Results for Fiscal 2016, 2017, and 2018
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The Volcker Alliance evaluated all fifty states' adherence to best practices on a set of nineteen common budget practice indicators, within five budgeting categories: Budget Forecasting, Budget Maneuvers, Legacy Costs, Reserve Funds, and Transparency.
Use the data visualization below to explore whether each state followed or failed to follow best budgeting practices in each of the budgeting practice indicators over the three fiscal years studied, 2016 through 2018.
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In the Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis report covering all fifty states over the fiscal years of 2016 through 2018, the Volcker Alliance focuses on five critical areas that explain methods used to achieve budgetary balance, as well as how budgets and other financial information are disclosed to the public.
- procedures in developing and presenting annual (or in some instances biennial) budgets, including the extension of reliable revenue and spending estimates over periods beyond the annual budget;
- use of ad hoc, one-off adjustments of revenues and expenditures at the expense of future budgets;
- practices with respect to funding (or failure to fund) pensions and OPEB (other post-employment benefits, including health care) for public employees—quantitatively by far the most important area of this study for most states;
- provisions for, and responsible use and replenishment of, rainy day funds and other fiscal reserves;
- and comprehensiveness of disclosure of budgetary information, including tax expenditures and infrastructure replacement costs.
In each category identified below, a state was given a grade ranging from A to D-minus. Although there are no “failed states,” the results, as might be expected, cover a wide spectrum, with especially excellent or weak performances scattered across the nation.
Budget Forecasting evaluates whether and how states estimated long-term revenue and expenditure trends.
Budget Maneuvers evaluates whether states used one-time revenues, borrowings, asset sales, and other measures to achieve short-term budgetary balance.
Legacy Costs evaluates whether states provided adequate funding, as defined by retirement system actuaries, for pensions and other promised retirement benefits for public workers. The Legacy Costs budgeting category grade was modified to also take into account any unfunded pension liabilities (pension funding ratios were compiled by Bloomberg as of the end of the fiscal year in question; the ratios were not available for fiscal 2018 as of our publication deadline, so fiscal 2017 data were used instead).
Reserve Funds evaluates states’ rainy day funds and other fiscal reserves, as well as any policies governing their use and replenishment.
Transparency evaluates the accessibility to the public of states’ budget practices.
While we attempted to keep the scoring and grading systems as simple as possible, some variation among budget categories was necessary to most accurately reflect states’ success in implementing budgetary best practices. Save for legacy costs, which was assessed on three factors, categories were scored on the adherence to best practices on four equally weighted budget indicators, each measured by a research question or set of related questions. Here is how we determined the grades:
- The Budget Forecasting category was graded on a state’s use of a consensus revenue forecast; having a reasonable rationale for revenue growth projections (based on historical revenue and economic growth trends); producing multiyear revenue forecasts; and generating multiyear expenditure forecasts.
- The Budget Maneuvers category was graded on a state’s use of one-time actions to create short-term budget fixes, often to the detriment of long-term budget sustainability. Research questions related to one-time actions were grouped into four types of budget maneuvers, and states received credit for each type they succeeded in avoiding. One-time actions included funding recurring expenses with debt; funding recurring expenses with the proceeds of asset sales or by tapping future revenues; deferring a current year’s recurring expenditures; and covering general fund expenditures with transfers from other funds.
- The Legacy Costs category was graded on a state’s willingness to meet public employee pension obligations and other postemployment benefit (OPEB ) obligations. Thirty percent of a grade was determined by a state’s actuarially required or determined contribution (ARC or ADC ) for OPEB . Thirty-five percent of the category grade was based on whether the state made its public employee pension ARC or ADC , and 35 percent was based on the state’s pension funding ratio, which represents the amount of assets available to cover promised benefits. While it is best for states to make the full payment that actuaries determine is necessary every year, missing such a contribution is of greatest concern to states with high unfunded liabilities.
- The Reserve Funds category was graded on a state having a reserve fund disbursement policy; having a reserve fund replenishment policy; tying reserves to historic trends in revenue volatility; and having a positive reserve or general fund balance at the beginning of each fiscal year.
- The Transparency category was graded on the extensiveness and usefulness of a state’s financial disclosure practices. States received credit for having a consolidated budget website; disclosing outstanding debt and debt service cost tables; providing information on deferred infrastructure maintenance costs; and providing cost estimates for tax expenditures.
State fiscal sustainability is of no small concern to the US economy or the federal government. As Volcker Alliance Chairman Paul A. Volcker stated in 2017, “The purposes and manner in which public funds are spent are matters basic to our well-being as a nation.” Indeed, states generate $2.1 trillion in annual revenue, equivalent to 10.3 percent of the nation’s gross domestic product. State and local governments—the latter heavily dependent on state budget funding—employ almost twenty million people.
Spending decisions are appropriate and necessary issues for political debate and decision. The Great Recession and the relatively slow growth of the US economy in recent years have intensified budgetary pressures in many states. Faced with constitutional, statutory, or customary requirements for annually balanced budgets, a large number of states have been forced to reduce or reallocate spending. The potential to defer or obfuscate in making these adjustments is very real. That is why the need for comprehensive and accurate accounting and transparent reporting of the financial positions of individual states is even more compelling.
In a report released in December 2018, Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis covering all fifty states over the fiscal years of 2016 through 2018, the Volcker Alliance focuses on five critical areas that explain methods used to achieve budgetary balance, as well as how budgets and other financial information are disclosed to the public. States were given grades of A to D-minus for their procedures in:
- estimating revenues and expenditures;
- using one-time actions to balance budgets;
- adequately funding their public worker retirement and other post-employment benefits;
- overseeing and using rainy day funds and other fiscal reserves;
- and disclosing budget and related financial information.
In addition to assigning grades, the Volcker Alliance proposes a set of best budgeting practices for policymakers to follow.
Critical to this work has been the cooperation of eight universities, each with a demonstrably strong interest in public service education and particularly in the management of state and local governments. The Alliance hopes to assist schools of public policy and administration by helping to widen the scope of research in the areas of public budgeting and finance while training students looking toward careers in state and local governments. The universities’ research efforts were augmented by Volcker Alliance staff, data consultants at Municipal Market Analytics, and special project consultants Katherine Barrett and Richard Greene.
The Volcker Alliance plans on releasing an update to this project by the end of 2019, which will include updated fiscal year 2018 results as well as preliminary fiscal year 2019 results.