Wonky Word Wednesdays: Structural Balance

Feb 11, 2015

By MBPC Staff

I hope you are ready this week because Wonky Word Wednesdays is going to turn up the wonk factor. Over the summer, you learned about how budgets at the state and federal level work. And last week, we explained what Montana’s ending fund balance is. But over the past several weeks, there has been talk about ensuring that Montana maintains “structural balance” of its budget. Governor Bullock referenced this in his State of the State speech, and there are a number bills up in the legislature that pose a serious risk to the structural balance of Montana’s budget. But what does that mean exactly?

Many understand that Montana is constitutionally required to maintain a balanced budget. Meaning our state cannot spend more than it brings in during a year. However, simply meeting the constitutional definition of a balanced budget is not enough – it is important that the state maintains a budget that is financially sustainable over time. This is structural balance.

You won’t find the term structural balance in our constitution or in Montana’s code of law. It is more of a term of art. In short, structural balance means that a state has revenue coming in that effectively covers the government’s expenditures going forward. This is important. As one resource notes, “A true structurally balanced budget is one that supports financial sustainability for multiple years into the future.”

Another way to think about this is that the ending fund balance at the start of the legislative session should – more or less – match the ending fund balance at the end of the session.

The State of Montana has done well to ensure structural balance over the last decade. Our ending fund balance – which again, should be considered our “rainy day fund” and a part of Montana’s budget – remained at consistent levels. This ensures that we can weather a recession, when revenues drop and costs to the state may rise.

But all this is at risk. Legislators have introduced a series of bills that will cut hundreds of millions in revenue to the state. In total, the legislature heard and approved, through at least one branch, tax cuts representing nearly $250 million in lost revenue to the state. Many of these bills dramatically cut income tax revenue (our largest revenue source), or alternatively, shift an even greater reliance on income tax (which is a more volatile revenue source than, say, property tax revenue).

As the Governor rightly pointed out, Montana has been a fiscally prudent state over the last decade, and we should be proud. This is partly how we weathered the federal government shutdown without cutting programs and services. Hopefully the legislature will rethink these massive cuts to acknowledge that fiscal responsibility is in our state’s best interest both now and in the long term.