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Late Budgets

Legisbrief vol. 12, no. 31, August 2004
Ian Pulsipher

Last year, California, Connecticut, Nevada, New York, Oregon, Pennsylvania and Rhode Island began their fiscal years without a final budget. Although many states have measures to limit the effects of late budgets on government operations, there are consequences for those that fail to pass a budget on time.

The Reasons. Legislative rules and procedures can increase the likelihood of late budgets. States without a limit on the length of legislative sessions are particularly prone to budgetary tardiness. Of the seven states in 2002 with late budgets, six had no session limits. In 1991, eight of the 11 states with late budgets similarly lacked session duration constraints.

Supermajority requirements for appropriation bills also can affect the timeliness of state budget passage. Two of the three states with those requirements had late budgets in 2003. California's two-thirds supermajority requirement, the strictest of all such requirements, is often pointed to as the main cause of the state's 13 late budgets in the last 17 years.

Extreme fiscal conditions, negative or positive, can also affect the process. Revenue collections were below forecasts in 37 states in 2003. At the same time, more than half the states faced shortfalls in double-digit percentage of their total budgets. This caused longer and more difficult deliberations. Exceptionally healthy state finances during the late 1990s prolonged debate over what to do with the unexpectedly high revenue and also resulted in several late budgets. Other factors such as a history of late budgets, inclusion of nonfiscal related issues in a budget bill, short deliberation periods and certain accounting practices, such as Wisconsin's cash-based revenue and expenditure recording system, also can increase the likelihood of a late state budget.

State Actions

In the event of a budget lapse, state action usually consists of one or more of the following:

1. The legislature passes a temporary appropriation bill, also known as a "continuing resolution,” or "stopgap measure.” Eleven states use temporary appropriation bills to maintain the operation and finance of government. Five of the seven state legislatures with late budgets in 2003 passed temporary appropriation bills. Oregon Governor Kulongoski signed two stopgap measures before the passage of the budget ended the longest legislative session in the state's history. New York lawmakers used two-week mini budgets that maintained spending at the previous year's levels until an historic legislative override of the governor's veto resulted in a final budget.
2. Constitutional or other provisions or procedures ensure the continuous operation of government during an appropriation lapse. At least 12 states have various provisions that allow for continuous payment of funds for agencies and services without a current budget. The current interpretation of California court rulings on cases related to late budgets allows continuous operation of most of state government through automatic funding at levels of the previous year.
3. Without a budget the government shuts down. In the absence of a budget, provisions in more than 20 states direct the government to shut down. The most recent example of this was Tennessee's partial shutdown in 2002. During that time, classes stopped at public universities, driver's licenses were not issued and road construction ceased. Many services such as public health, welfare, child support, mental health, prisons and highway patrols all continued however. A budget was signed three days into the new fiscal year.

Deviations from these procedural options have occurred in some states. The Nevada legislature passed the state budget last year only after the intervention of the state Supreme Court. The Florida governor avoided a shutdown in 1992 by promising retroactive pay for state employees working through the appropriations lapse.

Costs. There are a variety of costs associated with late budgets. Extending the regular legislative session or calling special sessions increases operational costs. States may be subject to legal actions from employees or citizens because of lost wages. Without appropriation details, local government and nonprofit organizations are unable to budget, plan or deal effectively with their contractual obligations leading to secondary and tertiary costs to overall government operation. States also pay indefinable costs in terms of a decline in public confidence in elected officials, damage to the state's image and possible difficulty in future personnel recruitment.

A consistent failure to pass a budget on time also may affect a state's credit rating. With 19 late budgets in that many years, New York is an example worth consideration. Former New York Comptroller H. Carl McCall says a history of late budgets has contributed to the state's consistent poor credit ratings. This lowers bond ratings and increases interest rates paid by states when borrowing. In measuring the effect of credit ratings on state borrowing, a 1997 study by the New York comptroller's office found that a credit upgrade of one rating over the life of an examined debt would have resulted in an estimated $158 million in savings to the state. Another state with a significant history of late budgets, California, has a current Standard & Poor's credit rating of BBB—the lowest of any state in the past 10 years.

Selected References

• Eckl, Corina. Legislative Budget Procedures. Denver: National Conference of State Legislatures, 1998.
• "Measuring the Cost of New York's Financial Practices: The value of a credit rating upgrade." New York: Office of the State Comptroller, 1997.
• Prunty, Robin and Howard Mischel. Public Finance Report Card: The U.S. States. New York: Standard & Poor's, 2003.
• Snell, Ronald K. "Improving Wisconsin's Fiscal Management” presented to the Wisconsin Legislative Council, Special Committee on Improving Wisconsin's Fiscal Management. Madison, Wisc., Sept. 19, 2002.

Published August 2004; posted June 2007.
Email statefiscal-info@ncsl.org for more information.
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