It's budget season in state legislatures, and we sat down with two experts on state budgets to discuss the key steps in the budgeting process, revenue estimates and the overall state of state budgets going into the new fiscal year.
It's budget season and in the 46 states that start the new fiscal year on July 1, people are hard at work getting their budgets ready. Those state operating budgets amount to more than a trillion dollars a year.
But what exactly does getting the budget ready entail? To discuss that, we sat down with Krista Lee Carsner, the executive director of the Fiscal Review Committee for the Tennessee General Assembly and the president of the National Association of Legislative Fiscal Offices.
She explained the importance of accurate revenue forecasts, how the budget hearing process works on both the executive and legislative sides of state government and how individual legislators can get a say in the budget process.
Our second guest on this podcast was Erica MacKellar, a fiscal policy expert with NCSL. She broke down the fiscal condition of the states, how they're coping in the post pandemic period and how revenue projections are very much on the mind of those crafting state budgets.
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Ed: Hello and welcome to “Our American States,” a podcast from the National Conference of State Legislatures. I’m your host, Ed Smith.
KC: With ours being a consensus then there are not arguments and fights between the legislature and the governor as to how much money they can spend. You are at your cap. This is what we have. Everybody agrees this is what we have and then you can argue about how you want to spend that amount.
Ed: That was Krista Lee Carsner, the executive director of the Fiscal Review Committee for the Tennessee General Assembly. She is one of my guests on the podcast along with Erica MacKellar, a fiscal policy expert with NCSL. It’s budget season and the 46 states that start the new fiscal year on July 1 are hard at work getting their budgets ready. Those state operating budgets amount to more than a trillion dollars a year. But what exactly does getting the budget ready entail? I sat down with Krista to get a better view of what goes into some of the key steps of the budgeting process. We discussed the importance of accurate revenue forecasts, how the budget hearing process works on both the executive and legislative sides of state government and how individual legislators can get a say in the budget process.
Erica broke down the fiscal condition of the states, how they are coping in the post-pandemic period and how revenue rejections are very much on the mind of those crafting state budgets. Here is our discussion starting with Krista. Krista, welcome to the podcast.
KC: Thank you, Ed. It’s so nice to be here.
Ed: Maybe you could start out by telling listeners a little bit about your role in Tennessee.
KC: So, I am the director of the Fiscal Review Committee. We are responsible for doing cost analysis and revenue analysis on all proposed legislation that is moving through the General Assembly and we also do revenue forecasting for the Funding Board that the budget is then based on.
Ed: Give us a little bit of an idea and I just somewhat based on Tennessee, but I know you are the head of NALFO a well so you’ve got a good national perspective, I’m sure. Tell us a little bit about the typical budget timeline, the operating budget timeline how the process gets started and what are some of the key steps are.
KC: So, in Tennessee, we do an annual budget. It’s pretty much a year-round process for us. In August or September, the executive branch agencies will provide their kind of requests for the following budget year. Usually, November the governor will start holding his budget hearing with each of the individual agencies to hear kind of what their needs are and how things have been going. At that time too, our Funding Board, which is made up of our three constitutional officers and the governor and our commissioner of finance and administration who oversees the executive budget, will meet to determine the revenue estimates for the current fiscal year and the following fiscal year. Then in January and February, late January, early February, the governor will propose his budget. The legislature will start looking into it. Usually end of March, early April, the administration will amend the governor’s budget and at that point, the legislature kind of finalizes their version of the budget. We usually pass it the end or April, first of May. And then in July, the Department of Finance and Administration, they will allocate all of the appropriations to the appropriate place and then we start the process all over again.
Ed: So, you are right in the thick of it right now because we are talking later in March so again thank you for taking the time. You refer, of course, to the governor’s budget and I guess the big key effort is this revenue forecast. I was just reading a piece about the revenue forecast here in Colorado. Talk about why that step is just so important, so critical to this process. Tell me in Tennessee, are you both doing a revenue forecast, both the legislature and the governor.
KC: So, in Tennessee, we do what’s considered a consensus revenue forecast. I mentioned our Funding Board. They will meet and we will have economists. So, our office presents an estimate from our economist, the Department of Revenue that handles all of the collection of taxes in the state, they will present a forecast. And then there is usually a forecast from two of the state universities. The Funding Board will take all of those estimates and kind of determine where they think the state revenue is going to land. And it’s important because that is where if any changes, such as we are coming in really low, then what we projected the year before and the current then in the budget we are going to have to adjust our spending or try and make up for those loses. And it’s what we base the future year impact the budget is going to have on the next following fiscal year.
Ed: I know that in some states you’re doing a consensus process. In some states, there are separate processes between the legislature and the executive and some states just the executive does the forecast. Do you have kind of a notion pros and cons on that and do you like your system? Do you think that’s better than maybe some of the other approaches?
TM: 5:55
KC: I think I’m more familiar with our approaches. So, I don’t know if it’s better than other approaches. I think it really depends on kind of the state with ours being a consensus than there is not arguments and fights between the legislature and the governor as to how much money they can spend. You are at your cap. This is what we have. Everybody agrees this is what we have. And then you can argue about how you want to spend that amount. But say if the legislature is coming up with a forecast and the governor is coming up with a separate forecast, then they may disagree on how much money there is to spend and then in instances where you are coming in low or have overspent then it’s who do you blame.
Ed: Good point.
KC: You know. Whose fault is it? I appreciate the way that we do this. From a staff standpoint, when we are trying to help the members determine their budget and how they are going to spend their money. It’s more useful for us if everybody is on the same page as to how much money there is total.
Ed: That certainly makes a lot of sense. Let me ask you another thing about the way states do these things differently. Sometimes both chambers develop a budget and then they negotiate toward a single budget. In those instances, when does that negotiation start. Is it after both of them completely finished their budget or is there an ongoing process from your understanding in other places?
KC: I think it’s an ongoing process. Now it may not be an ongoing public discussion. But I do think that especially in our incidences there will be conversations and both sides are trying to get a feel from each other as to you know what’s really important to them. What’s you know not as important and things that they are definitely going to try and plan things that they are definitely a no to. And so that helps the process to know okay we are kind of on the same page on maybe this issue, but there’s going to be some harder negotiations that we are going to have to do if we are actually going to get this passed. Honestly, in my experience, it starts well before the legislation session starts. It’s just a matter of when each side wants to kind of show their hands.
Ed: As you suggest, kind of like playing cards.
KC: It is. Yeah.
Ed: Let me ask you about hearings. Now you mentioned earlier the budget hearings that the executive would have and there’s hearings in both before the legislature and the governor. Are those different? Is it a different cast of characters? Does the public have more opportunity to comment at one stage than another?
KC: It is a different cast of characters at least in Tennessee. For the governor’s hearings, it’s the governor, his main staff that work on the budget. It’s basically a conversation more so with his commissioners or agency directors. With the legislative budget hearings, there are specific you know questions trying to get down to the meat and potatoes of the budget, what they are really spending money on, what we’ve spent money on in year’s past, how that’s worked out. Just in general, I think it is easier for the public to have their voice heard at the legislative hearings. The governor’s hearings are public too, but the legislative hearings are during the normal course of their session. The public are already here in the building when they are occurring. They can you know sign up to request to make statements. They can also go and meet with the representatives or their senator right when it is happening and the conversations are going on. Personally, I think it’s an easier more open process in that manner. But I think it’s important in both of them because in those hearings you can hear the differences and the items that matter to the legislature versus the items that really matter to the governor and maybe they are on the same page on things. Maybe they are not. And a lot of times there are things that a department or agency will request, but the governor will not include it in his or her budget. And so, this is a good with the legislative hearings, it’s a good point for the departments to say you know we think this is really good. This is something the legislature may really want to do and it’s a good back and forth to get that out.
Ed: Things may bubble up that the governor and his folks don’t necessarily want to focus on, but this is an opportunity to let those come up. Let me ask you about how the budget is actually enacted. I know in some states it’s a series of bills. Some states it’s the budget is the bill. What are some of those different approaches?Are there pros and cons to those?
TM: 10:58
KC: So, in Tennessee, we have kind of what’s a budget package, but the main budget is our appropriation bill where everything is listed out. But we do have what we call the BIM, but it’s our budget implementation bill and it because in our appropriation bill, we can’t really make law changes. It can just be money and so you have the BIM to if there’s any kind of tweaks to statute that you have to make to implement the budget. That works really well for us because everybody knows exactly where to go to what information that they need. In other states, I know the they feel that it works really well by just including the appropriation for any bill and each individual piece of legislation and then come together and know exactly after they’ve passed how much they’ve spent on each thing and how that works. So, I really think a lot of times it’s what you are comfortable with usually and states have usually done this for a very long time and everyone who comes into it is you know learned that process. And so, I think there’s pros and cons to both sides of it really.
Ed: Well tradition certainly plays a big role in a lot of things legislatures do and the way that they do them. Let’s talk a little bit about rainy day funds and how states think about using those. Are there drawbacks to rainy day funds and that approach?
KC: I don’t think there’s drawback to rainy day funds. I’m a big proponent of rainy-day funds. Rainy-day funds are just in general supposed to be there for those instances where you are having a budget shortfall or some catastrophic event happens. With the recent pandemic, when we were first starting to get into that, a lot of people were thinking oh what are we going to do and looking towards how much of the rainy-day fund was going to cover how many days of their budget if there were revenue shortfalls and things like that. And then all the federal money came in so then it didn’t matter as much. I think it’s really important to understand that at any given time a state is going to deal with a catastrophic event whether it is weather related as in tornados or flooding or possibly you know something happens to a government building. There are just all kinds of variations and. We had an issue a few years ago where they were concerned a road was going to slide off the side of a mountain. Anything can happen and that’s what that rainy-day fund is there for. And states vary on how they fund it. Some states will require any overcollections that they are getting from their revenues to go to the rainy-day fund. Some it is just a portion of what they see fit. You know a lot of states I think are somewhere in between 5% and 15% of their general fund budget is what they try and keep in the rainy-day fund. It is all there for safety purposes when you really need it. For the rainy-day fund, that’s the other thing there will be sometimes states will have requirements as to what they can spend the rainy-day fund on. Some states will not. We have in our appropriation bill kind of some leeway for our finance and administration commissioner to spend it if an emergency comes about. But typically, especially in the last few years, there’s always been a large chunk of money that we put into our rainy-day fund to kind of keep up with the growth of our general fund.
Ed: Let me ask you about the line-item veto. This is something many U.S. presidents wished they’d had, but they don’t. But the vast number of governors do have that. How does that affect budgeting? Does it make it more likely that a consensus will be reached before you get to the point where the governor starts marking through things or what? I’m just not sure how it would affect it.
KC: I think a lot of that depends on the relationship between the legislature and the governor. What type of authority the legislature has to overturn the governor. In Tennessee, we are a super majority so the governor, the Senate and the House are all Republican majorities and there’s typically a lot of back and forth and understanding of where everybody is on each piece of legislation or what they are trying to fund. You know, even if the governor were going to veto something, it would come down to if the legislature thought that they had the votes to overturn that veto or not. You know in some states the governor is very powerful and if there’s disagreements, I think they absolutely use that power a lot. So, I think it can vary very much so between what state and what the current leadership looks like in that state.
Ed: One of the reasons we are doing this podcast is to talk to legislators who are not on the budget committee and are or maybe not super aware of all the ins and outs. And I just wonder in Tennessee, for example, what sort of opportunity is there for legislators not directly in the process to comment or to have input on those decisions?
KC: So, there’s always opportunity. I think with newer members who haven’t gone through the process as much, it is more difficult because they don’t understand that discussions started months ago before they even get involved. And also, the way that we are set up, the House will hold all of their budget hearings in the House Finance Committee. And so, if you do not serve on that committee, it can sometimes be difficult to have a public conversation about certain budgets or other departments. Now sometimes the policy committee will have a hearing, but they don’t get into the nuts and bolts of the budget itself. And so sometimes the first time that they may really see it and have that conversation is when the budget gets to the floor for the full body to vote on. In the Senate, it’s a little different because the policy committees will be the ones to hold the individual department and agency budget hearings. And so, they are hearing it and they will vote on a recommendation to the Finance Committee for each department agency’s budget. So, in the Senate, each member is more involved in all of that throughout the session. So, it’s a little bit different. But it can be very difficult for members especially members who don’t understand the process and don’t know you know who to go to or when to go to a member when there is something that they are trying to get funded. But I think that’s where you know the staff comes into play in trying to make sure that members feel like their voices and needs are heard. I always recommend to members that they start early and often, but not to the point where you annoy the finance chairs.
Ed: Not annoying finance chairs, I think is probably good advice for everybody who is in the legislature. As we wind up here, let me ask you about just sort of the macro question of how does the budget process differ when the state is doing well, there is a surplus, versus more challenging economic times and I know some states are actually in both situations this year. There are some that are doing well and others that have certainly had some surprises – California comes to mind. What are your thoughts on that?
KC: Well from a staff point and from several of my you know counterparts across the country, I think we appreciate it more when there is somewhat of a downturn because it is easier to get them to focus on really what the needs are and what’s necessary when your flushed with cash everybody wants some of it, needs some of it, thinks that their program process whatever issue is that they really you know it needs to be funded and there’s plenty of money and why can’t we just fund all of this. But it is hard to rein some of that back in when you are a staff person saying hey you know we’re not probably always going to be here at this point. You need to slow this down some. So, from staff point, I think it’s different. From a member’s standpoint, I think it is more difficult for them to understand at times you know hey really there isn’t this money available when you are in a downturn. That’s what we are dealing with right now in Tennessee. We’ve had all of these years with so much overcollection and so much more money coming in than people expected. Technically, we are in a downturn, but we’re really just getting back to kind of normal growth. But it’s not at the level that we’ve seen in the past few years and it’s hard for members to understand that hey you know there’s not just this bucket of money that we are rolling in that you can spend because you’ve already spent it. You spent it on other things. It is a very different tactic in how you go about it, but when you are in a downturn, it really does help accentuate what is important to the people in charge of making those decisions and you know what programs they really care about, where they want the money to go to and so it helps in that sense, I think.
Ed: Krista, thank you very much for walking us through what can be sometimes kind of an opaque process. I know I learned a few things today, so thanks a lot and take care.
KC: Oh, you are welcome. Thanks, Ed.
Ed: I’ll be right back after this short break with Erica MacKellar from NCSL.
TM: 21:43
Erica, welcome back to the podcast.
EM: Thanks, Ed. It’s great to be here.
Ed: So, Erica, I want to talk to you about the budget situation in the states this year and going into the new fiscal year, but before we get to that can you tell listeners just overall how states have faired in terms of fiscal conditions coming out of the pandemic?
EM: Yeah, you know the fiscal pictures in states has definitely been interesting the last few years. I’m sure you will remember as the pandemic hit, states were scrambling to try and estimate how much revenue they would lose. Large portions of the economy largely shutdown. States were predicting huge deficits, but the impact ended up being a lot more muted than experts expected. And coming out of the pandemic, states ended up with substantial surpluses the last few years. I think states weren’t sure exactly what the economic recovery would like so they were making pretty conservative revenue estimates and then really blowing past those. The labor market also stayed strong and there was a lot of pent-up demand for goods and services coming out of the pandemic. High inflation in the last couple of years has also helped a host of revenue collections. So, there are a lot of reasons why state revenues kind of recovered so swiftly and so strong. But I think one of the biggest reasons was the amount of federal aid that was distributed to states. You know those funds really helped states plug budget gaps and address the pandemic in 2020 and later the American Rescue Act Plan or ARPA funds really helped states kind of through that recovery and allowed them to make some really big investments particularly around capital projects and infrastructure.
The federal funds plus you know those better-than-expected revenues have allowed states to really build up their rainy-day funds in the last few years and kind of be ready for any kind of economic downturn they might see. So, the fiscal conditions in the states overall have been really strong and healthy the last few years.
Ed: Now given what you’ve just described, we know that the fiscal year for most states ends at the end of June. So, what’s the situation been in states this year?It sounds like pretty good.
TM: 25:16
EM: The last few years have definitely been good, but we are definitely starting to see that robust recovery slowdown a bit now. When we surveyed states at the start of the fiscal year in July of 2023, states were expecting either much more modest growth and revenue or slight declines from the previous year. We also surveyed states earlier this year to see how they were kind of expecting their general fund revenue collections to perform for kind of the remainder of this fiscal year which as you mentioned ends on June 30 for most states. And of the 45 responses that we’ve received, 30 states are expecting to kind of meet their revenue expectations and 10 states plus Puerto Rico anticipate kind of exceeding those revenue estimates. By contrast, when we did this survey at the start of 2022, at least 25 states were expecting to exceed revenue estimates for that fiscal year. So, I think that that just kind of helps illustrate a little bit how things have started to kind of shift back into a lower gear.
We are also seeing the end of those federal funds that were really kind of helping to boast our state budgets. States have until the end of this year to obligate any remaining funds they have from ARPA and until 2026 to spend those funds. So, you know this fiscal year, we just aren’t seeing those big surpluses that we have the previous few fiscal years. So, states also won’t have those federal funds to rely on. But overall, you know states are still in a pretty healthy position as they wrap up this year’s budget and begin the next fiscal year.
Ed: So those of us who are more causal observers of state budgets than you and other people in the fiscal world have been unable to avoid a lot of news stories about estimates falling short of expectations. We are never really sure how bad that is until we ask an expert like you, Erica. So how bad is it? How big of a problem is it and how worried are lawmakers about this?
EM: There definitely have been some headlines lately of states missing revenue targets and of course it is always better when we see those headlines about states having those big surpluses. And there are some exceptions to this, but I think that by and large most states aren’t really concerned about this yet. And there are a few reasons for that. You know the first is that states have kind of been anticipating this slowdown in revenue growth for some time. You know everyone knew that the revenue growth from the last few years couldn’t continue. So, states have been preparing for that by doing things like building up those rainy-day funds. And you know since states have known these surpluses and the federal funds wouldn’t continue, I think they have far and large been very mindful about kind of treating those funds as one time in nature and not relying on them for a lot of core government functions. So that hopefully means that as revenue growth slows and some of these estimates are missed, it hopefully won’t translate to kind of big budget cuts at least in the short term. We’ve also heard from states that those surpluses they’ve had have also allowed them to kind of carry forward funds from previous fiscal years and those funds are kind of helping to offset some of those missed revenue estimates that states are seeing now. So of course, it’s natural for us to worry when revenue growth starts slowing and we see these headlines. But many states seem to be kind of considering this more as a normalization of revenues that they’ve been kind of expecting to see. You know that said, there still is a lot of uncertainty out there in the economy and other factors that can affect state revenues so it is definitely something to keep an eye on in the longer term.
Ed: So now we are looking at fiscal 25 beginning July 1 for most states. What’s top of mind for lawmakers? What kind of priorities are you seeing there as you talk to people?
EM: Yeah, I mean I think the biggest thing that will be top of mind for lawmakers is this revenue slowdown that we’ve been kind of talking about as states develop their next budgets. You know the last few years states have had a lot of money to work with and they’ve been able to fund a lot of different priorities or in some cases cut taxes. Then this year and I think some future years may pose more of a challenge as lawmakers kind of have to adjust to this new reality and they may have to make some tough choices about what they are choosing to fund.
Ed: Well in my discussion with Krista earlier on this podcast, we were talking about the fact that sometimes legislators would just as soon have a tight budget. Sometimes it’s a little bit easier to make those decisions then when there’s quite a bit of surplus money and it’s a lot of arguing about how to spend that. As we wrap up, anything else you would like to share with our listeners about the current state of state budgets?
EM: No. I think I would just wrap up by saying that while states are still in a pretty stable and healthy position, you know there is a lot of uncertainty out there and I think states are going to remain cautious heading into the next fiscal year and maybe into the future.
Ed: Erica, thanks so much for going over this with us and take care.
EM: Thanks a lot, Ed.
Ed: I’ve been talking with Krista Lee Carsner, Executive Director of the Fiscal Review Committee for the Tennessee General Assembly and Erica MacKellar of NCSL about preparations now underway in most states for the 2025 fiscal budget. Thanks for listening.
TM: 30:28
You can check out all the podcasts from the National Conference of State Legislatures by searching for NCSL podcasts wherever you get your podcasts. This podcast “Our American States” dives into some of the most challenging public policy issues facing legislators. On “Across the Aisle” host Kelley Griffin tells stories of bipartisanship. Also check out our special series “Building Democracy” on the history of legislatures.