State Strategies to Manage Budget Shortfalls

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Case Study: Contingency Budgeting In Arkansas

The Revenue Stabilization Law, enacted in Arkansas in 1945, has two primary goals: (1) to ensure that the state lives within its resources and (2) to allow the governor and legislature flexibility to set funding priorities every two years. The law, which applies to the general fund, includes several provisions to accomplish these goals, including:

The creation of a mechanism for legislative priority-setting every two years that would be stable regardless of the performance of state tax collections; and
The development of a system that allows state agencies to make budgetary decisions consistent with revenue collections by having the ability to easily determine the level of funding that would be available.

Under the Revenue Stabilization Law, appropriations are tied directly to revenue collections and there is a spending plan in place for every dollar of the forecast. But the law takes into account that it is difficult to estimate revenues accurately. To keep spending within actual revenue amounts, the law requires that appropriations be made according to priority categories that are established by the legislature every two years. Usually the legislature establishes three priority categories--A, B and C--although there have been up to five levels in the past--A, A1, B, B1 and C. All commitments in the A category must be funded before the next level receives any funding, then once the second level is completely funded, the next level will receive funding and so on until revenues are exhausted or all priority categories are funded.

Although the legislature does not classify agency programs as A, B or C, it provides specific appropriated amounts to each of these categories. Appropriations made by the legislature are maximum authorizations. The legislature determines each agency's funding level in each category based on revenue estimates. Once the department has been notified of its appropriation, it prioritizes its programs into the various category levels. Typically, category A has a 98 percent chance of being funded, category B has about a 50 percent chance and category C has less than a 20 percent chance.

To summarize, the process basically follows these steps:

The number of categories (e.g., A, A1, B, C) are determined by the legislature.
The Joint Budget Committee determines the total appropriation funding for each of the categories based on revenue estimates.
The Joint Budget Committee determines the portion of each agency's appropriation funding that is assigned to each category.
The agencies prioritize programs and place them in the categories.

The law permits the legislature to set priorities on new appropriations, yet leaves it to the agencies' discretion as to how they wish to prioritize programs. Essential programs are usually funded, but new programs or enhancements may not receive funding. If an agency ends the year with unspent appropriations, the funds usually return to the general revenue pool and are used to fund state construction projects. However, some departments, like schools, retain savings accrued during the year.

In addition to the benefits and drawbacks of contingency budgeting identified earlier, Arkansas' version has other distinct pros and cons. Some advantages are:

It forces program evaluation by requiring agencies to prioritize their spending.
It protects minimum program needs and eliminates optional program enhancements when funds become limited.
It minimizes uncertainty for agencies during the fiscal year because managers know which areas of their budgets will be cut if the state faces a revenue shortfall.

Some disadvantages are:

Agencies assume a critical role in establishing spending priorities, a responsibility reserved for the legislature in many other states.
Legislative initiatives may not get funded at all because they depend on where the agency places them in the budget.
Before budget problems even develop, policymakers and agency managers are required to establish and communicate that some programs are not high priorities--a process that may produce unnecessary distress if revenues materialize as projected.

State officials describe Arkansas' contingency budgeting as a complex process that is difficult to understand. Even so, it is likely to remain because it is credited for Arkansas' ability to maintain a stable budget with no deficit spending. {Telephone conversation with Bill Goodman, Assistant Director of Research and Tax in the Arkansas Bureau of Legislative Research.}

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Written December 1996, posted January 2003, reviewed December 2003
Email statebudget-info@ncsl.org for more information.
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