Friday, August 5, 2011

Balanced Budget Requirements: Evidence from the States

Yesterday I ran down some of the reasons why I think a balanced budget amendment to the constitution would be disastrous public policy, even though I think Congress should work hard for a deal that includes new revenues and spending cuts to put the nation on a path to fiscal sanity.  Today, I want to take a brief look at what balanced budget requirements have meant to state governments. 

First, 49 of the 50 states have some sort of balanced budget requirement.  They range from a strict rule that requires adjustments to expenditures during a fiscal year when revenues fall short to rules that simply require the governor to submit a balanced budget to the legislature.  In these latter cases, state rules often allow the state to borrow in the event revenues fall short and some allow the state to carry the deficit into the next year.  Each of these rules has a different fiscal impact on a state's finances.  The rules also may apply only to a state's general fund or to all of its finances.  Whatever the case, states and their governors/legislatures often find gimmicks in order to comply with the rules.  Some states simply move many expenditures 'off budget' and use earmarked tax dollars or matching revenue from the federal government. 

Most small states, especially the poorer southern states, have the strictest rules regarding balanced budgets.  In Mississippi, the governor is allowed to make budget reductions to agencies whenever projected revenue is less than budgeted expenditures.  By law, all agencies must be reduced by 5% before any agency can be reduced by more than that.  This often creates a high level of chaos for agencies dependent upon state funding, leading to periodic layoffs, uncertainty about staff positions, filling vacancies, and adjusting eligibility rules for state services.  Over the past 3 years we have seen our state support cut by 23%, resulting in tuition hikes for students that many can ill afford.  And when revenue increases, state support rarely is restored.  Ask any college student you know when the last time his or her tuition was reduced!  Arizona is another example.  Due to projected revenue shortfalls the eligibility rules for medicaid are being revised so that more than 100,000 people will lose their health insurance next year.  Balanced budget requirements among the states have cost hundreds of thousands of teachers, police officers, firefighters, and other state workers their jobs in recent years.  The number of jobs lost in the states might have been double that if not for the Democrats stimulus package in 2009.  Nevertheless, that money has run out and lacking a remarkable recovery, it is likely states will accelerate the pace of layoffs in the coming year.  Of course, this has the effect of prolonging the recession since laid off workers typically have little discretionary funds to spend.

Some states create multiple for the general fund and one for other things such as federally funded programs, capital expenditures, and other projects.  This second budget is usually not subject to the balanced budget requirement.  This allows the state to finance improvements to its infrastructure and carry the balances forward from year to year, much the way a family may carry the balance of a car loan, credit card, or mortgage forward.

Another way that many states escape the balanced budget requirement is through the creation of special districts.  At present there are more than 34,000 such districts (school, water, power, etc...), many of which have taxing authority.  Altogether there are over 87,500 governmental entities in the United States! 

Of course, revenue declines at the state level also impact city governments and county governments, many of which also have some sort of balanced budget requirement.  These have led many cities and counties to difficult decisions requiring cutbacks to essential services like police & ambulance protection.  In at least one case, a 2 yr old boy choked to death because the fire crew closest to his home was away covering for one closed due to budget cuts.  In another case, the town assessed all residents a $75 fee for fire protection and allowed a resident's home to burn to the ground because he had not paid the fee.  The full story is here

The news is replete with stories of negative effects from budget cuts required by revenue shortfalls due to either an unwillingness to raise taxes or an inability to do so because of rules imposed upon governments.  That is not to say that I think governments ought to have a blank check...just that we ought to consider the real impact on the lives of everyday citizens before slashing budgets and cutting services.  Sometimes a temporary deficit isn't such a bad thing after all.

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