Caught Off-Balance: How Implementing Structural Changes to State Balanced Budget Requirements Can Foster Fiscal Responsibility and Promote Long-Term Economic Health

INTRODUCTIONIn 1998, tobacco companies settled lawsuits with forty-six states, agreeing to pay annual payments expected to total $256 billion over the next twenty-five years.1 The states agreed to use the entirety of these funds for the explicit purpose of attacking the health problems caused by tobacco, including medical research for tobacco related illnesses and tobacco-use prevention campaigns in schools.2 The states, however, have failed to uphold this promise.3 In 2013, the states only used 1.8% of their tobacco settlement money on tobacco related pro - grams-approximately two cents for every dollar received from the settlement.4 In fact, 36% of tobacco programs were cut during the 2008-2012 period, notwithstanding continued receipt of the settlement money.5Instead of using the money to address tobacco-related illnesses, state governments have used the money to help alleviate budget deficits.6 States directed the money to sources that would help bridge their budgetary shortfalls, including placing the money in the general operating fund or into funds unrelated to tobacco.7 For example, despite statutory requirements to the contrary, New Mexico has diverted upwards of an estimated $150 million from a permanent tobacco settlement fund to replace general revenue funds.8 Another state, New York, has allocated all $800 million of its tobacco settlement funds into its general operating budget, to be used however the legislature determines.9 These states exemplify a larger pattern of states consistently misusing funds to supplement their own budgetary shortcomings. 10Although forty-nine states have balanced budgetary requirements, these requirements generally have proved ineffective in actually producing balanced budgets.11 Within the past few years, the economic downturn has created severe budgetary shortfalls for most states.12 Between 2009 and 2012, the combined budgetary shortfalls for states totaled more than 540 billion dollars.13 Despite recent economic growth, states still experience sharp budgetary shortfalls.14Today, most states still face large shortfalls and numerous obstacles to recovery.15 Thirty-one states faced shortfalls totaling $55 billion over the 2013 fiscal year.16 Meanwhile, revenue growth has not recovered enough to offset these shortfalls.17 Even states that initially survived the economic downturn, such as resource rich New Mexico, Alaska, and Montana, now face budgetary concerns as revenue dwindles.18The size and prevalence of these deficits have galvanized a national discourse concerning governmental fiscal responsibility.19 This Note assesses many of the problems experienced by current state balanced budget requirements and proposes structural changes that can be used to ameliorate many of the most pervasive issues.20 Part I explains balanced budget requirements and how they commonly operate across the country.21This Part further identifies some of the alternative elements that could be used to solve many problems facing state budgets.22 Part II highlights many of the problems afflicting the states balanced budget attempts, including the numerous gimmicks relied upon by lawmakers.23 Finally, Part III argues that the implementation of transparency measures, stricter enforcement mechanisms, and more flexible timelines can be instrumental in solving many of these serious budgetary problems.24I. THE BALANCING ACT: UNDERSTANDING STATE BALANCED BUDGET REQUIREMENTSAlthough each state's balanced budget system is unique, understanding the schemes in terms of their common foundational principles is key to identifying their underlying problems.25 Typically, state balanced budget amendments are conceived as sets of rules constricting the budget process at several key junctions.26 State balanced budget requirements are generally best understood as a scheme involving numerous pieces throughout the state political and administrative structure.27 These provisions guide every stage of budget implementation. …