A Framework for Understanding State Balanced Budget Requirement Systems: Reexamining Distinctive Features and an Operational Definition

Abstract

Studies of state fiscal and budgetary policies often use balanced budget requirements (BBRs) as explanatory variables. While current measures laid the crucial groundwork for a basic understanding of state BBRs, their lack of comprehensiveness threatens the validity of empirical work. Based on comprehensive legal research, this article offers a framework for analyzing state requirements: each state's BBRs form a coherent system for achieving budget balance through budget cycles; a fully developed BBR system offers a three‐line construct against imbalance; and the more complete, developed, and explicit a BBR system is, the more stringent it will be in achieving budgetary balance.

Political distortions in state forecasts

“…However, this requirement is ambiguous since there are multiple ways to define the budget. Twelve states, however, explicitly require that "own-source revenue must match current expenditures" (Hou and Smith 2006). The variable "Balanced budget" is equal to 1 if the state has this more stringent balanced budget requirement and 0 otherwise.…”

A better budget rule

“…If revenue falls short of the forecast, the state can make up the difference from savings or, if necessary, by borrowing. This is looser than the balanced budget requirement found in some jurisdictions where, if actual revenue is less than forecasted, spending in the period of budget execution must be reduced to bring it into line with actual tax receipts (Hou & Smith, 2006). Consequently, smoothing spending in Oregon requires only two changes to its budget process.…”

Volatile earmarked revenues and state highway expenditures in the United States

“…Following Kioko and Martell (2012), I included a binary indicator of whether a state had a tax and expenditure limit and another dummy variable for voter approval or legislative super majority vote for new or higher taxes. Four widely used BBR-related binary variables specified in I indicate (1) whether a state's governor must submit a balanced budget, (2) whether the legislature must pass a balanced budget, (3) whether the governor must sign a balanced budget, and (4) whether current year-end deficit can be carried over into the next fiscal year (Hou and Smith 2006). These BBRs may have potential effects on state spending (Abrams and Dougan 1986;Krol 1996).…”