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Hearing of the Committee on Rules

"Biennial Budgeting: A Tool for Improving Government Fiscal Management and Oversight"

Statement of Ronald K. Snell,
Director of Economic, Fiscal and Human Resources,
National Conference of State Legislatures

INTRODUCTION

The trend among state governments for the past 50 years has been to abandon biennial budgeting for annual budgeting. Forty-four states practiced biennial budgeting in 1940. Twenty-one do so now. There have been several reasons for the shift to annual budgeting, but in general the shift has been part of the resurgence of state legislative power since the middle of the century. In the past decade, however, two states have returned to biennial budgeting from annual budgeting, and no state has shifted from biennial to annual budgeting.

The growing role in legislatures in state government can be measured by the shift from biennial to annual legislative session. In 1940 only four state legislatures held annual sessions; now 43 do so. A shift to annual budgeting tended to follow the move to annual sessions, as state budgets became larger and more complicated and as federal grant-in-aid programs to state and local governments became increasingly prominent in the 1960s and 1970s. At the same time, state finances became more dependent upon personal income and sales taxes, enlarging the revenue stream and making it somewhat less stable than in the past, adding another reason for adoption of annual budgets.

State changes have not moved in only one direction. Connecticut returned to biennial budgeting in 1991, reversing the decision it made to go to annual budgeting when the state shifted to annual legislative sessions in 1971. Arizona made a gradual transition from annual to biennial budgeting in the course of the 1990s, and completed the process with the enactment of a biennial budget in 1999. Kansas provides smaller agencies with biennial budgets and larger agencies with annual budgets, a practice Arizona used in the mid-1990s. A few states have moved from annual to biennial budgeting over the past 20 years or have changed back and forth, because of partisan politics, uncertainty as to which worked better, or both, as shown in table 2 at the end of this report. As this report will show, state experience does not make a clear case for the superiority of either biennial or annual budgeting over the other.

True biennial budgeting--enactment of a consolidated two-year budget--occurs only in three states--Oregon, North Dakota, and Wyoming (table 1). Oregon and North Dakota have biennial legislatures as well--they meet in regular session only once in two years. Although the Wyoming legislature meets annually, in the non-budget year its session is scheduled for only 20 days.

Except for those three, the practice is for biennial budgeting states to enact separate budgets for two fiscal years at once. Since most of the states that do this have annual legislative sessions in which they can and do revisit the budget, table 1 may overstate the extent of true biennial budgeting. As already noted, the long term trend has been for states to move to annual budgeting. Biennial budgets are more likely to be found in the less populous states, as are biennial legislatures. Among the 10 largest states--whether measured by population or by legislative appropriations--only Ohio and Texas use biennial budgets, and only Texas has regular biennial sessions of the legislature.

TABLE I. ANNUAL AND BIENNIAL BUDGETING STATES
(Boldface indicates the 10 most populous states)

 

ANNUAL SESSION
ANNUAL BUDGET
(29 states)		 ANNUAL SESSION
BIENNIAL BUDGET
(14 states)		 BIENNIAL SESSION
BIENNIAL BUDGET
(7 states)
Alabama
Alaska
California
Colorado
Delaware
Florida
Georgia
Idaho
Illinois
Iowa
Kansas
Louisiana
Maryland
Massachusetts
Michigan
Mississippi
Missouri
New Jersey
New Mexico
New York
Oklahoma
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Utah
Vermont
West Virginia		 Arizona
Connecticut
Hawaii
Indiana
Maine
Minnesota
Nebraska
New Hampshire
North Carolina
Ohio
Virginia
Washington
Wisconsin
Wyoming* 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 		 Arkansas
Kentucky
Montana
Nevada
North Dakota*
Oregon*
Texas 
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 
 
 
 
 
 
 
 
Population estimates are for 2000

* Biennial budget states that enact a consolidated two-year budget. Other biennial budgets enact two annual budgets at one time.

These are the other issues this report examines:

  1. Significant differences of budget administration between states with annual and biennial budgets.
  2. Advantages and disadvantages of a biennial budget cycle.
  3. The consequences of a biennial budget cycle for predictability and planning certainty for executive branch agencies and legislative committees.
  4. The ability of governors and legislatures to respond to changing events and changing budget priorities.
  5. The likelihood and consequences of increasing reliance upon supplemental appropriations in a biennial budget cycle.

1. Significant differences of budget administration between states with annual and biennial budgets.

Biennial and annual budgets do not seem to cause significant differences in budgeting practices among the states, although state practices vary so widely for reasons of politics and history that it is difficult to single out any one reason for differences in practice.

There does not appear to be any consistent relationship between state budget and legislative cycles and the powers governors have to cut budgets or transfer funds between agencies or programs. A governor's power to reduce budgets or make transfers varies greatly from state to state, but it does not appear to be consistently greater in states with biennial budgets or legislative sessions than in other states.

Arkansas, for example, which has a biennial legislature and budget, imposes strict limits on the governor's power to transfer funds among programs in an agency appropriation, denies the power to transfer funds among agencies, and limits the governor's power to cut the budget with provisions that are enacted in the budget itself. Despite the biennial legislative sessions, the legislature preserves a significant amount of control over changes in the budget when it is not in session. This is no different in its effect from the practice in the annual-budget state of Tennessee, where the constitution encourages the governor to call a special session of the legislature if budget cuts are needed, and where transfers are similarly limited.

Some states with annual legislatures and budgets provide governors with remarkably broad administrative authority over the budget. Iowa, Indiana, South Carolina, and South Dakota allow their governors unlimited power to transfer funds among state agencies. Ten of the states with annual legislative sessions allow their governors to reduce budgets by unlimited amounts to cope with revenue shortfalls. Only five of the 20 states with biennial budgets give their governors as much power to reduce spending. Thus the budget cycle in itself does not appear either to create a need for strong executive budget review powers or to prevent the need for them.(1)

2. Advantages and disadvantages of a biennial budget cycle.

There is little evidence of clear advantages of either annual or biennial state budgeting practices. These are the findings of two major studies. In 1972, the Council of State Governments examined the issue, a favorable time for doing so since states' experience in shifting from biennial to annual budgeting was recent enough to allow comparisons of biennial and annual budgeting within some states. No clear findings emerged, and the study concluded that:

In reality, a State can develop a good system of executive and legislative fiscal and program planning and controls under either an annual or biennial budget. The system would work differently with the alternative timespans, but could be effective under either approach.(2)

Analysts at Texas A & M University reviewed the CSG study in the course of their own examination of annual and biennial budgeting in 1984, and came to the same conclusions:

The arguments used to justify and refute both annual and biennial budgets remain essentially unchanged [since 1972]—and unproven. The success of a budget cycle seems to depend on the commitment of state officials to good implementation rather than on the method itself.(3)

Major advantages of biennial budgeting are said to be that it is conducive to long-term planning; that it allows more time for program review and evaluation; and that the process itself is less expensive and time-consuming than that of annual budgeting.

Long-term planning. Many states, like the federal government, carry out long-term planning efforts that are independent of their budget cycle, but there is no evidence that biennial budgeting particularly favors those efforts. Evidence from states which have changed from annual to biennial budgeting over the past 30 years fails to provide strong support for the contention that biennial budgeting is conducive to long-term planning. The Council of State Governments' 1972 study of eight states produced such conflicting evidence that it could neither confirm nor reject the idea. An in-depth study of five states carried out by faculty of Texas A&M University in 1984 was also inconclusive on the point, as is the study done by the General Accounting Office in 1987.(4) Analysts in Connecticut, however, emphasize that the governor and legislature have greatly increased their long-term budget forecasting and analysis since the state adopted a biennial budget in 1991.

Program Review and Evaluation. A strong argument for biennial budgeting is that it allows more time for performance evaluation, and thus can encourage administrators and legislators to move in the direction of outcome-focused budgeting rather than continue to focus on budget controls. This was one of the principal arguments that led Connecticut to return to biennial budgeting. Proponents contended that, "The present system (of annual budgeting) does not allow enough time to review expenditures in depth. Those preparing the budget finish one year and then immediately plunge into the next year's budget."(5)

It is not clear that Connecticut's experience has lived up to this goal, since budget revision and consideration of new programs has, according to participants, taken up about as much time in the non-budget years as writing a budget does in the budget sessions. Analysts in two other biennial budget states--Ohio and Oregon--emphasize that their budget cycles facilitate policy consideration and reflection. Oregon's biennial legislative schedule provides time for interim study committees to undertake major projects in the absence of a legislative session.

Comparisons between states are very difficult, however, and many legislatures with annual budgets carry out sophisticated program and performance review through specialized staff agencies with legislative oversight. Although it seems intuitively certain that biennial budgeting encourages legislative performance review and evaluation, there is probably no way to prove that the opportunity is more beneficial than the existence of a strong performance evaluation effort in an annual-budget state.

Budgeting costs. Biennial budgeting may reduce executive branch costs of preparing budgets, since the process is consolidated in comparison with annual budgeting. State experience appears to bear this out, according to the studies cited in the notes on the previous page. Annual budgets certainly create greater pressures on all budget staff and policy makers than biennial budgets, since in many states preliminary work on the next fiscal year's budget is simultaneous with beginning the implementation of the current budget and wrapping up the previous fiscal year's budget.

Economic and fiscal circumstances probably have more to do with a state's rigorous review of its fiscal priorities than its budget cycle does. For example, in the early 1990s many states discovered serious shortfalls in the middle of a fiscal year. They reviewed earlier budget commitments, considered cuts and revenue increases, revised spending priorities, and in effect wrote new budgets. This was primarily an executive activity in some states, and in others there was the usual budget process of executive recommendations and legislative enactments.

In years when political leadership and economic circumstances are unchanged, budget processes can be fairly routine, regardless of whether an annual or a biennial budget is being written. Conversely, appropriations for the second year of a biennium are not secure if economic conditions have altered for the worse.

3. The consequences of a biennial budget cycle for predictability and planning certainty for executive branch agencies and legislative committees.

It is obviously more difficult to project revenues and expenditures accurately for a biennium (requiring forecasts of events 30 months away) than for an annual budget (requiring forecasts for 18 months). Accurate forecasting is important for state governments, partly because of the focus on balancing resources and spending and partly because inaccurate forecasts attract political attacks.(6) As one would expect, the consensus is that forecasting is more accurate in states with annual budgets. Accuracy in forecasting, in turn, reduces the need for special sessions of the legislature, supplemental appropriations, and reserves.

Biennial budgeting represents a commitment of policy direction and funding amounts for a longer period than annual budgeting; it also means that agency personnel have to spend less time in budget planning and presentations than under a system of annual budgeting. Does this mean more predictability and certainty of planning for them and for legislative committees, in matters other than total revenue and expenditure forecasts? The answer to that question is generally yes, but the increase in the certainty of policy and funding commitment may in fact be small.

State governments tend to budget incrementally, which means in effect that budgeting for the coming period, whether annual or biennial, begins with the current level of expenditures and tends to divide up any additional resources largely in proportion to the size of program budgets in the past. In the absence of dramatic economic change, state budgets rarely impose dramatic changes in agency budgets.

Predictability tends to continue under both kinds of budgeting cycle because state budgeting is incremental in nature. Between 60 percent and 70 percent of most states' general fund appropriations are for elementary, secondary and higher education, health care programs, other entitlement programs, and corrections. Such programs are not susceptible to sweeping changes in funding levels or program redesign. Predictability and stability characterize them regardless of the budget cycle.

Economic cycles can make state budgets uncertain and unstable. Seventy percent of state tax revenue comes from sales and income taxes, which are very sensitive to the health of the economy. The boom of the 1980s affected annual and biennial states alike: they prospered and expanded their budgets. The recession of 1990 and the slow recovery have had unsettling effects on states regardless of the length of their budget cycles. State experience suggests that nothing they can do about the length of their budget cycles can isolate them from external factors such as the condition of the economy and federal mandates.

4. The ability of governors and legislatures to respond to changing events and changing budget priorities.

State governments have developed mechanisms to deal with unexpected fiscal and policy events—constitutional and statutory provisions to allow for transfers of revenue among programs with departments, rainy day funds, the reduction of expenditures when legislatures are not in session, and the use of unanticipated grants from the federal government. The National Conference of State Legislatures recently published a study of the solutions states have found to such problems.(7) This report has discussed some of them already in making the point that there does not appear to be greater executive authority over state budget administration in states with biennial budgets than in states with annual budgets.

State balanced-budget requirements require prompt action when revenues fall short of projections. Fifteen states give their governors full authority to cut the budget when there is a revenue shortfall. Very few prohibit the governor from making any spending cuts. California, which has a full-time legislature, prohibits the governor from making such cuts, but that is exceptional.

Most states take a middle way. They give the governor limited authority to make cuts and require the legislature to act when circumstances require more extensive action than the governor has authority to take. Maryland, for example, allows the governor to cut any line-item appropriation by as much as 25 percent. Connecticut and Kentucky limit such cuts to 5 percent. In Oklahoma, the governor's cuts must affect all appropriations equally, meaning that elementary education funding must be cut along with programs where cuts would produce less of a public outcry. This provision tends to bring the legislature into the picture when cuts have to be made.

When constitutional and statutory provisions do not cover a problem, a special legislative session is necessary. Partly because of fiscal difficulties, legislatures in 31 states held more than 50 special sessions in 1991. But legislative reapportionment and education reform were as likely to be the cause of special sessions as the recession was. Reforming the state school funding formula required Texas to hold three special sessions in 1989 and four in 1990. Overall, states with biennial legislatures appear to have had no more special sessions than states with annual, part-time legislatures in the four years beginning with 1988 and ending in 1991.(8)

5. The likelihood and consequences of increasing reliance upon supplemental appropriations in a biennial budget cycle.

According to older studies of state decisions to shift to annual budgeting from biennial budgeting, supplemental appropriations became less common after the shift. But in recent years supplemental appropriations have been common in all states—not just those with biennial budgets—because of the unpredictable changes in the national economy and because of cost overruns in Medicaid programs.

In the late 1980s and early 1990s, many state budgets were hit by revenue shortfalls and expenditure overruns. The former tended to occur in the three largest state tax sources—the general sales tax, personal income taxes, and corporate income taxes where a small error of estimate can create a significant dollar shortfall. Overruns occurred largely in Medicaid programs, to a less extent in other entitlement programs, and to a small extent in elementary education and corrections.

Annual legislative sessions and annual budgets provide for reasonably timely responses to such issues and insure that requests for supplemental appropriations will be reviewed in the context of the entire state budget. States where annual legislative sessions review biennial budgets for the off year also can put supplemental requests into perspective. In either case, consideration of supplemental appropriations is often as difficult and time-consuming as consideration of an original departmental budget, and, by focusing attention on a few agencies, is likely to bring entire departmental budgets back into the political arena.

The extent to which budgets are actually revised for the second year of a biennium varies from state to state and from time to time, largely depending on economic and fiscal conditions. Connecticut's experience has been that budget revisions and adjustments to account for new programs cause off-year budget revision to be about as time-consuming as creation of the full budget. Ohio's experience has been the opposite: except for the regularly scheduled enactment of a capital budget in the off-year, the biennial budget usually receives a minimum of adjustment and the adjustments are not time-consuming.

CONCLUSION

There is little evidence that either annual or biennial state budgets hold clear advantages over the other. Evidence from the past is inconclusive on the question whether biennial budgeting is more conducive to long-term planning than annual budgeting is. Some evidence indicates that biennial budgeting is more conducive to program review and evaluation. Biennial budgeting is likely somewhat to reduce budgeting costs for executive agencies, but it also is likely to reduce legislators' familiarity with budgets. States with biennial budgets and biennial legislative sessions do not appear to have given greater authority over budget revision to governors than other states have. Forecasting is likely to prove more accurate in annual-budget states than in biennial-budget states, reducing the need for supplemental appropriations and special legislative sessions.

In the short run, economic conditions largely determine how efficiently a state budget is enacted and whether it requires extensive change in the course of administration. In the long run, the political expectation that state operations budgets will be balanced annually or biennially is one of the basic controlling elements of state budgeting, far more important than the length of the budget period or the frequency of legislative sessions.

TABLE 2. STATES THAT HAVE CHANGED THEIR BUDGET CYCLES SINCE 1968S

 

FROM BIENNIAL TO ANNUAL APPROPRIATIONS


Alabama – 1975
Florida -- 1971
Georgia – 1974
Idaho – 1972
Iowa -- 1983
Illinois – 1970
Mississippi -- 1971
Missouri – 1972
Oklahoma -- 1968
Tennessee – 1970
Utah -- 1969
Vermont – 1978 .

FROM ANNUAL TO BIENNIAL APPROPRIATIONS

Arizona – 1999
Hawaii – 1968
Nebraska -- 1987

FROM BIENNIAL TO ANNUAL TO BIENNIAL


Connecticut – to annual in 1971, to biennial in 1991.
Indiana – to annual in 1975, to biennial in 1978
Minnesota – to annual in 1973, to biennial in 1975
Nebraska – to annual in 1972, to biennial in 1987
North Carolina – to annual in 1973, to biennial in 1975

FROM BIENNIAL TO ANNUAL TO BIENNIAL TO ANNUAL


Iowa – to annual in 1975, to biennial in 1979, to annual in 1983

Sources: NCSL surveys of legislative fiscal officers, 1987, 1994; GAO, 1987.

NOTES:

The author is indebted to Steven D. Gold and Harold Hovey for their suggestions for revising an earlier version of this report. This paper benefits from the research presented in Barbara Yondorf, "Annual versus Biennial Budgeting: The Arguments, the Evidence: A Presentation to the Wisconsin Assembly Ways and Means Committee, January 26, 1987," (Denver, Colo.: National Conference of State Legislatures, 1987).

1. The preceding four paragraphs are based on Corina L. Eckl, Legislative Authority over the Enacted Budget, (Denver, Colo.: National Conference of State Legislatures, 1992), Tables 5, 6, and 7.

2. Council of State Governments, Annual or Biennial Budgets? (Lexington, Ken., 1972), 23.

3. Public Affairs Research Council of Louisiana, "Results of PAR Survey on Annual vs. Biennial State Budgeting" (Baton Rouge, La., 1982).

4. Charles W. Wiggins and Keith E. Hamm, "Annual Versus Biennial Budgeting?" Public Policy Paper No. 7 (Austin, Texas: Public Policy Resources Laboratory, Texas A&M University, 1984), III-15; United States General Accounting Office, Budget Issues: Current Status and Recent Trends of State Biennial and Annual Budgeting (Washington, D.C., 1987).

5. [Connecticut] Commission to Study the Management of State Government, Final Implementation Report (Hartford, Conn., 1991).

6. Forty-nine states have statutory or constitutional requirements for a balanced budget; Vermont is the exception. In most states the requirement includes all state spending, but it invariably applies to appropriations from the state general fund.

7. Eckl, Legislative Authority over the Enacted Budget, Tables 5, 6, and 7.

8. Council of State Governments, Book of the States, 1990-91, Table 3.22; Book of the States, 1992-93, Table 3.25 (Lexington, Ken., 1990, 1992).