States frequently circumvent their Balanced Budget Requirements – they can shoulder aff funding and implementation
Randall and Rueben 2017 – Megan Randall is a research associate in the Urban-Brookings Tax Policy Center and in the Urban Institute’s Research to Action Lab, focusing on state and local public finance, federal place-based programs, state and local economic development policy, and inclusive economic recovery; Kim Rueben is the Sol Price fellow and director of the State and Local Finance Initiative at the Urban-Brookings Tax Policy Center, and she is an adjunct fellow at the Public Policy Institute of California; “Sustainable Budgeting in the States: Evidence on State Budget Institutions and Practices,” November 27th 2017, Urban-Brookings Tax Policy Center, https://www.urban.org/sites/default/files/publication/93461/sustainable-budgeting-in-the-states_2.pdf
BBRs are not uniform across states. They vary in stringency and design, and not all spending is subject to BBR limitations. Capital and pension funds, for example, are usually exempt from BBR limitations (Snell 2011) (box 5). In 44 states, the governor must propose a balanced budget, while in 41 states the legislature must pass a balanced budget, and in 40 and DC the governor must ultimately sign a balanced budget (figure 11). States combine rules differently. For example, although Texas and West Virginia require the legislature to pass and the governor to sign a balanced budget, they do not require the governor’s initial proposal to be balanced. Hawaii, meanwhile, requires the governor to propose and eventually sign a balanced budget, but the state does not require the legislature to pass a balanced budget as an intermediary step.
Circumventing Balanced Budget Requirements
Balanced budget rules are often designed imperfectly, and state policymakers can circumvent BBR requirements. Limitations on the spending covered under BBRs, paired with government fund accounting practices, can provide opportunities for circumvention. BBRs are generally applied on a cash basis rather than on an accrual basis, which means that states can engage in accounting gimmicks to satisfy requirements. For example, states can push a payroll or state aid payment from the last month of the current fiscal year into the first month of the next. This allows states to meet their legal requirement to balance their budgets while leaving resources and obligations out of balance. In 1998, Hawaii delayed payroll for state employees from June to July to balance its budget, although the effort resulted in several lawsuits from public university employees.
In 1985, Texas made a similar choice to move its payroll in order to balance the budget (Oregon Office of the State Controller 2009). California moved its payroll obligation by one day in the 2009–2010 budget cycle to balance its budget (California Legislative Analyst’s Office 2010). This gimmick only produces one-time savings, however, as the state is simply transferring its obligation to the following fiscal year. If a shortfall is caused by sudden changes in economic conditions, this flexibility can allow a state time to recover economically and meet its fiscal obligations. However, it can also lead to ongoing reallocation of expenses to the next budget year. State BBRs do not apply to all revenue streams or spending obligations. For example, states typically do not apply their BBRs to pension obligations or employee health care costs. In these scenarios, a flexible BBR can make suspending pension payments especially attractive, even if fiscally unwise in the long term, since suspending payments frees up resources to cover general fund expenses. This example illustrates how state fund accounting can obscure a state’s true fiscal position.