Four Considerations for Success
Define Terms
States can begin by defining how one-time versus recurring revenues and expenditures apply in their state. While coming to a complete consensus on definitions may be difficult, even discussion can build consensus, set expectations and help frame the conversation around budget priorities. Establishing definitions can also help increase the likelihood that future legislatures will continue to budget for one-time and recurring revenue and expenditures separately.
Example Definitions
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Ongoing expenditure
Appears in the budget year after year and require recurring funding to maintain programmatic function. These expenditures are typically more difficult to defer.
Examples: Paying employee salaries, paying rent or utility bills, purchasing nondurable goods, paying social service benefits, infrastructure maintenance, or contracting for services.
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One-time expenditure
Do not commit the state to regular future funding obligations. They often provide ongoing value without ongoing appropriations. These expenditures are typically easier to defer than ongoing expenditures.
Examples: Paying down pension debt, making optional deposits into the rainy day fund, addressing maintenance backlogs, and purchasing durable equipment.
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One-time revenue
Cannot be expected to recur year after year and can be highly unpredictable. These revenues cannot be relied upon to fund ongoing expenditures.
Examples: Temporary federal aid, transfers from other state accounts, sale of an asset and the proceeds from a lawsuit.
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Ongoing revenues
Recur year and year and are more predictable. These revenues can be used to fund ongoing expenditures without creating future budget crises, although lawmakers should recognize that even an ongoing revenue source can experience a temporary spike that may need to be treated as one-time.
Example: Personal income tax revenue.
Develop a Clear Set of Rules and Establish Norms and Precedents
Legislatures are fluid, with members and leaders who potentially change each elections cycle. In addition to defining what one-time and recurring revenues and expenditures mean to your legislature, developing some norms and rules around the process can help guide future legislatures to continue to account for one-time and recurring funds, creating more long-term fiscal sustainability. Beginning this process will take champions in the legislature that believe in the importance of forward-looking budgeting and requires buy-in from members to be successful. While this can be legislatively driven, establishing this culture within the executive branch can make the process even stronger.
Developing norms to account for one-time and recurring revenues and expenditures in budgeting involves creating a culture that respects that process, even when it may prove challenging.
Examples of norms and precedents within the legislature
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As bills move through the legislature, budget committees sometimes only see a slice of the overall budget at any given time. Matching one-time and recurring revenues with one-time and recurring expenditures requires looking at the full budget picture. For example, in Utah, the Joint Executive Appropriations Committee first approves a baseline budget using the previous year's budget as a blueprint. Additional bills with a fiscal impact are held until the last few days of the session, when the Executive Appropriations Committee, along with caucus leaders and other stakeholders, review those bills along with available revenues and decide which bills will be funded so the budget stays in balance.
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Legislative staff play a critical role in the process of matching one-time and recurring revenues and expenditures. They often have insights and tools to help policymakers evaluate their choices and maintain a balanced budget. In states with multiple staff offices, conversations to reach as much consensus as possible around one-time and recurring funds is beneficial. Legislative leaders should strive to create an environment that attracts talented legislative staff, and a culture where legislators have trust and confidence in the information staff provide.
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From a practical standpoint, to differentiate between one-time and recurring revenues, it may help to use the same categories as the revenue and economic forecast. For example, the categories laid out in Colorado's forecast overview and report can serve as an organizational framework.
Examples of rules
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In addition to establishing norms that can create an environment that supports matching one-time and recurring funds, creating some specific rules can create guardrails to ensure this process is followed even in challenging times. Examples of rules that exist in some states include:
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New Mexico's revenues are heavily reliant on oil and gas taxes, which are notoriously volatile and can vary widely from year to year. These revenue streams have soared recently due to a large production boom. To reduce the impact of revenue volatility on New Mexico's budget, the state implemented laws to cap peak oil and gas tax revenue and transfer them to two permanent funds that distribute investment income back into the budget. The state also saves excess oil and gas tax revenue in a fund that distributes 25% of its balance each year for multi-year innovative pilot projects with requirements for performance measures and rigorous program evaluation to demonstrate effectiveness before moving funding into an agency's recurring base budget.
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Each year, Utah uses the previous year's budget as a starting point to build the next annual budget. Utah passes a base budget, largely of recurring expenditures, and additional one-time expenditures are added as revenue is available.
Transparency, Communication and Education
As previously mentioned, budgeting for long-term fiscal health by differentiating between one-time and recurring funds requires a culture of trust and buy-in from legislators. That culture is difficult to achieve without transparency in the process, effective communication and educating legislators that do not sit on an appropriations committee. Some ideas for increasing transparency, communication and education include:
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Identify funds early: Begin identifying one-time and recurring funds early in the budget process. Require agencies to identify what they consider one-time and recurring expenditures in their agency budget requests.
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Accessible data: Develop a way that members can visualize one-time and recurring funds. Clearly label one-time and recurring expenditures in a budget document. To increase transparency, consider allowing all legislators access to this document.
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Share information between chambers: Consider holding informal or formal joint hearings between the House and Senate so members know they are receiving the same information and to increase transparency and buy-in from legislators in both chambers. For example, the Georgia legislature holds informal joint budget hearings to begin the budget process, before holding formal separate hearings in each chamber.
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Consistent effort to continue efforts/norms: The committee process is different in every state and chamber, and in many cases, most legislators do not sit on an appropriations committee, especially early in their careers. Increase transparency by Including an explanation of how and why the legislature identifies and accounts for one-time and recurring funds in training sessions and providing other opportunities for education of members.
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Forecast often: Consider revising the revenue forecast frequently, either formally or informally, to track revenues and ensure the budget stays balanced. Staff of the Joint Legislative Budget Committee in Arizona publish a fiscal highlights brief each month, which includes information on how revenues are performing relative to forecasts.
Incorporate into Short-and-Long Term Processes
Identifying one-time and recurring revenues and expenditures in the state's annual or biennial budgeting process is a key first step in maintaining structurally balanced budgets. However, for long-term fiscal sustainability, matching one-time and recurring revenues to expenditures should also be viewed with a longer time horizon. Some considerations for how to incorporate more long-term strategies into this process include:
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Draft fiscal notes: Fiscal notes are one of the main ways states evaluate the price tag of legislation. Including at least two-year estimates in fiscal notes is a good way to begin thinking long term about balancing one-time and recurring revenues. For legislation that phases in gradually, fiscal notes can include enough years to estimate costs after full implementation. Notes can also explicitly list effects on revenue and spending as recurring or nonrecurring.
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Prepare mid-term outlooks: Prepare revenue and expenditure estimates and analysis three to five years out when possible. While estimating this far out can pose challenges, looking ahead three to five years can allow time to potentially identify recurring funds to replace one-time funds in agency budgets over time.
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Conduct a long-term trend analysis: An analysis of historical data can help identify revenue cycles. This can help better identify trends over time in one-time and recurring funds and smooth out volatility. Hawaii has a long history of identifying one-time and recurring revenues and expenditures in its biennium and supplemental budget worksheets, as well as accounting for them in the six-year financial plan.
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Evaluate investment outcomes: One of the most important aspects of evaluating one-time and recurring revenues over the longer term is recognizing that one-time funds can lead to additional one-time investments or even recurring costs in future budget cycles. For example, most infrastructure projects will require some future one-time or recurring maintenance costs. Accounting for the full cost of ownership in the current budget cycle and long-term analyses strengthens the state's long-term fiscal health.
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Don't count out obligations and incentives: While they may not need to be identified as recurring or one-time costs in each budget, states face other types of long-term obligations that need to be accounted for to achieve long-term structural balance. States typically have pension obligations that can be included in long-term modeling. Additionally, states often offer tax incentive packages, both large and small, to businesses operating in the state. These incentives can be complicated and can include triggers for further incentives based on a company hitting benchmarks. These incentives can be especially difficult for states to account for in budgeting, but it is valuable for lawmakers to be thinking about these incentives as part of each budget cycle and in long-term forecasts.