92.1% 81.4%
Downward 0%5% 4.7% 4.6% 7.2% 3.0% 4.7% 5.1% 10.3% 6.1% 4.8% 5.9% 6.4% 4.9%
revisions 5%10% 0.7% 1.6% 1.1% 2.5% 0.4% 4.0% 2.0% 3.2% 0.2% 3.0% 0.9% 2.9%
10%15% 0.2% 0.7% 0.4% 1.9% 0.4% 3.1% 0.7% 1.8% 0.0% 2.8% 0.3% 2.0%
15%20% 0.2% 1.6% 0.0% 1.7% 0.0% 2.2% 0.2% 0.7% 0.0% 3.1% 0.1% 1.9%
> 20% 0.0% 4.0% 0.6% 6.1% 0.5% 4.7% 0.0% 11.9% 0.0% 7.8% 0.2% 6.9%
5.8% 12.6% 9.3% 15.2% 6.0% 19.0% 13.2% 23.7% 5.0% 22.6% 7.9% 18.6%

Table 6 Coefficients for Between-Effects Model Table 7 Coefficients for Fixed-Effects Model
Variable Current Spending Capital Spending Variable Current Spending Capital Spending
R2 .27 .19 R2 .42 .44
Cons .001 .010 Cons .060 1.893
Degree of incrementalism in the initial budgeting process Degree of incrementalism in the initial budgeting process
BUDGET_CHANGE .209*** .044*** BUDGET_CHANGE .067*** .024***
SPENDING_CATEGORY_CHANGES .053** SPENDING_CATEGORY_CHANGES .021
SPENDING_PURPOSE_CHANGES .006 SPENDING_PURPOSE_CHANGES .006
Political variables Political variables
POLITICAL_ORIENTATION .002 .002 POLITICAL_ORIENTATION .003 .009
POLITICAL_FRAGMENTATION .001 .006 POLITICAL_FRAGMENTATION .001 .003
Organizational features 0_YRS_SINCE_LAST_ ELECTION .009*** .006
STAFF_TSF .079 159.204 1_YRS_SINCE_LAST_ ELECTION .009*** .021
CFO_OFFICE_SIZE .001*** .001 3_YRS_SINCE_LAST_ ELECTION .006** .018
REBUDGETING_ON_OTHER_TITLE .006** .041** 4_YRS_SINCE_LAST_ ELECTION .009*** .073***
Financial conditions Organizational features
ACCUMULATED_SURPLUS .018 .039 CFO_OFFICE_SIZE .001 .002
CURRENT_SURPLUS .083*** .359 REBUDGETING_ON_OTHER_TITLE .001 .001
FINANCIAL_AUTONOMY .009 .178** Financial conditions
EXPENDITURE_RIGIDITY .040 .161 ACCUMULATED_SURPLUS .045 .205
NET_BORROWING .031*** .001 CURRENT_SURPLUS .025 .059
REVISION_OF_PAST_SURPLUS .290*** 1.804*** FINANCIAL_AUTONOMY .006 .332**
Local socioeconomic conditions EXPENDITURE_RIGIDITY .185*** .248
LOCAL_GDP_TSF .011** .067 NET_BORROWING .013 .205***
REVISION_OF_PAST_SURPLUS .215*** .928***
** Significant at 5%; *** significant at 1%.
Local socio-economic conditions
LOCAL_GDP_TSF .017 .606***
initial budget by applying uniform increases to the previous years ** Significant at 5%; *** significant at 1%.
gures, with no dierentiation across types of expenditures, do not
feel a greater need to adjust their appropriations during the scal and capital spending; 3_YRS_SINCE_LAST_ELECTION is
year. This result is somehow counterintuitive, as the lack of sophis- positive and signicant for current spending). Toward the end
tication in the formulation of the initial budget could reasonably of the term, rebudgeting is probably a way for the administra-
be expected to require greater adjustments during the scal year. tion to increase political consensus and, as a consequence, its
A possible explanation is that the municipalities that apply uniform own chances of reelection. At the beginning of the term, a pos-
increases are those that prefer to keep the status quo, do not feel any sible explanation is that a newly elected administration will use
need to revise this choice during the scal year, and consequently rebudgeting to gradually incorporate its policies into the budget-
have little need for rebudgeting. ing processall the more so in the election year, the budget for
which will have been prepared by the outgoing administration.
Hypothesis 2that political variables will aect rebudgeting The other political variables (POLITICAL_ORIENTATION and
is supported only with respect to the electoral cycle and espe- POLITICAL_FRAGMENTATION) are never signicant. A pos-
cially for current spending. More specically, rebudgeting will sible explanation is that the key functions and issues that munici-
be greater both at the beginning of an administrations term of palities must deal with are not dictated by political ideology but
oce (0_YRS_SINCE_LAST_ELECTION and 1_YR_SINCE_ by basic service expectations.
LAST_ELECTION are positive and strongly signicant for
current spending) and toward its end (4_YRS_SINCE_LAST_ Hypothesis 3that organizational features will aect rebud-
ELECTION is positive and strongly signicant for both current getingis supported only in the between-eects model, by
Budgeting and Rebudgeting in Local Governments: Siamese Twins? 881
the positive and statistically signicant coecients for CFO_ The descriptive part of our results indicates that upward revisions to
OFFICE_SIZE (current spending only) and REBUDGETING_ the budget are more frequent than downward adjustments, espe-
ON_OTHER_TITLE. Size, as captured by the variable STAFF, is cially for current spending. This probably reects a conservative
never signicant. The positive coecient for CFO_OFFICE_SIZE approach to the formulation of the initial budget, whereby initial
seems to suggest that a larger Financial Comptroller Oce will expenditure appropriations are dened solely on the basis of those
use its power to impose scal conservatism in the initial budget revenues whose occurrence is viewed as suciently certain. During
formulation and to authorize increased spending through rebud- the scal year, as extra revenues are recognized, spending appropria-
geting only when expected revenues are actually recognized. The tions are increased through rebudgeting.
positive coecients for REBUDGETING_ON_OTHER_TITLE
apparently conrm the presence of cross-organizational dierences Given that overspending the budget is illegal, but underspending
in the propensity toward rebudgeting, even after controlling for is not, it is in fact surprising that the budget should ever be revised
nancial conditions. downward. In the presence of decreases in revenues, the administration
could simply require the departments to contain spending without
Hypothesis 4that the municipalitys nancial conditions will asking the city council to formally approve a downward revision of the
aect rebudgetingis generally conrmed, even after controlling budget. Possible explanations for the presence of downward revisions
for the midyear emergence of past-year net surpluses or de- include the following: (1) underspending may be perceived by stake-
cits, which was found, unsurprisingly, to encourage rebudgeting holders as an indicator of poor performance, and downward revisions
(REVISION_OF_PAST_SURPLUS > 0 and strongly signicant may be an eective way of concealing it; (2) if budgeting is incremen-
across all specications). More specically, municipalities in better tal, downward revisions may be used to set a lower baseline for the next
nancial conditions seemingly require smaller midyear adjust- years budget; (3) if actual revenues fall short of budgeted ones, down-
ments, presumably because they enjoy greater degrees of freedom ward revisions may be the only eective way of forcing departments to
during the initial budgeting process. This is consistent with the reduce their spending plans, thus preventing the emergence of decits.
negative and statistically signicant coecients for CURRENT_
SURPLUS (for current spending in the between-eects model), the The reference to incrementalism leads to the explanatory part of the
negative and statistically signicant coecients for FINANCIAL_ article. In this regard, all of the hypotheses were supported, although
AUTONOMY (for capital spending in both models), the positive not for all variables and across all specications, and obviously with
and statistically signicant coecients for EXPENDITURE_ direct reference only to the period and governments under study.
RIGIDITY (for current expenditure in the xed-eects specica-
tion). The only partial anomaly is NET_BORROWING, whose First and foremost, rebudgeting was conrmed to be a comple-
coecient is signicantly positive for current expenditure in the ment to the initial budget formulation. The more a policy has been
between-eects specication and signicantly negative for capital incorporated into the initial budget, the less it needs to be pursued
expenditures in the xed-eects specication. through rebudgeting. In fact, rebudgeting
A possible explanation is that, in the presence can be a way to repeal some policies that the
The more a policy has been
of extensive borrowing, municipalities will administration introduced in the initial bud-
initially be very conservative in their current incorporated into the initial get and, consequently, to realign the budget to
appropriations, only to increase them during budget, the less it needs to be the previous years situation.
the scal year to the extent that it is pos- pursued through rebudgeting.
sible to do so. At the same time, they will be Under a rst type of complementarity, rebud-
unlikely to further increase capital spend- geting is a way for the municipality to ll a gap
ing through rebudgeting because borrowing cannot be further in its initial programming or to adapt its resource allocation to chang-
increased and because other capital funds becoming available dur- ing political priorities. Thus, when initial appropriations are only
ing the year (e.g., sale of xed assets, capital transfers from higher marginally dierent from the previous years, they are less likely to
levels of government) will be used to replace budgeted borrowing match the dynamic evolution of needs and thus more likely to require
rather than to fund additional capital projects. midyear revisions. In addition, newly elected administrations will
make a greater use of rebudgeting because they must operate within
Hypothesis 5that the municipalitys external environment will the budget approved by the outgoing administration and because they
aect rebudgetingnally, is conrmed by the negative and statisti- need some time to fully nalize their policies. Similarly, in the poorer
cally signicant coecient of LOCAL_GDP in the between-eects areas of the country, where public management skills are, on average,
model for current expenditures and the xed-eects model for weaker than elsewhere (see, e.g., Anessi-Pessina and Steccolini 2007;
capital expenditures. In other words, poorer municipalities (gener- Anessi-Pessina et al. 2008; Giordano, Tommasino, and Casiraghi
ally located in the south) show a greater propensity to revise upward 2009; Nasi and Steccolini 2008; Putnam, Leonardi, and Nanetti
their budgeted expenditures during the scal year. 1993), municipalities will be less likely to frame the initial budget
within a comprehensive programming eort and consequently will
Discussion and Conclusions use rebudgeting to a larger extent.
The existing literature on budgeting has traditionally focused on the
formulation of the initial budget. In contrast, this article argues that Under a second type of complementarity, rebudgeting is a way for
budgeting is a yearlong process composed of initial budgeting and politicians to pursue opportunistic goals. In particular, as elections
rebudgeting. Our focus, therefore, is on rebudgeting, using ve-year approach, politicians will use rebudgeting to increase their chances
data from Italian municipalities to test our hypotheses. of reelection.
882 Public Administration Review November | December 2012
Under a third type of complementarity, rebudgeting is a way for programs into a new budget. Another relevant policy implication
powerful Financial Comptroller Oces to enforce scal conserva- is that rebudgeting should be made more transparent. At pres-
tism in the formulation of the initial budget. Because underspend- ent, rebudgeting is a much less visible process than budgeting,
ing the budget is always an option, while overspending is not, if also because it is often composed of several small amendments
rebudgeting were not allowed, initial budgets would have to ensure to the initial budget, whose total amount is nevertheless impor-
the presence of slack resources to face unexpected events and new tant. Consequently, legislation could provide for city councils to
issues emerging during the year. Thanks to rebudgeting, on the devote one or two midyear sessions to budget revisions in order to
contrary, the formulation of the initial budget can be conservative eectively keep rebudgeting under control and ensure its overall
and spending limits can be gradually relaxed as revenues are actu- consistency.
ally recognized.
For practitioners, our results call for increased
Under a fourth type of complementarity,
For practitioners, our results call attention to rebudgeting, which clearly
rebudgeting is a way for municipalities in emerges as a politically charged, yearlong
dire nancial conditions and disadvantaged for increased attention to rebud- process rather than a purely technical matter.
socioeconomic environments to meet changes geting, which clearly emerges as As such, the key question is how rebudget-
in the constraints they face. Municipalities a politically charged, yearlong ing can be used to improve the governments
serving wealthier constituencies and character- process rather than a purely performance rather than favor the pursuit of
ized by comparatively larger surpluses, own technical matter. opportunistic goals. Two considerations stand
revenues, and discretionary expenditures will out.
have more leeway in the formulation of the
initial budget and are less likely to revise it in the presence of chang- First, rebudgeting cannot be a one-size-ts-all process. Each organi-
ing constraints. zation must develop its own approach and culture to budgeting and
rebudgeting and translate it into rules and routines that are consis-
Finally, two further points are worth highlighting. On the one tent with its specic contextual and political conditions.
hand, rebudgeting seems to be a consequence of specic organi-
zational cultures, in that governments seemingly have dierent Second, in doing so, the organizations main concern should be
propensities toward it. On the other hand, the determinants of how to manage and steer the exibility that rebudgeting oers.
rebudgeting are partially dierent for current and capital expen- If properly used, rebudgeting allows the organization to revise its
ditures. One major dierence is that CFO conservatism in the goals and priorities in order to keep them aligned with changing
formulation of the initial budget is apparently stronger for cur- internal and external conditions. Under dire nancial circum-
rent spending. This is not surprising, for at least two reasons: (1) stances, more specically, it can be a powerful tool to initially
once authorized in the budget, current spending usually can take impose strict spending constraints, which can gradually be relaxed
place without further constraints, while capital spending must as uncertain revenues actually materialize. The risk is for these
go through a more complex process (the sources of funding must changes to be decoupled from the organizations overall planning
actually be obtained; a project must be prepared and approved; a and control system. In an overly simplistic approach, a govern-
contractor must be identied, etc.), and consequently it is easier to ment would align its planning and control system with the initial
cancel or postpone; (2) current spending, even for items other than budget: the initial budget presents the spending implications of the
personnel and interest, sets a baseline that is dicult to reduce in organizations goals and programs; what cannot be funded in the
the following years. initial budget is excluded from the organizations goals and pro-
grams for the current year. As a consequence, the organization will
From a research viewpoint, this article sheds some light on the have no plans for the use of additional resources that may materi-
relationship between budgeting and rebudgeting. Moreover, it alize during the scal year, so that it will be easier to funnel these
makes a contribution to the traditional studies on incrementalism, resources toward the parochial interests of politicians and bureau-
which have paid little attention to the implications of incremental crats. Alternatively, should resources prove lower than expected, no
budgeting for budget execution. Future research should try to better plans will exist for where to focus the cost containment eorts, so
disentangle the determinants of budgeting and rebudgeting. It could that the axe will naturally fall on new initiatives put forward in the
also analyze the roles played by politicians, managers, and other initial budget.
stakeholders in the rebudgeting process.
In conclusion initial budgeting and rebudgeting must be viewed as
From a policy viewpoint, because elections and changes in politi- the components of a yearlong process; they take on specic features
cal orientation aect rebudgeting, one may wonder whether the in each organization; they must be designed and managed in an inte-
current election timing is consistent with the budget cycle. In Italy, grated fashion, as their interactions must be aligned with the organi-
for instance, elections are usually held between April and June. zations planning and control system and other managerial tools.
The incoming administration thus has to wait six to nine months
before it can formulate its rst budget. In the meantime, it has to Acknowledgments
operate within the constraints set by the previous administrations The authors wish to acknowledge the anonymous reviewers for their
choices and will resort to rebudgeting to modify such constraints. very helpful comments. We would also like to acknowledge funding
An alternative would be to hold elections in the autumn, allowing by the Public Management Department, SDA Bocconi School of
the incoming administration to translate immediately its electoral Management.
Budgeting and Rebudgeting in Local Governments: Siamese Twins? 883
Note
1. The year-end statement includes the actual amounts of revenues and expendi-
tures under the commitment basis of accounting, that is, the establishments of
amounts receivable and the legal commitments. The denitions of revenues
and expenditures under the commitment basis of accounting are similar to the
European Unionssee Council regulation (EC, Euratom) no. 1605/2002 of
June 25, 2002, on the nancial regulation applicable to the general budget of
the European Communities. For revenues, the establishment of an amount
receivable is the act by which the authorising ocer [ . . . ] (a) veries that the
debt exists; (b) determines or veries the reality and the amount of the debt; (c)
veries the conditions in which the debt is due. For expenditures, the legal com-
mitment is the act whereby the authorising ocer enters into or establishes an
obligation which results in a charge.
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