Are hurricanes extraordinary or simply special? Determinants of reporting nonrecurring items in the government setting

Abstract

We explore determinants and implications of reporting nonrecurring gains and losses — that is, extraordinary and special items — in the governmental setting. Common events triggering nonrecurring items include natural disasters, legal settlements, and asset sales. Primary results show that nonrecurring items systematically predict future net surplus and hence are not entirely transitory, which suggests that reporting choices are at least partially driven by managerial discretion. Evidence exploring implications of reporting nonrecurring items suggests they are used to reduce both surpluses and deficits. The results are stronger when state laws allow voters to directly place initiatives on the ballot or mandate balanced budgets, and preceding new public bond issuances. Corroborating analysis finds that nonrecurring items are strategically reported surrounding an exogenous shock of a presidentially declared disaster. Overall, we conclude that local governments strategically report extraordinary and special items.