Are Biennial Budgets Better?
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The comparison of biennial and annual budgets recently made headlines thanks to Iowa Governor Terry Branstad, who vetoed a spending bill that only appropriated funds for one year and instead is insisting on bills that plan for two years of spending. Brandstad is adamant that a biennial budget is critical to creating responsibility, but are biennial budgets really so much better?
Empirically, the results are mixed. Over twenty states have converted from biennial to annual budgets in the last 70 years, but several states are now returning to a two-year budget cycle. State budgets and budget processes differ across many categories and there is no evidence for a systematic relationship between biennial budgets and performance. There are, however, a number of arguments touted by proponents of biennial budgets.
First and foremost, proponents claim that biennial budgeting engenders better planning by legislators and governors. According to the argument, the two year planning horizon makes legislators more fully consider the long-term implications of their decisions. This argument is confounded by the fact that most state officials hold office for several years, which may or may not coincide with the state budget. The relevant planning horizon for an elected official is their term of office, not necessarily the length of the budget they pass. If a budget last two years but a legislator is only in office for one more year, she is unlikely to be as concerned about the second year of the biennium.
Allegedly, a longer budget cycle also allows for more thorough program evaluation and oversight during the second year of the budget. This is supposed to help officials determine which programs are worthy of funding and which are not. In reality, program oversight is more a product of legislative diligence; it can be (and is) executed quite effectively in the course of a single fiscal year.
Finally, biennial budgeting is said to be less expensive. The claim that budgeting every other year is less expensive than budgeting every year has the intuitive appeal that fewer budget sessions imply lower costs. In general, this may be true, but most states with biennial budgets find themselves passing revised budget packages midway through the biennium, making costs a wash.
The frequency with which legislators meet during the second year of a budget biennium suggests that most of the potential advantages are unlikely to materialize; it seems that biennial budgets are more of a formality than a fundamentally different way of doing business. One reason that states find themselves having to update their budgets is that revenues-hard enough to predict as it is-are incredibly difficult to accurately forecast for two fiscal years.
What benefits there are to be gained by planning further into the future are confounded by the fact that the future is, well, unknowable. States with two-year budgets are no less subject to economic downturns than their annually-budgeting counterparts in this era where states are so heavily dependent on tax revenues for operations. One thing that states can perhaps rely on with more certainty than tax revenue is federal grant money, which is given out on an annual basis.
There is no clear winner between annual and biennial budgeting, but this shouldn't be too surprising. Most of the arguments for and against biennial budgeting implicitly juxtapose two budgets; one with an extremely short time-frame and the other with a much, much longer time-frame. Economists are wont to insist that analysis take place at the margin, and that is exactly what is called for here. In reality, the difference between a one-year budget and a two-year budget is a very small one. Small enough, in fact, that there does not seem to be a significant difference between the two.
Fundamentally, the arguments supporting biennial budgeting do not offer anything intrinsically appealing. Rather, they point to other responsible practices that biennial budgeting encourage, including long-term planning, program evaluation, efficient budgeting, etc. These are valid policy goals, but legislators shouldn't delude themselves into thinking that these ideals will suddenly become reality because their budget period is one year longer. Instead, policymakers should pursue meaningful reform directly.
Whether the budget session lasts one year or two, reality-based budgeting is absolutely critical to long-term sustainability. Pension liabilities don't go away when the budget is one year longer, nor do revenues magically increase. Legislators need to get real about their priorities this year.
A full description of reality based budgeting by State Budget Solutions President Bob Williams can be found here, but it bears mentioning in brief. Budgets, be they annual or biennial, are typically crafted incrementally. That is, legislators look at expenditures from the previous fiscal year and then increase funding based on program size. This approach fails to critically analyze how the state spends its money and leads to the runaway deficits of recent years.
Instead, legislators should ask themselves for essential questions each time they sit down to write the budget:
1. What must the state accomplish?
2. How will the state measure progress and success?
3. How much money does the state have available to spend?
4. What is the most efficient way to deliver essential services with the available funds?
You will notice that any of these questions can be asked for the course of one year or two. A two year budget does not responsible legislators make. If legislators aren't asking the right question, it doesn't matter how long the planning horizon is!
In fact, irresponsible legislators may be more of a problem with two year budgets. As mentioned before, most states with biennial budgets wind up holding supplemental session to update spending plans halfway through the budget period. This can actually lead to more expenditures. At least one academic study has found that states that budget biennially actually spend more than those that budget annually (Kearns 1994).
There are no silver bullets for state budgets, least of all how long the budget period lasts. A responsible approach to the state budget does not depend on whether or not the budget lasts one year or two, and irresponsible habits will not disappear overnight just because spending is laid out for an additional year. If legislators really want to find solutions for their state budget woes, they need to come back to reality.
Bryan Leonard is a Budget Research Analyst and Fellow at State Budget Solutions and was formerly an analyst at the Freedom Foundation. He received his Bachelor of Arts in Economics from Hillsdale College where he was a Koch Foundation Research Fellow for Dr. Charles Steele. Bryan is currently pursuing a Masters in Applied Economics at Montana State University where he is a research assistant for Dr. Randy Rucker and Dr. Dominic Parker
1. Ronald K. Snell, "Annual and Biennial Budgeting: The Experience of State Governments," The National Conference of State Legislators, 2010, http://www.ncsl.org/default.aspx?tabid=12658#point2 .
2. Kearns, Paula S. "State budget periodicity: An analysis of the determinants and the effect on state spending." Journal of Policy Analysis and Management, 13, no. 2 (1994): 331-362.