Budget Basics

• General Fund:  The predominant fund for financing a state’s operations.  Revenues are received from broad-based state taxes. However, there are differences in how specific functions are financed from state to state. 
• Federal Funds:  Those funds received directly from the federal government.
• State Funds:  General fund plus other state fund spending, excluding state spending from bonds.
• Other State Funds:  Certain expenditures from revenue sources, which are restricted by law for particular governmental functions or activities.  For example, a gasoline tax dedicated to a highway trust fund would appear in the “Other State Funds” column.
• Bonds:  Those expenditures from the sale of bonds, generally for capital projects.
• Capital Expenditures: Expenditures made for new construction, infrastructure, major repairs and improvements, land purchases and the acquisition of major equipment and existing structures.
• State Fiscal Year: Forty-six states begin their fiscal years in July and end them in June. The exceptions are New York, with an April to March fiscal year; Texas, with a September to August fiscal year; and Alabama and Michigan, with October to September fiscal years.
• Biennial Budget: A budget that includes 24-month appropriations. Twenty-one states operate on a biennial budget cycle. See Table 1 in the Budget Processes in the States report for more information.
• Budget Stabilization or “Rainy Day” Funds: Those funds that states may use to balance the budget or respond to unforeseen circumstances. Typically this includes when revenues do not meet expectations in the latter part of the fiscal year when budget cuts and revenue increases do not have enough time to take effect.
• Total Balances: Includes both ending balances and the amounts in states’ budget stabilization funds (rainy day funds).

A Note About State Deficits/Shortfalls

Over the years, many journalists have inquired about this topic. Below is a short explanation of state deficits or shortfalls.

One commonly used indicator for state fiscal health is a comparison of “shortfalls” or commonly referred to as “deficits.”  While shortfalls provide a tool to gauge the magnitude of state budget difficulties, we at NASBO urge analysts to consider using additional means to demonstrate state fiscal conditions as well as “shortfall” numbers.  Shortfalls are often referred to as “deficits” though almost none are technically deficits.  Unlike the federal government, most states have to balance their budgets and do not technically run deficits. They may have a shortfall that needs to be dealt with through cuts and other measures, but not a deficit that requires the borrowing of money.  

During economic downturns revenue collections come in lower and expenditures come in higher than forecasted, causing what many would refer to as a “shortfall” or budget gap. Shortfalls are a function of revenue and spending forecasts and can vary depending on the accuracy of these forecasts.  For example, if a state is anticipating a major downturn and forecasts  revenue growth of  3 percent  for the upcoming year, down from the previous year of 10 percent growth, they would experience no “shortfall” if their forecast is correct.  However, the forecast for year-over-year decline in revenue collections may have resulted in various budget cuts and other actions in order to balance the state’s budget.  Another example is a state that forecasts 8 percent revenue growth, although actual revenue collections only increase by 5 percent.  This state is experiencing a revenue shortfall when comparing actual collections to budgeted.  The 5 percent growth for the current year may exceed the 4 percent growth from the previous year and the state would still be experiencing year-over-year growth.  Both states in these examples may be having fiscal difficulties, although only one has a measurable shortfall.  While the state which did not forecast the correct rate of growth would have to take actions to balance their budget, in the end both states will have gone through a period of budget reduction.   

Shortfalls are also used for future budgets and gaps between available revenues and spending.  While highlighting fiscal stress, the shortfalls also can differ across states depending on the approaches used to develop baseline spending.  For example one state may use an inflation factor on all state spending to develop a baseline while another state uses an increase for only certain items such as debt service, Medicaid, K-12 formula spending, and corrections.  Comparisons between the states will not only highlight fiscal strain but also different methodologies used to forecast spending increases. 

Additionally, shortfalls can be problematic in that they are often a moving target and can change month-to-month as a state updates its revenue forecast.  For example, a state may pass a balanced budget in April which takes effect in July.  However, by October that state may be experiencing revenue growth that is lower than the forecast leading to a “shortfall” of $300 million. Over the following two month period, the state makes $300 million in cuts and adjustments to the budget, either by the Governor or a special session, and come December the state has corrected the shortfall.  Although the state no longer has a shortfall, is it still accurate to say the state had a shortfall of $300 million?  Shortfalls can be a misleading indicator when it comes to explaining a state’s fiscal health, as nearly every state is required to balance its budget. 

There are several other indicators of fiscal health in addition to shortfalls.  Such indicators include a state’s change in revenue growth or change in spending for large state services such as corrections, education, and health care.  Other indicators of fiscal health include a state’s rainy day fund and balance level.  While shortfalls can be an important indicator they do not necessarily tell the whole story regarding a state’s fiscal health and further examination is often needed.  Plus, the term deficit implies states are borrowing money to finance an operating shortfall and that’s rarely the case.