Another budget debate: Annual vs. biennial

Over the past few decades, more states have move away from the use of biennial fiscal cycles in favor of annual budgets, but Iowa and Michigan are considering bucking that trend.

Stateline Midwest: Vol. 20, No. 4: April 2011

State leaders are always looking at ways to save money, especially when budgets are tight.

The most obvious way to save money is through budget and program cuts. But some states are also exploring options to refine their budget processes in hopes of spurring more-effective long-term fiscal planning.

Policymakers in two states in the region— Iowa and Michigan — have proposed adopting a biennial budget. Proponents say the shift would provide more financial certainty to state agencies while allowing for more rigorous evaluation of existing programs and ensuring that state money is being spent wisely.

These efforts, if successful, may begin to reverse a long-term trend toward annual budgeting. In 1940, 44 states used a two-year budget, according to the National Conference of State Legislatures. But a fiscal survey published by the National Association of State Budget Officers found that in 2008, only 21 states used the biennial process, including Indiana, Minnesota, Nebraska, North Dakota, Ohio and Wisconsin.

Of the nine U.S. states with the largest general-fund budgets, seven use an annual budget process. The exceptions are Ohio and Texas.

Two other states, including Kansas, use a hybrid annual/biennial system. In Kansas, approximately one-fifth of the state’s departments and agencies are on biennial budgets, while the others use annual budgeting. Most of the agencies using biennial budgeting are professional, regulatory and licensing departments, which get their funding from fees rather than from state appropriations.

In some states, the move away from biennial budgeting occurred when legislatures moved to annual sessions. For others, the change was made amid concerns about the increasing complexity of state budgets. In the 1960s and 1970s, an NCSL report found, growth in the amount of funding from federal grant programs led states to adopt annual budgeting as a way to better monitor their larger, increasingly complex budgets.

During the same time period, states’ dependence on income and sales taxes was growing. Since these taxes can be less-stable revenue sources, states opted for annual budgeting as a way to address this unpredictability.

Iowa Republican Gov. Terry Branstad announced before he was inaugurated that he wanted to move to a biennial budget, which he said would provide more stability and make financial planning easier. In late January, Branstad presented a two-year budget, which was accompanied by fiscal projections going five years into the future.

In Michigan, Republican Gov. Rick Snyder has also endorsed the idea of a biennial budget. Republican Sen. John Proos, a strong proponent of long-term budgeting, introduced a resolution for a biennial budget process in the Senate earlier this year (SCR 4). Proos believes a biennial budget process would give more certainty to state-supported entities, such as school districts and social service agencies.

With a biennial process in place in Michigan, one year would be used to pass the budget. The next year, he says, would be “a chance for the Legislature to dig into state programs and look for a return on investment.” Proos envisions policymakers conducting in-depth assessments of select programs during non-budget years.

Proponents of annual budgeting say it allows for more accurate forecasting: Economic information is more current and likely to be more precise. Annual budgeting may also make it easier for leaders to adjust to rapid changes in their state economies.

However, forecasting has been a challenge for all states in recent years. Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, says that during the economic downturn, there has not been much of a correlation between the need for mid-term corrections to state budgets and whether they were developed annually or biennially.

“In fiscal year 2010, total revenue collections were below original estimates in 46 states,” Sigritz says. Most states, not just those with biennial budgets, had to make mid-year budget adjustments.