Late State Budgets
August 27, 2010
Since 2002, at least 19 states have started one or more new fiscal years without a final budget. Five of these states experienced partial government shutdowns as a result. Although some states have provisions in place to continue government operations in the absence of a budget, most do not. These states face the prospect of a government shutdown if the budget is not enacted by the beginning of the fiscal year.
To date, California, New York and Pennsylvania are the only states that did not pass their budgets by the start of fiscal year (FY) 2011 (Michigan also has not yet enacted a budget, but its fiscal year doesn’t begin until Oct. 1.) While others did not miss the critical July 1 date—the start of the fiscal year for 46 states—at least nine states have needed to extend their sessions or meet in special sessions to deliberate on the budget.
Reasons for Late Budgets
Extreme fiscal conditions—negative or positive—can increase the likelihood of late budgets. Weak revenue performance helped drive cumulative state budget gaps in FY 2009 above $117 billion. In developing their FY 2010 budgets, state lawmakers faced another $145 billion cumulative shortfall. Resolving these massive gaps can significantly complicate, and often lengthen, state budget deliberations. Nine states—Arizona, California, Connecticut, Illinois, Michigan, Mississippi, North Carolina, Ohio and Pennsylvania—began FY 2010 without a finalized budget.
The difficult fiscal conditions and subsequent budget delays many states currently are experiencing also occurred during the previous national recession (March 2001 to November 2001). In FY 2002 and FY 2003 revenue collections fell short of forecasts in most states, also leading to sizeable budget gaps. This contributed to eight states—California, Connecticut, Nevada, New Hampshire, New York, Oregon, Pennsylvania and Rhode Island—passing late budgets in FY 2004.
Exceptionally healthy state finances in the more distant past also affected budget timelines. During the late 1990s prolonged debate over what to do with unexpected surpluses also resulted in several late budgets.
Rules and Procedures
Legislative rules and procedures also can affect the punctuality of enacting state budgets. States without a limit on the length of legislative sessions are particularly prone to budgetary tardiness. Six of the nine states with a late budget in FY 2010 and five of the eight states with late budgets in FY 2004 had no session limits. In 1991, eight of the 11 states with late budgets similarly lacked limits.
Supermajority vote requirements for passing appropriation bills also can cause late budget adoption. Two of the three states with such requirements had late budgets in FY 2004. California's two-thirds supermajority requirement, the strictest of all such requirements, is often identified as the main cause of the state's numerous late budgets.
Other factors such as a history of late budgets, inclusion of non-fiscal related issues in a budget bill and short deliberation periods can increase the likelihood of a late state budget. A number of these factors are frequently cited for the cause of late budgets in New York. Beginning in 1985, New York went 20 years without passing its budget on time. 
Some states have rules or provisions to encourage timeliness. In Illinois, a majority vote in each house is required to pass the budget until June 1. After that date, the required vote increases to a three-fifths majority. Despite this requirement, in FY 2010, Illinois missed its budget deadline by 16 days. In Maryland, the state constitution requires that the budget be enacted by the 83rd day of the 90-day legislative session. After the 83rd day the only bill the legislature may consider is the budget.
In the event that a budget has not been passed by the start of a new fiscal year, state action usually consists of one or more of the following:
- The legislature passes a temporary appropriation bill, also known as a "continuing resolution,” or "stopgap measure.” Eleven states use temporary appropriation bills to maintain government operations if the new budget has not been enacted by the beginning of the fiscal year. Six of the eight states with late budgets in FY 2004 passed temporary appropriation bills. Connecticut, Michigan, North Carolina, Ohio and Pennsylvania passed temporary appropriation bills in FY 2010.
- Constitutional provisions or other procedures ensure the continuous operation of government. Twelve states have various provisions that allow for continuous payment of funds for agencies and services absent a new 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 the previous year’s level. In Arizona, dedicated revenue fund expenditures continued despite the lack of a budget in FY 2010. Lawmakers did approve the restoration of some education funds while the FY 2010 budget was being finalized in order to qualify for federal funds.
- Government partially shuts down. In the absence of a budget or a temporary appropriations bill, 22 states face government shut downs. This most often involves furloughing state employees not deemed critical to the maintenance of public safety and health. State parks are often closed, along with some state offices such as those that issue driver's licenses. Positions exempted from mandatory furloughs are usually referred to as "essential" state employees, and often include staff within the department of corrections, state police and disease control centers.
Deviations from these procedural options have occurred in some states. The Nevada Legislature passed the state budget in FY 2004 only after the intervention of the state Supreme Court resolved an impasse between the governor and the Legislature. And in 1992, the Florida governor avoided a shutdown by promising retroactive pay for state employees while lawmakers continued to work on the budget.
In 11 states, government officials do not know what would happen if the budget is late because state law does not directly address the issue. Because the budgets in these states have always been passed on time, the issue has never been tested.
More information on state provisions when the budget is late can be found at: http://www.ncsl.org/default.aspx?tabid=12616
Examples of Government Shutdowns
Since 2002, fives states have experienced a government shutdown after starting the fiscal year without an enacted budget. Here are their experiences:
- Michigan recently has faced two partial shutdowns. The state’s shutdown in 2007 lasted only four hours—from midnight of the last day of the fiscal year until 4:00 a.m. on October 1, 2007, when the governor and legislature reached a deal for temporary funding. In anticipation of the shutdown campers had been asked to leave state parks the night before. The short disruption also resulted in decreased state police on the highways. Plus, highway rest stops were barricaded, drawbridges closed and traffic cameras turned off. The partial shutdown involved temporary layoffs of 35,000 of the state's 53,000 employees. In FY 2010, Michigan experienced a technical two-hour government shutdown as lawmakers worked on a temporary spending plan. However, there was no interruption in the delivery of state services.
- Pennsylvania experienced a governor-ordered partial shutdown in FY 2008. The governor and the legislature reached a budget agreement nine days into the new fiscal year. After a week of impasses, the governor ordered nearly 24,000 state employees to stay home on July 9.
- New Jersey's state government partially shut down in FY 2007. This occurred despite the state having missed its budget deadline in three of the previous five years without shutting down. Before the governor signed the budget eight days into the fiscal year, 45,000 non-essential employees were placed on unpaid leave. One of the more dramatic results of the furloughs was the three-day shutdown of Atlantic City's casinos for the first time since their launch. This occurred because state casino inspectors, who are required by law to be present in the casinos, were among the state workers included in the furlough order.
- A partial shutdown occurred in Minnesota in FY 2006—the first shutdown in the state's history. Nine days into the new fiscal year the governor and legislature reached agreement on a temporary funding measure. This allowed the 9,000 state employees furloughed during the shutdown to report back to work.
- Tennessee's state government partially shut down for three days in FY 2003. During that time, classes stopped at public universities, state parks were closed, 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, continued to be provided.
The Costs of Late Budgets
There are various consequences associated with late budgets. Extending the regular legislative session or calling a special session increases operational costs. Furloughs of state employees result in lost wages. Pennsylvania's one day furlough of nearly 24,000 state employees in FY 2008 caused an estimated $3.5 million in lost wages. That represents a decrease in spending in the state's economy and foregone income tax collections on those wages. States also may be subject to legal actions from employees because of lost compensation.
Without appropriation bill details, state agencies and local governments, including school districts, are unable to budget, plan or deal effectively with their contractual obligations leading to secondary and tertiary costs to overall government operations.
A consistent failure to pass a budget on time also may affect a state's credit rating. Less favorable terms on loans resulting from poor credit ratings can increase debt service costs for a state. 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.
Revenue generation can also be affected when a late budget results in a partial shutdown. When New Jersey's state government was ordered to shut down in FY 2007, state officials reported that closing Atlantic City casinos resulted in daily losses of $1.3 million in gambling tax revenue. Taking the state lottery offline cost the state $2 million in lost revenue per day.
On top of the measurable, direct costs, states also pay indeterminable consequences in terms of a decline in public confidence in elected officials and damage to the state's image.
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1. States that have started a fiscal year (since 2002) without a budget in place: Arizona, California, Connecticut, Illinois, Kentucky, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Jersey, New York, North Carlina, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee and Wisconsin.
2. A New Fiscl Year-A Better Budget. Staff report to the New York Senate Select Committee on Budget and Tax Reform. April, 2010. http://www.nysenate.gov/files/pdfs/FINALFiscalYearWhitePaper.pdf