Balanced Budget Requirement

How It Works

Most U.S. cities operate under some form of balanced budget requirement, though the specific rules vary significantly across the 50 states. The National Conference of State Legislatures (NCSL) documents that 49 states (all except Vermont) impose balanced budget requirements on themselves, and most extend similar rules to their cities through state statute or municipal charter. Requirements fall along a spectrum: some mandate balance only at budget adoption (allowing mid-year shortfalls), others require the governor or mayor to submit a balanced budget, and the strictest require actual revenues to match actual expenditures at fiscal year-end with carryover deficits prohibited. Even strict requirements can be circumvented through accounting maneuvers including deferring payments into the next fiscal year, drawing down fund balance reserves, issuing short-term tax anticipation notes (TANs), selling assets for one-time revenue, using pension contribution holidays, or reclassifying recurring expenses as capital. These techniques are collectively known as "budgetary gimmicks" by the Pew Charitable Trusts and are flagged in rating agency analyses. A balanced budget on paper does not prevent a structural deficit, which is why the CitySpend Fiscal Health Score evaluates structural balance using multi-year trends rather than single-year adopted budgets. Cities like Stockton (bankruptcy 2012) and Detroit (bankruptcy 2013) adopted "balanced" budgets for years while accumulating the deficits that ultimately forced Chapter 9 filings under the U.S. Bankruptcy Code.

Related Terms

• Structural Deficit, A persistent gap where a city's recurring expenses exceed its recurring revenue, meaning the budget is fundamentally unbalanced even in a normal economy.
• General Fund, The primary operating fund for a city government, covering most day-to-day services like police, fire, parks, and administration.
• Fund Balance, The accumulated surplus (or deficit) in a government fund, essentially a city's savings account. A healthy fund balance provides a cushion against revenue shortfalls.