The concept isn’t hard. Any high school accounting student can explain why it’s a good idea to require state and local governments to pass balanced budgets.

And ensuring a state is responsibly budgeting and spending shouldn’t just be a concern for budget hawks and fiscal watchdogs. States with balanced budgets are more equipped to help constituents in need, build “rainy day” funds, improve state programming, and reduce taxpayer burdens. Also, states with balanced, healthy budgets are better equipped to weather unforeseen emergencies such as natural disasters or a global pandemic without needing to heavily rely on federal funds (and all the strings, requirements, and uncertainty that come with those funds).

The benefits of passing balanced budget requirements are clear. Which is why every state in the nation except Vermont, as well as 75 of the nation’s most populated cities have some form of a balanced budget requirement.

Good government won! Thank you for reading. Goodbye.

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Kidding (obviously). It is true that nearly every state in the nation has a balanced budget requirement on the books (with some even having constitutional balanced budget requirements). However, state legislators are often more concerned with the appearance of balancing budgets over enacting truly balanced budgets.

In 2025, half the country, 25 states, didn’t have enough money to cover their bills despite having balanced budgets on paper.

Every year, state legislators across the country use financial and accounting tricks to pass “balanced” budgets even though they spend more than they’re bringing in. According to the budget watchdog Truth in Accounting, there are a few main tactics politicians use to get around their states’ balanced budget requirements:

  • Inflating revenue assumptions
  • Counting borrowed money as consistent income
  • Understating the actual costs of government
  • Delaying the payment of current bills

Below are explanations of how legislators use (and abuse) these tactics during the budget-making process.

Inflating revenue assumptions

When an individual or family makes their household budget, it’s a pretty straightforward process. For people with salaried jobs, they know exactly how much they’ll make each year, and they know their biggest expenses (rent/mortgage, insurance, car payments, etc.). Based on that data, they plan how much they can afford to spend, decide how much to save and invest, and calculate how much is left over for a vacation or shopping trip.

Government budgeting, however, isn’t as straightforward. A government (whether it’s a town, city, state, or the federal government) doesn’t know exactly how much it will bring in each year. Government revenue depends on many changing variables such as how much people buy (sales tax revenue), how much people drive (gas tax revenue), how many people are working (income tax revenue), and dozens more. Because of this reality, state lawmakers must work with budget experts and administrative departments to forecast how much money the state will bring in each year.

Each year, states revise their budget projections up or down depending on new data. But for legislators eager to enact a big flashy program or spend on something they promised during a campaign, it can be very tempting to inflate a state’s revenue projection by tens if not hundreds of millions.

This can easily lead to legislators not being honest about state finances to spend money the state doesn’t have while pushing their state further into debt.

Counting borrowed money as consistent income

States and local government—like businesses or individuals—often use debt to pay for things they don’t immediately have the money to cover.

Now, all debt isn’t inherently bad or irresponsible. For example, when most families buy a house, they get a mortgage from a bank because they don’t have hundreds of thousands of dollars in cash. Or a business might get a line of credit or a loan to purchase a large piece of equipment they need to operate. In the same way, state and local governments often use debt (typically in the form of bond issuances) to pay for necessary infrastructure projects. This lets a government pay for a needed public project (like a highway or bridge) while responsibly spreading out the cost over time.

However, sometimes, cities and states will use debt to pay for general operating costs or to pay for expensive projects the government simply can’t afford. When governments do this, they often count the debt as “revenue” in the same way that they would count tax revenue. However, counting debt as revenue is analogous to someone who makes $50,000 a year spending $80,000 by putting $30,000 on a credit card.

This is not only dishonest and misleading to taxpayers, this practice can lead to a dangerous downward spiral for a state or city’s finances going further in the red.

Understating the actual cost of government

In the same way that legislators can overstate how much they think the government will bring in in a year, it can be tempting for state leaders to understate how much they think their state will spend in a year.

In 2021, the Volker Alliance gave 12 states a D or D- for their forecasting abilities. That same study gave a nationwide average grade of a C for states’ abilities to accurately forecast their income and expenditures while doing their yearly accounting.

Labor costs, including pensions and other post-employment benefits (OPEB), are often the most mismanaged and understated liabilities eating up state budgets. Every year, governors and legislators in many states make salary and benefit promises to public employee unions that taxpayers simply can’t afford. Because of this, over the past few decades, state budgets have perennially been weighed down by unaffordable labor costs for current and retired state workers. According to the Reason Foundation, at the end of the 2023 fiscal year, the nation’s public pension systems had $1.59 trillion in total unfunded liabilities.

When state governments repeatedly make promises their states can’t afford and fail to accurately forecast their revenue and costs, they force harder and harder decisions on future budgets and future generations. States like Illinois, California, New Jersey, Connecticut and many more are trying to deal with decades-old debts and obligations. Most of that debt is unfunded pension and OPEB obligations. The longer states spend more than they can afford, the harder it is to craft a balanced annual budget. And as residents in those states have now seen, perennial bad budgeting leads to real problems and challenges for taxpayers and residents.

 Delaying the payment of bills

Because of how states balance their books and perform their accounting, it can be possible to alter how different expenses are accounted for and show up in a state’s budget. When a state comes to the end of the fiscal year, delaying payment on certain expenses a few weeks or months can help state legislators “reduce” their expenses for the current year by simply pushing it into the following year’s budget.

This is not a responsible budgeting practice. However, just like it’s dangerous for states to understate their pension and OBEB costs, it’s even more dangerous to delay paying for their pension and OPEB costs. As Truth in Accounting explains:

The most common accounting trick states use is hiding a large portion of employee compensation costs from the budgeting process. Employee compensation includes retirement benefits such as healthcare, life insurance, and pensions. States become obligated to pay for these benefits as employees earn them. Even though the benefits will not be paid until the employees retire, they still represent current compensation costs for the state. Furthermore, money must be put into the retirement fund to accumulate investment earnings.

Unfortunately, some elected officials have used portions of the money owed to pension and retirement funds to keep taxes low and pay for politically popular programs. Instead of funding promised benefits now, they are being charged to future taxpayers. Shifting the payment of employee benefits to future taxpayers allows the budget to appear balanced while state debt increases.

The need to pass honest balanced budgets

Responsible budgeting is important for every person, organization, and government. However, there’s an important distinction: When an individual or business budgets poorly, they only hurt themselves. When states and cities manipulate their budgets, the repercussions hurt millions of taxpayers and residents forced to deal with the fallout.

While balanced budget requirements, laws, and constitutional amendments can be important, unless properly written and enacted, they are paper tigers.

To ensure responsible and sustainable operations, it’s imperative for states, cities, and local governments to pass balanced budget requirements that forbid these commonly used tricks and workarounds. This is why SPN is working with partner organizations across the nation to pass meaningful fiscal reforms and truly balanced budgets every legislative cycle.

And transparency is a big part of honest budgeting. Governments must be transparent with how they’re budgeting, how much revenue they’re taking in, and what they’re spending. That’s why SPN partners like the Kansas Policy Institute are championing “Truth in Taxation” legislation. Since Kansas passed their transparency bill in 2021, taxpayers across the state have seen more open and honest budgeting by their state and local officials. They’ve also seen lower taxes because of that transparency.

Even though the concept isn’t hard, too few states pass honest balanced budgets on a yearly basis. Left to their own devices, elected officials have proven their willingness to use loopholes and gimmicks to do what’s easy, instead of what’s right.

It’s time for true budget transparency and truly balanced budgets. Any high school accounting student can tell you that.