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Podcast: The ABCs of State Budgets

February 9, 2010

In this podcast we will discuss the ABCs of state budgets, and the problems that many states face today because of the recession. I'm Shannon Spillane and I'm joined by the Deputy Director of the Center's State Fiscal Project, Jon Shure.

1. Jon, let's start by talking about the state budget calendar. States are now in fiscal year 2010. Tell me what is a "fiscal year" and when do states' fiscal years begin?

Sure, Shannon. "Fiscal year" is the technical term for the period covered by a budget. In most states the fiscal year goes from July first to the following June 30th. But a few states are exceptions. New York starts its fiscal year April 1st, Texas September 1st, and Michigan and Alabama October 1st.

2. How does the budget process get started?

The budget process starts well before the fiscal year begins - typically when governors issue their budget proposal. The state's laws or constitution usually set a deadline for the governor to release a budget proposal in January or February.

3. Jon, what happens next in the budget process?

A state's budget can't take effect until the legislature approves it and the governor signs it. Some legislatures have more authority to change the budget than others.

4. What is the largest part of most states' budgets?

The largest, most important part of most budgets is the general fund, also called the operating budget. Typically this is where the lion's share of general tax revenues (like sales and income taxes) go. The general fund pays for most state spending on education, health care, public safety, and other areas. In fact, over half of what states spend, on average, goes to education and health care.

5. What are the major sources of revenue in most states?

State taxes are the major source of revenue -- made up mainly of personal and corporate income taxes as well as general sales taxes. Most states have income and sales taxes. Also, about a quarter of state funds come from the federal government.

6. Are states required to balance their budgets?

Yes, they are. Unlike the federal government, every state (except Vermont) is required by its laws or constitution to balance the operating budget. They can't spend any more than they take in; and they can't borrow to pay for ongoing operating expenses. States can borrow for capital expenses, like new roads and buildings. They do this by selling bonds to investors, which states then repay with interest.

7. So if states have to balance their budgets, what does it mean when a state has a "budget shortfall" or a "projected deficit"?

The spending in the budget each state passes has to match the amount of revenue the state expects to collect in the coming fiscal year. If the amount of money a state takes in from revenue is less than what the state needs for ongoing services and existing obligations for the year, the state faces a budget shortfall or a projected deficit. They might see a shortfall even before the fiscal year starts because expected revenues won't cover needs. Or, as revenues come in below what the state estimated, they can have a "mid-year shortfall" or "mid-year deficit" for that year.

8. Jon, how do states handle a shortfall?

Unfortunately, lots of states have shortfalls right now because of the recession. They re-balance their budgets through steps like using reserve funds, cutting spending, and increasing revenues.

What states should do -- and many are doing -- is take a balanced approach that includes revenues, and not rely on spending cuts alone. Too much reliance on cuts hurts families who need help and damages the state's economy.

9. Some people say that states got into this trouble because they are spending too much. Is that the case?

It's important to point out that states' shortfalls are overwhelmingly due to declining revenues, not excessive spending or mismanagement. In fact, total state spending even before this recession started was smaller as a share of the economy than it was in 2001 - and it's fallen even more since then.

Thanks for joining me, Jon.