Understanding State Budgets and Spending

Instructor: James Walsh

M.B.A. Veteran Business and Economics teacher at a number of community colleges and in the for profit sector.

States don't just have one budget, but two. We will explain both of them, as well as cover the main sources of state revenue and what they spend it on.

Balance the Budget

November was a great month for Megan Driscoll. After a few terms in the state legislature, she decided to run for governor, and she won! Now she gets to begin her term as governor of this average state in the middle of the country. (Some people call it a flyover kind of place.)

One of the first things she will need to get into with the legislature is the budget. Like most other states, hers has a balanced budget provision. That means the governor and legislature legally cannot spend more for operating expenses than it takes in. Getting the budget to balance is a yearly challenge since all of the lobbyists and special interests keep wanting more and more, while the hard working citizens never want to pay another dime in taxes!

The new governor knows she needs to get on top of the budget, and fast. So, she decides to call in her budget experts.

The state capitol
State capitol

The Operating Budget

Bob, the budget expert, comes in and congratulates Megan on her victory. He then tells her that, before we can make this state great again, they will need to fight the budget battle with the legislature.

There are two budgets they will need to deal with; one is the operating budget. This is where the revenue from the taxpayers and grants from the federal government fund the day-to-day business of the state. Bob then tells Megan about all of that ''day-to-day business.''

She is now responsible for running the schools from kindergarten through grade 12, plus State University. There is also health insurance for lower income residents that she will need to provide through Medicaid. She needs to maintain the many state highways. There is also the state police, the state courts and prison system, and a whole lot of state government employees to pay. All of this is covered in the operating budget. ''Whew,'' thought Megan, ''no wonder it is so hard to make it balance!''

The Capital Budget

''Wait, now we aren't quite finished,'' Bob says, ''we also have to contend with the capital budget.'' The capital budget finances long-term infrastructure projects like new highways and bridges. It also covers big one-time expenses, like the new football stadium the Capitol City Crushers want. Bob tells Megan that some of the legislators are pushing hard for that!

The capital budget is covered by issuing long-term bonds that will have to be paid off with interest for as long as 30 years. Megan is alarmed; ''have those legislators told the citizens about the debt?'' she wondered. ''Besides,'' she tells Bob, ''the Crushers are a bad football team.'' She decides right then to let the people vote in a referendum about that stadium, and will tell them so in a press conference tomorrow.

Bob is pleased to see that Megan doesn't seem afraid to make hard decisions. He tells Gov. Driscoll that she is way ahead of those politicians in Washington who never seem to make their minds up about anything!

State Revenues

Bob is going to send in another expert, Rita. She is going to fill the new governor in on all of the details about where the state's money comes from, and what it's spent on. Rita explains that the states raise revenue from two main sources: taxes from the citizens, and assistance from the federal government. She provides an interesting breakdown of the tax revenue for an average state like theirs, with percentages for each:

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