Budgeting Compliance Evaluation
According to National Association of State Budget Officers (NASBO) all states (except Vermont by constitution, though Vermont practices it too) have some form of balanced budget requirement, meaning that they must ensure revenues cover expenditures in the budget. States evaluate compliance with these requirements through a mix of forecasting and monitoring during the fiscal year and audit/financial reporting at year-end. Typically, a state’s budget office or comptroller certifies that the enacted budget is balanced based on revenue estimates. During budget execution, if revenues fall short or spending overruns loom, states have mechanisms, like Lean Six Sigma, to streamline operations and reduce waste. Accountability measures include requirements that governors report any budget variances to the legislature, and in many states the end-of-year financial statements (Annual Comprehensive Financial Reports) are audited to confirm whether the state ended in the black or ran a deficit (which is generally not permitted to carry forward). In short, states determine they’ve met budgeting requirements by continuously comparing actual revenues and expenditures to the budget and taking corrective action as needed, then validating the outcome with formal financial audits.
Balanced Budget Requirements: While every state differs, budget guidelines commonly require: (1) the governor’s proposed budget to be balanced; (2) the legislature to pass a balanced budget; and (3) the state not to end the fiscal year in deficit. The Tax Policy Center notes these requirements are often statutory or constitutional, but enforcement mechanisms are usually informal or political rather than automatic. Unlike the federal government, states cannot easily run ongoing deficits, because bond markets and legal rules push them to balance.
To determine if a budget is balanced at enactment, states rely on revenue forecasts. For example, Texas requires its comptroller to certify that anticipated revenues will fund the appropriations. The budget cannot become law without this certification. In California, the governor’s budget proposal must show proposed expenditures do not exceed estimated revenues and available reserves. Many states have a consensus revenue estimating group or conference (like Missouri, Michigan, and New Mexico) where the executive and legislative staffs agree on revenue numbers. If balanced by these estimates, the budget is considered compliant.
During the fiscal year, budget compliance is evaluated through regular monitoring. State budget offices track monthly revenue collections against projections. If a shortfall starts to materialize, most states empower the governor or executive budget director to implement controls. Thirty-three states share interim periodic reports on expenditures. Maryland and New York, for example, release quarterly financial reports comparing the budget plan to actual results, giving lawmakers and the public a transparent view of fiscal performance.
“To determine if a budget is balanced at enactment, states rely on revenue forecasts.”
Common mid-year review and compliance measures
Spending Allotment Reductions
Governors can often instruct agencies to slow down or reduce spending (e.g., release only around 98% of appropriations) if revenues lag. For instance, Mississippi law (Miss. Code Ann §27-104-21 (2017)) gives the Governor authority to reduce agency budgets up to 5% without legislative approval. Additional reductions may be applied across all agencies.
Hiring Freezes and Travel Bans
Changes to hiring and travel can be implemented mid-year to save money quickly.
Drawing from Reserve Funds
Nearly every state has a “rainy day fund” (budget stabilization fund). If revenues drop due to an economic downturn, states may withdraw a certain amount (often requiring legislative approval) to fill the gap and maintain a balanced budget without cutting services drastically. South Carolina allows withdrawal from its general reserve fund to cover operating deficits, but the General Assembly must replenish these funds from future revenue (S.C. Code Ann. §11-11-310 (2023)).
Special Legislative Sessions
In some cases, the Governor may call the legislature into an emergency session to revise the budget when projections show a looming deficit.
At fiscal year-end the state prepares financial statements comparing actual revenues and expenditures. If expenditures exceeded revenues and available reserves, that’s a deficit – which states address by drawing down any carryover fund balances or in rare cases carrying a deficit forward. This can be unconstitutional, so legislatures often correct issues in the new budget. Most balanced budget requirements apply on a cash basis or fund balance basis at year end, meaning if the general fund is not negative in cash or short-term borrowing is paid off, the requirement is met.
After each fiscal year, state’s budget offices report if budget goals were met. Most states publish an Annual Comprehensive Financial Report (ACFR) — a set of financial statements prepared by the state that details all revenues, expenditures, assets, and liabilities for the year. These reports adhere to the accounting requirements established by the Governmental Accounting Standards Board and are typically audited by independent auditors.
The ACFR compares actual financial results to the budget. For example, it will show the variance between what was budgeted in the General Fund and what was received and spent. These reports indicate whether the state stayed within its appropriations and whether revenue targets were hit. Because ACFRs follow national accounting standards (GASB rules), they provide an objective look at the state’s fiscal health and adherence to budget requirements.
The California State Controller’s Office provides access to the state’s ACFRs, offering comprehensive financial information.
The Commonwealth of Massachusetts publishes its ACFR through the Office of the Comptroller, reporting financial activity according to Generally Accepted Accounting Principles.
Georgia’s ACFR is an annual publication available through the State Accounting Office, presenting the state’s financial statements.
Montana’s ACFR is published by the Department of Administration, State Financial Services Division, providing insights into the state’s financial condition.
External Audit Procedures
Transparency and accountability can be strengthened through comprehensive financial statements (including ACFRs) and external audits. Policymakers may consider mandating regular audits by independent state auditors to affirm financial accuracy and budgetary compliance. California and Illinois demonstrate effective external auditing practices. California’s State Auditor and Illinois’s Auditor General are legislative appointees who audit state finances annually.
The auditor position is found in forty-eight states (See Figure 2), 24 of those states elect an officer responsible for state audits and government accountability. These audits verify the accuracy of financial reports and may include a “budgetary compliance” opinion. Many states also meet the federal single audit requirement, where an external audit checks proper use of federal grant funds at the state level (ensuring no waste in federally funded state programs).
Audit findings are reported publicly to ensure transparency. If an audit finds any instances of overspending beyond a budget or improper accounting, it is flagged as a compliance issue that officials must address.
Internal Audit Procedures
Internal auditing mechanisms, like Delaware’s Government Efficiency and Accountability Review (GEAR) or Washington’s Productivity Board, institutionalize continuous improvement and innovation. Policymakers can establish and support such internal structures, providing incentives and resources to encourage agencies and employees to continuously identify efficiency opportunities.
Delaware’s GEAR board, established by Executive Order #4 in 2017, works to improve the quality, efficiency, and effectiveness of government services through:
Enterprise Services Delivery
Streamlining shared services across agencies to reduce redundancy and operational costs.
Public-Private Partnerships
Collaborating with the private sector to leverage expertise and resources, improving service delivery and cost-effectiveness.
Training Programs
Implementing educational initiatives to equip state employees with skills in process improvement and efficient resource management.
The Washington State Productivity Board incentives state employees to suggest innovations to enhance government operation. Key aspects of the program are:
Individuals can submit ideas that potentially save money, generate revenue, or improve services. Successful suggestions may earn the proposer up to $10,000.
Teams collaborating on projects that lead to cost savings or increased efficiency can receive financial rewards, with each member eligible for up to $10,000.
States evaluate if funds were spent for the intended purpose and whether agencies achieved the outcomes funded by the budget. Some legislatures require agencies to report on “key performance indicators” alongside their budget requests, and these reports are reviewed in budget hearings to decide if programs should be continued, expanded, or cut. Utah requires executive agencies to provide performance measures and targets for performance measures conducted collaboratively between the Office of Legislative Fiscal Analyst and the Governor’s Office of Planning and budget.
In summary, states determine if they met budget requirements by:
- Building a balanced budget on credible forecasts.
- Tracking budget execution and adjusting as needed.
- Formal accounting at year-end to confirm revenues are greater than or equal to expenditures.
- Undergoing audits and public reporting for transparency.
By adopting these actionable budgeting practices and advancing a culture of continuous improvement, state policymakers can reduce wasteful spending, maximize efficiency, and ensure effective use of public resources.
In short, the budgeting process does not end with passing a budget — states actively monitor execution and audit outcomes to verify that budgeting requirements (fiscal and programmatic) have been fulfilled.