6 Ways to Improve State Budgeting

A new report from The Volcker Alliance, headed by former Federal Reserve Chairman Paul Volcker, outlines six ways states can write budgets that keep the future more in mind.

It’s timely advice:  as states finally emerge from the aftermath of the Great Recession, they need to address serious long-term problems that could slowly undermine their ability to fund education, health care, infrastructure, and other critical needs.  Addressing these problems requires acknowledging them, not relying on short-term measures and budget gimmicks that obscure the state’s actual financial condition.

The report focuses on budget practices in California, New Jersey, and Virginia to illustrate the importance of its recommendations.  In brief, they are:

Complete budgetary information, including how balance was achieved and whether one-time revenue sources were tapped, should be easier to find and interpret....

Short-term revenue forecasts should be transparent and supportable by historic growth trends.  Past projections should be assessed for accuracy to help improve forecasting methods....

Recurring costs should be paid with recurring revenue....

The proceeds of borrowings should not be used to cover operating expenses....

States should move away from strictly cash budgeting and toward the type of accounting, used in their audited comprehensive annual financial reports, that shows the true present value of future spending obligations....

States must build rainy day funds to safeguard essential services during economic downturns.  The size of the funds should be adjusted for revenue volatility, and they should be replenished consistently after they are tapped....

These recommendations are consistent with our “Budgeting for the Future” report, which explains how state policymakers can write budgets with an eye toward the future, not just the present.  Tools like these can help states chart their fiscal course accurately and make corrections when needed.