This paper examines the determinants and consequences of how local governments classify and report nonrecurring financial items—specifically, extraordinary and special items—often triggered by events like natural disasters, legal settlements, and asset sales. The authors find that these reporting choices are not entirely mechanical; rather, they reflect managerial discretion and are influenced by political and economic incentives within the public sector.

• Nonrecurring items in government financial reports systematically predict future net surpluses, suggesting they are not fully transitory and may signal underlying fiscal trends or strategic choices.

• The classification and timing of extraordinary and special items are used strategically by local governments to manage the appearance of financial performance, particularly around events like disasters or before issuing new bonds.

• The use of these nonrecurring items is more pronounced when voter initiatives or balanced budget mandates exist, revealing a link between institutional constraints and reporting behaviors.

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