January 13, 1997


State Balanced Budget Requirements Differ from
the Proposed Federal Balanced Budget Amendment

by Iris Lav and Robert Greenstein


Many people point to state balanced budget requirements as evidence that a federal balanced budget constitutional amendment is workable. Yet state balanced budget provisions differ significantly from the proposed federal constitutional amendment.

A study of the state requirements by the General Accounting Office (GAO) shows they differ from the proposed federal structure in a number of critical ways. In addition, a new study by Columbia University law professor Richard Briffault explains that states are able to function under balanced budget requirements largely because those requirements are neither stringent nor binding. The differences between the state balanced budget requirements and the proposed federal constitutional amendment, which are substantial, are discussed below.


State Requirements Generally Apply to Operating Budgets, Not the Total Budget

Many states are required to balance their operating budgets, not their total budgets. States typically have an operating budget that funds programs and salaries, as well as a separate capital budget that funds long-term investments such as the construction of buildings and roads. State requirements for budget balance often apply only to the operating budget and not to the capital budget or the myriad of enterprise funds and trust funds that states typically maintain.

The states that do subject capital or special funds to balanced budget requirements generally allow bond proceeds and other borrowing to count as revenues for purposes of determining whether the budget is balanced. The Briffault analysis finds that state balanced budget requirements rarely if ever require that all current expenditures be paid for out of current revenues without borrowing. That is precisely what the proposed constitutional amendment would do at the federal level.

Stated another way, state investments in roads, bridges, school construction, and the like generally are not subject to the type of budget balancing requirements entailed under the federal constitutional amendment. They can be and generally are financed through bonds or other borrowing measures. Borrowing for longer-term projects is widely regarded as a sound practice at the state level because such investments are designed to yield long-term benefits that can strengthen state economies.

Comparable investments at the federal level that yield long-term pay-offs rather than immediate benefits are likely to be placed at a disadvantage if they must compete, under a balanced budget regime, with funds for ongoing government operations. This is one area where the federal amendment differs markedly from, and is cruder and much more rigid than, the balanced budget procedures of many states.


Federal Amendment Would Require Balance at Start, During, And End of the Year

Despite their own balanced budget requirements, states sometimes run deficits even in their operating budgets. For example, many states require that the governor submit a balanced budget or that the legislature enact a balanced budget, but not that year-end balance in the state’s operating budget actually be achieved. Such requirements recognize that changes in the economy and other circumstances beyond a state's control often push state operating budgets out of balance.

The GAO found that nearly half the states allow deficits in their operating budgets either to be carried forward to the next year or to be covered through borrowing. Briffault found that just between fiscal year 1990 and fiscal year 1993, ten states either ran a deficit that was carried into the next fiscal year or borrowed money to close the gap. These 10 included states with Republican and Democratic governors alike; among them were some of the nation’s largest states, such as California, Illinois, Michigan, New York, and Pennsylvania.

By contrast, such practices would not be permitted under the federal constitutional amendment unless three-fifths of the House and Senate voted to authorize them for a specific year. And the budget would have to be balanced not just at the start of a year but during and at the end of the year as well. If a deficit developed during the course of a year for any reason — such as because of slower-than-expected economic growth or lower-than-forecast revenue collections — spending cuts or tax increases would be required, often late in the year, to bring the budget back into balance unless three-fifths of both chambers waived the requirement. To achieve sufficiently large cuts late in the year to bring the budget into balance, very deep cuts in programs or large, sudden tax increases could be required. Furthermore, precipitous cuts or tax increases could jam the brakes on the economy; by withdrawing substantial purchasing power from the economy in a short period of time, such action could risk triggering an economic slowdown or tipping a faltering economy into recession.

Despite budget-balancing requirements far less restrictive than those the federal constitutional amendment would impose, however, most states operate in a fiscally responsible manner; most keep their operating budgets in rough balance when their budgets are measured over periods of time, rather than on a single-year basis. A balanced budget requirement as rigid and all-encompassing as the proposed federal amendment is not supported by state experience.


Federal Amendment Would Prohibit "Rainy Day" Or Reserve Funds

Still another major difference between the constitutional amendment and state balanced budget requirements involves the use of "rainy day" funds. Most states have established "rainy day" or reserve funds, which they can draw upon when their budgets would otherwise be out of balance. The proposed constitutional amendment, however, would prohibit this approach at the federal level.

State Budgets, Capital Markets, and Bond Ratings

One force for budget discipline at the state level comes from capital markets and bond ratings. Since states borrow to make long-term investments and finance temporary deficits, they have an interest in maintaining sound bond ratings.

The discipline that results from capital markets is, however, strikingly different from the rigid strictures the federal constitutional amendment would impose. A state may maintain a favorable bond rating while borrowing to finance major capital investments and also running periodic deficits in its operating budget to accommodate unforeseen needs and swings in economic conditions. Bond ratings reflect investors’ confidence in a state’s ability to pay its debts, and as Briffault explains, this does not necessarily require a state’s operating budget to be balanced every year according to generally accepted accounting principles, a standard that few states achieve with regularity. Furthermore, state policymakers sometimes choose a course that leads to an unbalanced budget, a modest reduction in bond ratings, and a slightly higher interest rate as an alternative to tax increases or budget cuts judged to be imprudent at a particular point in time.

Nearly every state either has a rainy day fund or allows surpluses from one year to count toward balancing the budget in the next year. States also accumulate monies in various trust funds to spend in future years when they are needed. For example, resource-rich states typically save a portion of severance taxes and royalties in trust funds to be used for environmental clean-up, conservation, or similar activities. State budget procedures allow these funds to be spent when they are needed, even if they have been collected many years earlier. Thus states can save now to finance increased needs later, a practice businesses and families also use. (Families, for example, routinely save over a period of years to pay for their children’s college tuition or borrow to cover such expenses; they rarely finance such expenses out of current income.)

The constitutional amendment, however, would prohibit the federal government from saving now to finance increased needs later. Expenditures in a given year would have to be financed entirely from revenues collected in that same year and could not be financed in part from savings built up in previous years.

The rigidity of these aspects of the proposed federal constitutional amendment is inappropriate. The federal government has even greater needs than states to be able to use funds saved in previous years. Such practices will be critical when the baby boom generation retires and the federal government faces very large Social Security and Medicare obligations.

The constitutional balanced budget amendment would preclude the federal government from building up savings over the next two decades while most baby boomers are still working to help meet costs that will mount after they retire. Under the constitutional amendment, only unpalatable alternatives would be permitted in the baby boom generation’s retirement years. For all expenditures, including Social Security benefit costs, to be financed in full by revenue collected in the same year, one of the following would have to occur: a) taxes would have to be raised to sufficiently high levels in the years that most of the baby boom generation was retired to cover all Social Security and Medicare benefits paid in those years plus all other government costs; b) Social Security and Medicare benefits would have to be cut far more deeply than would otherwise be necessary — and probably more deeply than the public would accept; or c) the rest of the budget would have to be slashed to such an extent that the federal government would have difficulty performing some of its basic functions.

In short, the baby boomers’ retirement will leave the nation with a temporary bulge in costs. The balanced budget amendment would require all those extra costs to be financed out of current income and thus impose a special burden on the generation of workers whose peak earnings occur from about 2010 to 2040. A more equitable policy would be to spread that temporary bulge of costs across a much longer time period, but the balanced budget amendment would preclude such a policy.


The Federal Budget Has A Larger Impact Than State Budgets On the U.S. Economy

Federal budget cuts or tax increases during periods of weak economic growth slow the national economy more than such state actions do. Moreover, the fact that states usually cut their budgets and raise taxes when the economy slows or recession hits is itself a reason the federal government should not do the same. To the contrary, federal tax cuts or spending increases can be essential during such periods to stabilize the economy and to offset the drag on the economy caused by state and local retrenchment.

Proponents of the constitutional balanced budget amendment do not deny that temporarily unbalanced budgets are appropriate during times of recession. Instead, they argue that the supermajority vote required to avoid potentially damaging federal tax increases or budget cuts — three-fifth of the members of each house of Congress — would not be difficult to obtain during a recession.

The experience of the states, however, suggests that the causes of a deficit can be a matter of dispute, especially in the early stages of a recession, and that agreement on an appropriate response is far from easy to obtain. States have encountered great difficulties and long delays in resolving budget problems that have arisen as their economies have weakened. There is no reason to assume matters would be different at the federal level. Even the threat of a government unable to pay its bills will not necessarily spur prompt action; California issued scrip to pay its bills in 1992 when no solution to its budget deficit could both garner the required supermajority in the legislature and win the governor’s approval.

Federal deadlock over budget and debt limit restrictions in the early stages of a recession would have far greater consequences than similar problems at the state level. A minority of members of Congress holding out for either budget cuts or tax increases, rather than a temporary deficit, as the economy weakens could roil financial markets and tip a struggling economy into a recession, deepen a recession in its early stages, or delay recovery from a recession.


Federal Amendment Would Make It More Difficult To Raise Revenues Than Cut Spending

The GAO found that in recent years, a majority of the states surveyed have used revenue increases to help balance their budgets. During the period the GAO studied (roughly 1991 to 1994), revenue increases accounted for about one-third of the deficit reduction these states achieved to reach budget balance.

That states have been able to take such action is not unrelated to the fact that the large majority of states require the same number of votes to raise revenues as to cut programs. According to the National Conference of State Legislatures, only 11 states require a supermajority to pass any legislation raising revenue, while two others apply supermajority requirements to specific types of tax measures. The federal constitutional amendment, by contrast, would make it somewhat harder to raise revenues than to cut spending; it would require that legislation raising taxes be approved on a roll call vote by a majority of the full membership of both houses, rather than a majority of those present and voting. But for cuts in programs, a majority of those present and voting would continue to be sufficient, as would unrecorded "voice" votes.

This procedure would apply to all forms of tax legislation, including measures to curb special interest tax expenditures that are sometimes termed "corporate welfare." The Congressional Budget Office found, in a 1995 report, that the majority of corporate subsidies in the federal budget are embedded in the tax code rather than in the spending side of the budget.

Since spending cuts would continue to require only a majority of those present and voting while revenue increases would require a majority of the full membership, Congress would not be dealing with the federal budget on a level playing field. This is one more area where the procedures contained in the constitutional amendment differ from the procedures in use in a large majority of the states.


Federal Amendment May Shift Power from the Legislative to the Executive Branch

Still another difference between federal and state circumstances is that most states allow governors to act unilaterally without legislative approval to cut spending in the middle of a fiscal year. The President does not have this power at the federal level. Providing this authority to the President would represent a dramatic shift of responsibility for budgeting and power from the Congress to the executive branch. It would go far beyond the recently enacted line-item veto authority, which Congress can override, and would materially alter the balance-of-powers under which our nation has operated for more than 200 years.



As this analysis indicates, state balanced budget requirements differ in fundamental ways from the federal constitutional amendment and do not provide evidence the federal amendment is workable or represents prudent policy. To the contrary, the state experience suggests that to be workable, such requirements must have much greater flexibility built into them than the proposed federal amendment entails. The state experience also shows that provision of such flexibility is not inimical to the achievement of responsible fiscal policies.


1 General Accounting Office, Balanced Budget Requirements, March 1993.

2 Richard Briffault, Balancing Acts: The Reality Behind State Balanced Budget Requirements, Twentieth Century Fund, 1996.

3 Briffault writes: "There does not appear to be any case in the last several decades in which a state court actually invalidated a state budget for failure to satisfy a constitutional balance requirement or compelled a state to take action to bring its budget into balance."

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