States Lack of Strict Budgetary Requirements Increases Budget Shortfalls

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Stronger balanced budget amendments safeguard against shortfalls

By Phillip Suderman

As states complete their budget forecasts, 40 states are already reporting more than $80 billion in budget gaps for the next two fiscal years, according to the National Association of State Budget Officers. In a joint report released last week by NASBO and the National Governors Association nearly half of the states are already projecting shortfalls for the upcoming fiscal year. A further 11 states are still trying to close the deficits of this year’s budget.

Recently, Wisconsin’s governor-elect Scott Walker told the Wall Street Journal that the fiscal problem is severe enough that he is “open to privatizing all state operations but the prisons.” While states’ legislators could look at cutting individual programs for temporary reprieve, to ensure long-term fiscal security they must adopt new rules to improve budget solvency and discontinue federal programs lacking full federal support.

Every state, with the exception of Vermont has a balanced budget requirement. However shortcuts exist that allow for states to work around the intention of the rule. Enacting stricter requirements can mitigate many of these loopholes.

“There are several ways that states can enact stricter balanced budget requirements,” said Mercatus Scholar Matthew Mitchell. “You can require a state to return surplus revenues to its citizens at the end of the year. This eliminates the ability for states to hold extra funds for large expenditures that could eventually turn into long-term fiscal commitments.”

Mitchell went on to say that research indicates states with strict balanced budget requirements are more likely to cut spending when faced with a budget shortfall rather than raise taxes.

“This is especially true for those states that enact supermajority requirements for legislatures to raise taxes,” said Mitchell.

Mitchell also recommends the use of a special variety of veto power known as the item reduction veto. The power allows for a governor to write in a lower spending amount for a particular item, rather then just remove the line entirely as in a traditional line item veto.

“This veto power, all by itself, has been shown to help decrease spending by about 12 percent,” said Mitchell.

Furthermore, research done by Mercatus Scholar Russell Sobel has shown that taking federal money tends to increase long- term state level spending. Despite that federal programs are largely subsidized by federal dollars, they increase the likelihood that states will spend beyond their means.

Sobel’s research shows that these programs tend to go on long after federal money dries up. Temporary programs frequently become permanent, and states are then forced to increase taxes to account for the funds needed to continue the program.

Mercatus Scholar Antony Davies’ work shows that even when states continue to get partial funding for a project, it still creates incentives to overspend. Davies says states heavily participating in federal programs with federal matching funds tend to encounter worse budgetary problems than states that participate in fewer of such programs.

“Federal matching funds offer incentives for states to increase spending, while usually taking years for the federal government to reimburse the state,” said Davies. “This leads to long-term budget problems, as states will simply pass the spending down the line for the next group of legislators.”

If governors are intent on addressing state budget issues, they must address the rules creating and maintaining a sustainable budget and they must look at the long-term ramifications of running federal programs without full support from the federal government.

Phillip Suderman is a media associate at the Mercatus Center at George Mason University.