Capital Budgeting and State Debt

The state of Georgia must by law operate with a balanced budget. A balanced budget is one in which the amount of money spent over a fiscal year does not exceed the amount of money collected from taxes and other revenue sources for that same fiscal year.
The requirement for a balanced state budget places major constraints on the way the state administratively runs its budget process, on the political pressures felt by the major budgetary participants, and on the funding levels appropriated each year for individual state programs. Governments without balanced-budget requirements may plan for and operate with a deficit, where the amount of money spent is greater than the tax revenues collected for that year; those governments can borrow funds to make up the difference. The federal government, for example, does not have a balanced-budget requirement; in fact, the federal government usually operates with a deficit and generally has a much more free-flowing budgeting picture. A balanced-budget requirement places definite limits on what the state can spend, which has the effect of restraining every participant and every program hoping for funds.

Balance in the Operating Budget

Most states have a balanced-budget requirement, but few take the requirement as seriously as does Georgia. The Georgia Constitution makes it illegal for the General Assembly to pass an operating budget that anticipates expenditures exceeding funds available. If the budget becomes unbalanced after the start of the fiscal year, then the governor must call the General Assembly back into special session to make changes to the budget. The amended budget will either raise revenues or cut expenditures or provide for a combination of both.
The state constitution does allow the state to borrow in the short term if revenues fall below projections, but with strict conditions: the amount of short-term borrowing cannot exceed 5 percent of the previous year's tax collections, the borrowing must be paid back by the end of the fiscal year, and no additional borrowing can be made in the next year until after the previous year's borrowing has been repaid. As of May 2004 this short-term debt provision had not been used.
In actuality, the balanced-budget requirement does not apply to all forms of the budget. There are different types of budgets, and in Georgia only one type, the operating budget, must be balanced. The operating budget includes those expenditures a government must make regularly, even daily, just to stay open—expenditures for such continuing obligations as salaries, fringe benefits, equipment, supplies, and communications. The operating budget is by far the largest of all the budgets, and it is the one that draws the greatest attention in the news media and in public discussion of state spending.
A major factor in the preparation and authorization stages of the original budget is making sure the expenditure proposals do not in total exceed the state's official revenue estimate. The revenue estimate is usually done a bit conservatively, so that as the fiscal year proceeds there will be more revenues coming in than expenditures going out—that is, with the conservative revenue estimate, the state seeks to create a surplus. The state places the surplus funds into two accounts: a midyear adjustment reserve (in typical years about 1 percent of the year's revenues) and a revenue shortfall reserve (often called the state's rainy-day fund and usually between 3 and 5 percent of revenues).
With the amended budget, the state is able to modify current fiscal-year spending levels, based upon the extent to which conditions have changed in the months since the budget was adopted. As examples, the budget planners may have to take into account changing numbers of school enrollments, prison inmates, or Medicaid recipients. In addition, the midyear amended budget creates an opportunity to allocate money for special projects favored by the governor and various state legislators for which funds were not available when the original budget was being considered.
The amended budget is usually only a small fraction of the overall operating budget, its size fluctuating with the amount of surplus monies in the reserve, the extent of the changes in the state's conditions, and the number of special projects that can be handled. When the state is experiencing revenue shortfalls (in economic recessions, for example, tax collections may fall short of what the original revenue estimate had predicted), the amended budget may even call for reductions in the current operating budget, and it may also draw funds from the revenue shortfall reserve. Both were done during the 2003 fiscal year.
In severe economic recessions the state's revenue shortfalls may be so significant that the reserves are not sufficient to handle the shortfall. As noted, the state can borrow on a short-term basis to cover the shortfall, but it has never done so. Instead, when serious shortfalls have occurred, the governor has called a special session of the General Assembly (typically in August or September) to consider an amended operating budget that will cut current expenditures to the level of the revenues being collected. The resulting actions may cut all state spending by a certain percentage, which is usually small, or may cut by large percentages some programs deemed to be nonessential. At any rate, state government officials have shown they will take whatever actions are necessary to keep the operating budget balanced.

Capital Budgeting and Debt

The other important part of the state budget is the capital budget, which provides for very expensive and long-lived projects. Typically, capital expenditure items are physical structures, such as new buildings at state universities or trade and convention centers. Because of their high cost and long life, such items are rarely placed directly inside the annual operating budget. Instead, the state borrows money long-term (up to twenty-five years) by selling bonds. A bond is a promissory note—an IOU—that the state sells; the state pledges to pay back the amount of the bond plus interest, a portion at a time over many years. In the case of the capital budget, the state goes into debt; it borrows by selling bonds to investors and then pays back the face value and interest on those bonds.
Each January, when the governor presents the proposed new operating budget to the General Assembly, he also presents a new capital budget, which goes through the same legislative approval process as the operating budget. The governor's Office of Planning and Budget plays a major role in developing the capital budget through the staff of its capital budgeting unit, who perform the specialized reviews needed to evaluate and prioritize the capital spending requests submitted each year by the state's various executive departments.
The state constitution and state law place tight constraints on the capital budget and debt process. Since 1973 state bonds have been issued by one central authority, the Georgia State Financing and Investment Commission, which is responsible for ensuring that all state debt is for proper public purposes. The commission is composed of top state officials, including the governor, lieutenant governor, Speaker of the House, attorney general, state auditor, director of the Office of Treasury and Fiscal Services, and commissioner of agriculture. The commission has a small full-time staff to handle the administrative matters of issuing bonds, accounting for the proceeds of the bonds, and overseeing any construction financed from state bonds.
Nearly all state and local governments work with the balanced-budget requirements on their operating budgets. One of the ways in which governments are able to function with the restrictions that balance places on them is the creation of different types of budgets, such as the capital budget, that allow them to borrow and go into debt. Doing so is accepted governmental practice that allows the state to spread out over time the high cost of construction of many physical facilities. As long as the state follows its own legal requirements in regard to debt management, the capital-budgeting process is thought to be a major positive aspect of good governance.
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Further Reading
John L. Mikesell, Fiscal Administration: Analysis and Applications for the Public Sector, 6th ed. (Belmont, Calif.: Wadsworth, 2003).

Irene S. Rubin, The Politics of Public Budgeting: Getting and Spending, Borrowing and Balancing, 4th ed. (New York: Chatham House, 2000).
Cite This Article
Digby, Michael F. "Capital Budgeting and State Debt." New Georgia Encyclopedia. 20 August 2013. Web. 31 October 2014.
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