Truth and Integrity in State Budgeting Preventing the Next Fiscal Crisis
From The Volker Alliance, December 12, 2018 (excerpts)
This report marks the Volcker Alliance’s second annual assessment of US state budget practices. Covering the fiscal years 2016, 2017, and 2018, the study grades states’ success in pursuing transparent and fiscally sustainable procedures as they estimate their revenues and expenditures and attempt to keep them in balance not only at the start of the fiscal year but as it progresses.
Because the US federal system is composed of fifty sovereign states, it is essential to assess and compare the quality of their budget practices against a common set of standards. As we did in the 2017 report, we gave states grades of A to D-minus, the lowest possible mark, for their practices in five areas that are the building blocks of budgeting nationwide:
- budget forecasting, in which we evaluate how and whether states estimate revenues and expenditures for the coming fiscal year and the long term;
- budget maneuvers, in which we gauge dependence on one-time actions to offset recurring expenditures;
- legacy costs, in which we assess how well states are funding promises made to public employees to cover retirement costs, including pensions and retiree health care;
- reserve funds, in which we examine the condition of general fund reserves as well as rainy day funds and rules governing their use and replenishment; and
- budget transparency, in which we scrutinize disclosure of budget information, including debts, tax expenditures, and the estimated cost of deferred infrastructure maintenance.
In this report, we also compared states’ budgetary grades to marks given the year before and offer best practices in each of the five budget categories.
Grades awarded to states this year did not follow geographic patterns, and larger and smaller states were equally likely to score well or badly. Of the five smallest states by population, Alaska won an average A in transparency, South Dakota and Vermont received Bs, and North Dakota and Wyoming posted Cs. Grades also varied across categories within individual states. Hawaii, for example, received a D-minus in the legacy costs category, which covers pensions and other postemployment benefits, while earning an A for its work in budget forecasting.
The eight states receiving an average of A in legacy costs were Idaho, Iowa, Nebraska, Oklahoma, Oregon, South Dakota, Utah, and Wisconsin. Six states received the lowest possible grade of D-minus: Hawaii, Illinois, Massachusetts, New Jersey, Texas, and Wyoming. Each of these states failed to make their full ARC or ADC for both pension and OPEB in either 2017 or 2018.
For at least three decades, many states have followed a general rule that rainy day fund reserves should equal about 5 percent of the general fund balance. While the origins of this rule remain uncertain, it has become clear that it makes little sense to hold all fifty states to the same reserve standard without considering their individual revenue structures.
Largely due to advocacy efforts by the Pew Charitable Trusts, a growing number of states have acknowledged this issue and are tying their rainy day fund goals to the volatility of their revenue streams. Nineteen states follow this practice, thanks in part to recent legislative momentum. In 2017, Hawaii, Maryland, Montana, New Mexico, North Carolina, and North Dakota changed rainy day fund policies to increase their consideration of revenue volatility.
While federal standards for reporting highway and bridge deferred maintenance costs are being upgraded, Hawaii, which received a grade of B, and the three states receiving top average scores of A—Alaska, California, and Tennessee—are the only ones making a clear effort to disclose these costs in budgetary or related documents.…
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Volker Alliance: Hawaii State Budget Practice Report Cards and Budget Resource Guide