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To: Dr. Pengju Zhang

From: Rashae Williams
Subject: Balanced Budget Requirements (BBRs)
Date: August 11, 2022

In order to understand the complex process of budgeting and finances at a state level and within
local policy, it is essential to also understand the concept of Balanced Budget Requirements
(BBRs). This memo will not only describe BBRs, but also explain the reasoning behind why
implementing not just stringent BBR requirements, but also political BBRs, is recommended in
each state.

While each state in the US has varying stringency and layout requirements within their BBR
policies, it is generally understood that BBRs are “constitutional or statutory rules that prohibit
states from spending more than they collect in revenue”.1 BBRs originated from the “Norm of
Balance” in the very early years of the United States as a country.2 While different political
factions had opposing viewpoints regarding government budgeting, it was eventually decided
that taxes should be low and debt should be avoided. Unfortunately, because the specific BBR
requirements are ultimately determined by each state, BBRs can be difficult to interpret and may
not be explicit.

As seen in Figure 1, there are certain rules that could potentially be a part of a state BBR, and
depending on implementation of each, the BBR would have varying degrees of what is
considered “strength” or “weakness”, in other words, how strict the budgets are. This variation is
because each step outlined in the process is relatively ambiguous. This figure shows two separate
characteristics involved, political and technical, that govern BBR creation and implementation.
While both are required to create a BBR framework and move the process forward, many states
take advantage of the ambiguity in this framework and create their own definitions of balanced
budgeting, as well as include loopholes that allow for excess expenditures under specific
circumstances. Other states are extremely specific, and some even vary their fiscal policies for
BBRs from year to year. This is why stringent or specific BBRs alone do not create a balanced
budget.3

A recent study by Kioko and Lofton tested the effectiveness of stringent budget requirements and
characteristics of technical vs. political frameworks. The results showed that states who adopt a
more political framework reported lower fund balances and a more balanced budget overall.4
Other factors don’t play as critical of a role in a balanced budget.

1
What are state balanced budget requirements and how do they work? (n.d.). Tax Policy Center. Retrieved August 3, 2022, from
https://www.taxpolicycenter.org/briefing-book/
2
HOU, Y., & SMITH, D. L. (2006). A Framework for Understanding State Balanced Budget Requirement Systems: Reexamining
Distinctive Features and an Operational Definition. Public Budgeting <Html_ent Glyph="@amp;" Ascii="&Amp;"/> Finance,
26(3), 22–45. https://doi.org/10.1111/j.1540-5850.2006.00853.x
3
Ibid, Footnote 2
4
Kioko, S. N., & Lofton, M. L. (2021). Balanced Budget Requirements Revisited. Public Finance Review, 49(5), 635–672.
https://doi.org/10.1177/10911421211054977
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Additionally, the current contradictions or issues related to BBRs today involve the conflict
between constitutional vs. statutory provisions and issues with states that currently have no BBR
policies whatsoever. Allowing each state to determine their own BBR policy parameters creates
conflict between decisions made locally or by parliament, and decisions explained in the
constitution.5 Some principles are considered overly strict or outdated, while others are
constantly changing, and states are left to pick and choose their own policies, which does not
provide much clarity. As for states that currently have no BBRs, these include North Dakota and
Wyoming. This is a problem that can be attributed to the lack of state self-reporting required by
the US government for BBRs, and therefore lackadaisical verification policy regarding any state
reporting, which does not encourage clarity or strict BBR adherence.6

Studies by Smith and Hou use a regression analysis about the effects of these contradictions, as
well as problems that result year to year from fiscal shocks or issues with BBR policy.7 With
variables such as state revenue, income, unemployment rate, budget surplus, and federal
contributions against dependent variables of state revenue and expenditures, results prove that
specific BBR requirements for each state had a positive, statistically significant effect on fund
surplus, specifically referring to expenditure cuts rather than increase in revenue.

Other studies showed similar results, that BBRs that particularly encouraged decreased
expenditures and minimization of deficits with budgets approved by a governor (which is part of
political policy) have an improved ability to manage and endure financial risk from year to year.8
The studies indicate the more specific these requirements are, the higher likelihood of an
improved financial situation for states in the future.

While BBRs are a complex subject in the state and local financial field, including a BBR policy
is critical to a states’ ability to navigate finances each year. Politically focused BBR policies help
increase revenue by decreasing expenditures and hold each state accountable for their financial
actions. These state BBRs can also minimize financial risk and allow more of an in depth
understanding of the state financial plans and specifications.9

In conclusion, BBRs are policies that help states spend less than they make in revenue. BBRs
that are specific, clear, and that encourage decreased expenditure have been proven to be very
beneficial to state finances over time. Political BBRs result in lower fund balances. It is
recommended that each state implement a specific, political BBR to better enjoy and benefit
from these results.
5
National Conference of State Legislatures. (2010, October). NCSL FISCAL BRIEF: STATE BALANCED BUDGET
PROVISIONS. The Forum for America’s Ideas.
https://www.ncsl.org/documents/fiscal/StateBalancedBudgetProvisions2010.pdf
6
Ibid. Footnote 1.
7
SMITH, D. L., & HOU, Y. (2013). Balanced Budget Requirements and State Spending: A Long-Panel Study. Public Budgeting
& Finance, 33(2), 1–18. https://doi.org/10.1111/j.1540-5850.2013.12007.x
8
Ibid, Footnote 2.
9
Ibid. Footnote 4.
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Figure 1