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Which budget to be balanced?

State and local governments are normally required to balance their annual budget. This is generally referred to as the "balanced budget requirement (BBR)." The Federal government, however, does not follow the rule, despite of the frequent come-and-go discussions for things like "balanced budget amendments."

WHICH budget to be balanced for state and local governments? This can be confusing thought. Some people talk about a "balanced operating budget" while others say a "balanced general fund budget." Which one is more widely used? Are they both correct? Or, are the two identical to each other?

I get 29,100 links when I googled "balanced operating budget," and 872 links for "balanced general fund budget." The results make sense as the correct phrase is indeed the former one -- according to the BBR state and local governments need to balance their "operating budget" instead of "capital budget."

In many times a balanced operating budget does lead to a balanced general fund budget (or roughly so). The operating budget includes several funds, in which the general fund is usually by far the largest one and covers most revenues/expenditures for all the operating budget except for special revenues, debt services, and capital funds.

  • The special revenues are earmarked for some specific purposes and are "self-balanced" for that purpose anyway;
  • The debt service fund has the amount that is transferred from the general fund for debt payments including principal and interests. So the expenditure of debt service fund throughout the fiscal year is actually part of the expenditure for the general fund;
  • The capital funds tend to be small as many governments rely on debt finance rather than "pay-go" for capital projects; so it may not significantly deviate the general fund expenditure to the operating expenditure.
Soon after I wrote this blog I realized a mistake. The operating budget should include governmental funds and proprietary funds. It is only in governmental funds that we will further distinguish general funds, special revenue funds, capital funds, and debt service funds. Considering that proprietary funds are largely self-balanced as we normally hope business-type activities to archive break-even, a balanced operating budget is close to a balanced governmental fund budget, in which the general fund pays a dominant role.

I decided to leave the original blog unchanged and to simply add this footnote of correction. Hey, this is the beauty of writing -- which gives you a clear opportunity to be wrong.


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