In the most stringent cases, states are required to pass balanced budgets, and no borrowing is allowed to finance the operating budget. The states can use rainy day funds built up from previous years’ surpluses to finance current operations. The states keep capital budgets separate, and states are permitted to finance capital expenditures with borrowing.
The available academic literature suggests that these balanced-budget requirements do work, at least in part. Although states have a wide array of budgetary tricks they can and do employ to hit their deficit targets, research evidence suggests that the balanced-budget requirements do limit borrowing and that, as a result, states with more stringent requirements face somewhat lower borrowing costs.