THE LONG VIEW OF STATE BUDGETING: Accrual accounting is a big-picture way of ensuring state governments are living within their means.

• Author: Lays, Julie
• Position: BUDGETS

Unlike the federal government, states balance their budgets every year--it's required for all of them except Vermont. But a different story sometimes emerges in states' own financial reports, which look more comprehensively at revenue and spending and how the money is managed.

These financial reports show that between fiscal years 2003 and 2017, most states amassed sufficient revenue to cover their expenses. The typical state's revenue, composed primarily of taxes and federal grants, totaled 102.1 percent of its total bills over those 15 years. That's pretty good, considering the Great Recession and two economic recoveries occurred during mat time.

That's the median, however, of all states' revenue and expenses, and it obscures how widely states' situations can vary. While 40 states collected more than enough revenue to cover expenses during that period, 10 had negative balances. Those states carried forward deferred expenses for previously provided services, such as the annual cost of public employee retirement benefits. Such moves push off to future taxpayers some of the costs of operating government and providing services, which can jeopardize a state's long-term fiscal flexibility.

Diagnosing Fiscal Health

State budgets generally track cash as it is received and paid out. But mere's a way to capture all of a state's financial activities (excluding those of some legally separate organizations, such as economic development authorities or some universities). It's called "accrual accounting," and it offers a different perspective on state finances.

Accrual accounting attributes revenue to the year it is earned, regardless of when it is received, and expenses to the year incurred, even if some bills are partially or wholly deferred. This method captures deficits that can be papered over in the budgeting process, even when balance requirements are met by such means as accelerating tax collections or postponing payments.

This long-term view also produces data that are more comparable state to state. Examining aggregate revenue as a share of aggregate expenses transcends temporary ups and downs that states experience over the years, as it allows surplus funds collected in flush years to balance out shortfalls in other years.

Key Financial Reports

Researchers for The Pew Charitable Trusts' Fiscal 50 project, which tracks and analyzes key fiscal and economic trends, used accrual accounting techniques to get a longer-term view of all 50 states'...