Budget Balance: State Rankings

March 29, 2016 |

In Brief: 

One indicator of a fiscally sustainable government is that it maintains a generally balanced or positive ratio of revenues to expenses or “budget balance”. This article explores the relative performance of the 50 U.S. states according to their budget balance ratio.

Introduction: Why We Measure

Across the United States, governments in severe fiscal distress have consumed our collective national attention. Citizens in Stockton, Detroit, and Puerto Rico are facing the consequences of fiscal short-sightedness: increased taxes, cuts to public services, or unfulfilled promises to public employees. But often, public officials, journalists, researchers, and citizens lack the data and practices to identify fiscal challenges in advance of severe distress.

To combat the challenges of access to, and understanding of, fiscal sustainability data, US Common Sense has created the nation’s largest comprehensive and free municipal finance platform on GovRank.org. The platform includes “top-line” financial figures, understandable measures of fiscal sustainability, and interactive rankings for over 13,000 municipalities nationwide.

In this article, we examine state performance according to one aspect of fiscal sustainability: how well a government balances its budget. For a full explanation of our data collection, analysis, and methodology, please refer to the GovRank project’s Methodology article.

Overview: Fiscal Sustainability and Budget Balance

A government is fiscally sustainable if it can meet the service needs of its current population without jeopardizing its ability to meet the service needs of its future population. We selected a set of three measures to help citizens understand fiscal sustainability: a budget balance ratio, asset flexibility ratio, and pension funding for public employees ratio. A fiscally sustainable government would maintain a generally balanced or positive budget balance ratio, a positive and relatively high net asset ratio, and a low per capita unfunded liability associated with retired public employees’ pension benefits.

Budget balance is the ratio of a government’s total revenues to its total expenses in any given year. The budget balance ratio illustrates whether a government operated in surplus, balance, or deficit in a given fiscal year.

Budget Balance = Total Revenues/Total Expenses

  • Total revenues include all the income a government generated in a fiscal year, as reported in its comprehensive annual financial report (CAFR). The total amount includes tax collections, fees and charges for services, transfers from other governments, and other revenue sources.
  • Total expenses include all the costs a government paid in a year, as reported in its CAFR. These typically include costs for general operations, personnel, infrastructure spending, and services that may include corrections, education, healthcare, and others. Total expenses do not include the cost of public employee retirement benefits. These are reported elsewhere in a CAFR.

Interpretation:              

  • When the budget balance is greater than 1 (total revenues > total expenses), the government has a surplus, with a larger value indicating a greater surplus.
  • When the budget balance is equal to 1, the government broke even (total revenues = total expenses).
  • When the budget balance is less than 1, the government operated in deficit (total revenues < total expenses), with a smaller value indicating a greater deficit.

Budget Balance Ranking: To rank budget balance performance, we calculated the average of a government’s annual budget balance ratios from 2009-2014. The percentile rank for each government is based on the average budget balance ratio.

By their nature, percentile ranks are a relative measure of performance. A city government that ranks in the 98th percentile for budget balance performed better than 98% of the city governments in our sample. A higher percentile rank indicates better performance relative to the sample.

Example: If a city had $1,000,000 in total revenues and $900,000 in total expenses in a given year, then its budget balance was 1.11 ($1,000,000/$900,000). The result tells us that total revenues were 11% greater than total expenses, meaning the city had a budget surplus.

About the Data

This article assesses total revenue and total expense data among the 50 U.S. states. We included states that reported three or more years of data in the sample. 

The data is from Comprehensive Annual Financial Reports (CAFRs). While CAFRs are standardized documents that use consistent reporting standards, underlying differences in government systems remain. For example, a government’s total revenue depends upon its tax structure. If a government relies on a volatile tax source, such as capital gains, its annual revenue may fluctuate more than other governments’. Expenses can also vary widely, depending on the services the government is responsible for providing and also on unusual one-time expenses. Our analysis does not control for the observed differences in circumstances and policy preferences.

Budget Balance Results

Budget
Balance Ratio: States </br>  (Total Revenues/Total Expenses)

2009-2014
  • Overall, the state's mean budget balance ratio is 1.03, with a maximum (best performance) of 1.60 for Alaska, and a minimum (worst performance) of 0.90 for New Jersey. This means Alaska maintained an average 60% surplus and New Jersey maintained an average 10% deficit during the period.
  • Most states are keeping revenues and expenses approximately equal. Excluding the outliers of Alaska, North Dakota, and Wyoming, all states fall within the budget balance ratio range of 0.9 and 1.10, with 36 states falling within the budget balance ratio range of 0.95 and 1.05. Many states have balanced budget requirements, meaning the law requires that they plan to spend (i.e. budget) only the amount they anticipate generating in revenue. In reality, many states allow some flexibility in how the requirement is met. The revenue and expense figures we report reflect after-the-fact actual figures.
  • Alaska, North Dakota, and Wyoming have substantially higher average budget balance ratios than the other top states. Alaska, North Dakota, and Wyoming are all rich in natural resources, which may explain their higher average budget surpluses as their revenues rose due to abundant energy excise tax revenues. They are also three of the four least populous states in the U.S., which may have factored into their relatively low and consistent spending on expenses. Energy-rich states are currently experiencing sharp declines in revenues as global oil prices continue to fall, demonstrating the risk associated with heavy reliance on a single revenue source.
  • Most of the best-performing states have relatively small populations, with the exceptions of Florida and Texas. There is no single explanation for the trend, though greater predictability of the needs of a smaller population may be a reasonable justification.

Table 1. Top Performing States by Budget Balance (2009-2014)

State

Budget Balance Percentile Rank

Average Budget Balance Ratio

(2009-2014)

Average Surplus (Deficit) per Capita

(2009-2014, 2014 Population)

Overall Fiscal Sustainability Percentile Rank

Population

(2014)

Alaska

98

1.60

$5,420

68

736,732

North Dakota

96

1.32

$2,611

88

739,482

Wyoming

94

1.29

$2,098

98

584,153

Montana

92

1.08

$429

70

1,023,579

Utah

90

1.08

$300

78

2,942,902

South Dakota

88

1.06

$269

95

853,175

Florida

86

1.05

$202

50

19,893,297

Idaho

84

1.05

$246

93

1,634,464

Texas

82

1.05

$217

68

26,956,958

South Carolina

80

1.04

$209

53

4,832,482

Table 2. Bottom Performing States by Budget Balance (2009-2014)

State

Budget Balance Percentile Rank

Average Budget Balance Ratio

 (2009-2014)

Average Surplus (Deficit) per Capita

(2009-2014, 2014 Population)

Overall Fiscal Sustainability Percentile Rank

Population

(2014)

New Jersey

1

0.90

-$667

5

8,938,175

Illinois

2

0.94

-$340

1

12,880,580

Hawaii

4

0.94

-$414

13

1,419,561

Massachusetts

6

0.94

-$447

10

6,745,408

Connecticut

8

0.95

-$418

3

3,596,677

Maryland

10

0.96

-$218

15

5,976,407

Kentucky

12

0.96

-$196

8

4,413,457

Louisiana

14

0.97

-$149

28

4,649,676

California

16

0.98

-$128

18

38,802,500