What are the key characteristics of state budgeting and how do they contrast with federal budget practices? How do the fiscal roles of federal, state, and local governments vary and interact in our federalism system, and what are the implications for budget processes? Why is it important for the federal government to understand how state governments manage their finances and what can they learn from states? These questions and others are addressed in a recently released paper, Fiscal Contrast: An Analysis of State and Federal Fiscal Processes, a joint project of the Kem C. Gardner Policy Institute and NASBO published this month in the Gardner Business Review.
State and Federal Practices Differ
Under the U.S. Constitution, states and the federal government both hold sovereign fiscal powers to spend, tax, and borrow. However, the processes they follow for employing these powers differ in fundamental ways. States typically balance their budgets over a one- or two-year cycle, adopt budgets on a predictable schedule with most spending subject to standard appropriation processes, and practice proactive planning to prepare for an economic downturn or other contingencies, such as building up rainy day funds and conducting stress testing. States’ use of debt is generally limited to capital purposes. Meanwhile, the federal government practices routine annual deficit spending using a ten-year budget window, with most spending happening outside of a regular annual appropriations process, and primarily relies on debt as its contingency management tool.
The State-Federal Fiscal Relationship
In our federalism system, the three levels of government play different fiscal roles. State and local governments deliver most government goods and services to citizens, while the federal government plays a larger role in redistributing resources and stabilizing the economy, especially during cyclical downturns. An effective federal-state fiscal partnership in the United States is critical to enabling each level of government to perform its core fiscal functions. The federal government relies on states and territories to administer a variety of federally funded programs, while states count on those federal funds to help support numerous programs that are important to their residents.
In fiscal 2023, federal funds made up about 35 percent of total state spending. To ensure those dollars are deployed efficiently and effectively, it is beneficial for states and the federal government to understand how the other budgets and spends money. The influx of federal funds to states in recent years for pandemic aid, infrastructure, and other purposes made this need for understanding all the more apparent. For example, having knowledge of states’ budget processes and calendars can help inform the federal government on appropriate timing for issuing grant program guidance and setting certain deadlines. This can help states and territories in their planning and budgeting, and better position them to meet the goals for federally funded programs.
Read the full report for more analysis and data on the fiscal contrast between states and the federal government.
Additional NASBO resources on federal and state budget processes:
State Budget Processes & Spending Federal Funds (2022)
Budget Processes in the States (2021)
Budget Processes in the Territories (2024)