Introduction

Attending conferences on sustainability organized for government officials is often a very uplifting experience.  Keynote speakers typically come from a variety of backgrounds — including business, science, the mass media, and academia.  It is clear that the sustainability tent is a large one indeed and includes ample room for private-public sector partnerships between emerging industries and government; eager and informed citizen stakeholders and administrators can frequently be found working in cooperative enterprises of one type or another.  While nearly always concluding with warnings for the challenges to be faced along the path ahead, the keynote speakers usually offer the promise of a responsible and prosperous future if all reforms of consumption and production practices and processes are achieved as expected.  One generally walks away from these gatherings better informed, more deeply concerned, somewhat optimistic, and highly motivated to contribute to achieving the goal of sustainability for our progeny.

Why do we budget?  How Does the Typical Budget Process Work?

Simply put, we “budget” (both a noun and a verb) because we nearly always have limited financial resources and multiple demands on those resources that exceed actual cash balances, current assets, or expected cash and financial assets available to us.  Public budgeting is the process by which elected and appointed officials, acting in the interest of the governed, determine methods of collecting government resources and securing assets through forms of taxation, borrowing, or appropriation (e.g., the holding of public lands, forests, surface waters, etc.) and then allocate those financial and associated resources on priorities determined by the democratic political process.

The politics of budgeting entail arriving at outcomes where some priorities are deemed more important than others.  The result might be that revenues collected are, as a consequence of budgeting choices, directed to certain priorities while other noteworthy issues receive less financial support – or even no support at all.  Human nature being such that it is, hardly anyone relishes the thought of losing out in a budgetary process and virtually nobody who thinks that a priority is worthy of public funding would be pleased to discover that the majority of actors making budgeting decisions think otherwise.  The common result of the periodic budgeting process is that it creates great angst while it is going on, and the results of the process often are that conflict is sewn for the next round of budget allocations in each succeeding round of budgeting.

Most proponents of particular state and local budget priorities believe that becoming a funded priority of government is more likely if budget decision makers (elected and appointed officials) also value a particular priority and are acquainted with the methods for accommodating a budget request.  The budgeting process is iterative, meaning existing priorities are continually “explained” and the methods for securing funding have become increasingly sophisticated over time.  In the case of pursuing sustainable governance, priorities and budgeting practices have shifted somewhat.  Efforts on the part of some powerful advocates to promote sustainability are adding significantly to the traditional challenges of public sector budgeting.   Budgeting is, as a direct consequence, an increasingly complex process of “give and take” in American state and local government with many lobbyists and vested interests working diligently to influence priority-setting in budgetary processes at the federal, state and local levels of government.  To the traditional actors noted in earlier chapters, now the “sustainability lobby” constitutes a major voice in budgetary processes.

In most American state and local governments, budgeting occurs either annually or biannually.  Items established in previous budget cycles, if they are politically popular, are more likely to have a higher priority and gain funding than are newer items seeking a piece of the proverbial “budget pie.”  Unfortunately, many of the new budgetary items involving sustainable governance and the promotion of resilient communities are too new to seem a priority for seasoned budget makers.  This harsh reality means that the task facing sustainability advocates is a challenging one because new ideas must be promoted at the cost of established priorities, and they must gain broad favor in order to receive the lifeblood of public financial investment.

Generic Budgeting Process

As a list of major steps taken in the process of building a state and local government budget, the universal budget process appears deceptively simple:

1. Preparation of revenue and expenditure estimates for the next period takes place.
2. An executive budget is compiled and submitted to a legislative body.
3. The legislative body deliberates and issues budgetary approval.
4. The executive signs the legislative enactment containing the budget(s) into law.
5. Budget execution occurs with the allocation of resources to public agencies when there is authorizing legislation connected to budgetary provisions (both are necessary in most cases).
6. Systematic post-authorization audits are conducted to monitor budgetary compliance with legislative directives.

The Preparation of Budget Estimates:  The beginning of a budget cycle generally requires input from government agencies on the financial resources they expect to need for the next budget cycle.  Similarly, a process is generally in place whereby a unit of state and local government prepares revenue estimates for the coming year or biennium.  The agency expenditure estimates are shaped by many considerations, including the following:

• Existing statutes and rules:  Agencies consider the statutory requirements that they are required to accomplish.  State and local elected officials often develop new policies or adjust older policies through new or revised legislation, then work to estimate the costs associated with these new policies and programs.
• Statutes and rule additions and changes:  Agencies consider the costs of implementing and enforcing statutes through administrative rules and other policies.  Agency interpretations of the meaning of statutes —frequently subject to the accession of elected leaders and the courts — will often affect the expenditure estimates associated with implementation and goal accomplishment.
• Federalism Impacts:  State and local government agencies often must consider the statutory and administrative rule requirements emanating from other levels of government.  Local county and municipal governments are often constrained by state and national laws, rules, and resource provision; and most states are highly responsive to national politics and federal policy developments.
• Demographics:  Many budgetary priorities are a function of population —the numbers and types of people who live in a jurisdiction currently and who are expected to live there in the future.  As demographic changes occur (e.g., school-aged population, percentage of population requiring public health services, eldercare assistance, etc.), the public expenditures associated with accomplishing certain priorities change as a result.
• Agency-related issues:  Public agencies at the state and local government level must consider the changing role and nature of their personnel and their operations (e.g., the computerization of records, the adoption of e-government links to the public, etc.).  Agency anticipated expenditures often rise or fall independently of statutory additions or changes.

After agency estimates have been drawn up, these are typically submitted to an elective executive leader.  At the state level, the leader in question is the state governor; at the local level, it may be the county commissioners, the mayor, or the city manager.

Executive budget compiled and submitted to legislative body:  The political executive is powerful in the budgetary process, without exception.  Executives in both state or local government review, alter, and compile all agency budgets before submitting their own budget for legislative consideration.  Frequently, the executive has offered agencies some guidance in the preparation of their estimates, indicating the executive’s priorities as well as expressing expectations about resource availability for the budget derived from the revenue forecast as a whole, and often for constituent parts of the budget as well.  In many cases state and local government agencies request resources that do not line up fully with executive expectations or preferences; often adjustments are made prior to the submission of the budget to the legislative body in question which reflect the executive’s preferences and public policy priorities.

The politically responsible, elected executive authority must take into careful consideration the priorities of different levels of government, particularly when those levels of government mandate certain expenditures.  Mandates may come with funding to support a priority or may be “unfunded” — meaning that the state and/or local governments affected must carry the cost of complying with the mandate (e.g., some environmental protections for clean water, waste management, endangered species habitat preservations, etc.).  For an example that is quite commonplace, Congress might require all public agencies to provide reasonably easy access to the disabled in all public buildings; if funds are set aside for the reimbursement of costs incurred, this would be a funded mandate.  If, on the other hand, few if any such funds are provided, this would be an unfunded mandate.  Just as Congress often enacts such unfunded mandates, so do state governments often issue such mandates for their local governments.

In addition to mandates, the executive budget must also consider that certain public expenditures are directly related to entitlement programs.  Entitlements require that government pay for certain individual needs of a beneficiary meeting a set of eligibility requirements.  For example, indigent people without private assets qualify for state medical benefits — usually in the form of Medicaid.  The high costs incurred in meeting mandated and entitlement expenditures often limit resources for the introduction of new, cutting-edge policies related to sustainable communities and citizen engaged governance.

At the state and local level, the political executive usually enjoys the services of a staff budget officer and budget office, and this office is highly responsive to the political executive and his/her own set of priorities.  This executive staff office works with agency budget personnel to make adjustments in the expenditure estimates forwarded from the agencies, and it ultimately submits a compiled budget request to a legislative body for its consideration.  The executive budget is usually submitted as a balanced budget, with a discussion of expected revenues derived from the revenue forecast and a detailed accounting of expenditure priorities recommended for legislative adoption.

Legislative body deliberations and budget approval:  Both a fiscal management document AND a political document, the executive’s proposed budget reflects the current administration’s ideology and establishes priorities along those lines.  State and local legislative (deliberative) bodies are composed of other elected representatives with a wide range of values and issue priorities.  In many cases, the executive branch and the majority of legislators are from different political parties, a common situation typically slowing down the budget process.  A governor, for instance, may create a budget built around increases in tax revenues through tax rate adjustments, while a majority of the state legislature is opposed to increasing tax rates.  In such a case, the legislature would decline to support the requested level of spending.

The result of these core differences is a budget “deconstruction” (significant reconfiguration), after which an entirely new budget is created through the legislative process.  Legislatures usually conduct their budgetary business through an elaborate system of subcommittees, whose work is then submitted to the principal budgetary appropriations committee.  Through a combination of the subcommittees and the legislative body leadership, the process of establishing budgetary priorities takes shape.  Administrative research offices associated with the legislature, as well as the personal staff of legislators, work to coordinate the process and to offer information about various preferences and priorities, and the expected relative costs.  In the spirit of institutional checks and balances, revenue analyses are conducted by legislative research offices independently of executive research work.

Eventually, the appropriations committee’s work on the budget is compiled into a unified budget document that is discussed, amended, and eventually passed by the legislative body.  The legislative budget is then subject to approval or rejection by the political executive.  Potentially, the budget could continue to revert to the legislative body until it either overrides the wishes of the political executive or the political executive approves the budget.  In most states and in many local government jurisdictions the executive is permitted to exercise a “line-item veto” over particular budgetary items for some fixed period of time (30 to 60 days, generally), but this power is used sparingly where it is given to the governor, county commissioners or mayor.

Budget execution:  Following budget approval, budget instructions are sent to the agencies that will execute its provisions.  Budget instructions are usually rather detailed accounts of the goals and priorities of the agency — relating back both to statutory authority and county/municipal ordinances.  Budget instructions and “fiscal notes” may include expenditure rates and goals, as well as the borrowing authority permitted for some agencies dealing with capital investments.  Borrowing authority relates to an agency’s capacity to enter into loan agreements (“bonding”) for needed resources.  Some public agencies may be permitted to issue government bonds as a method of gaining resources.  Loans and bonds ultimately involve a promise of repayment of monies to a lender or bondholder, as well some amount of interest on principal.  This aspect of public budgets is particularly important where separate operations and capital budgets are prepared.  Capital projects frequently entail public borrowing, while operations budgets seldom do so.

Budget execution requires that agencies submit regular and detailed financial statements and reports to political executives and to the legislature, demonstrating that expenditures comply with established policy priorities.  If fiscal resources from another level of government come in the form of a grant, then budget execution may also include regular reports to granting agencies.  At times, an agency’s expenditures will exceed the amount budgeted to it.  In the executive phase, agency budget administrators promptly alert political executives and legislators of possible shortfalls in needed resources.  This relatively rare event occurs when there are either unanticipated problems (e.g., a natural disaster) or a serious breakdown of administrative processes occurs; such unusual events can result in mandated budget cuts or the identification of other sources of resources through new or increased fees, through tax rate enhancements, or through the sale of public assets.

Post-Audit:  At the end of the budget cycle, public agencies are held accountable for their spending actions.  The system of accountability that is used in state and local government involves either an independent or in-agency audit of the financial records of agencies.  The purpose behind the audit is to ensure that public funds were spent in accordance with the goals and priorities intended, and to determine if any resources were misused or wasted in the process of carrying out the people’s business.  If an audit is positive, the fiscally responsible agency might benefit by finding its budget requests funded during the next budget cycle.  Conversely, shoddy recordkeeping and poor financial expenditure choices might negatively impact an agency and the provision of public funds for its priorities.

Sustainable Budgeting and Sources of Revenue

State and local governments are the bedrock of the U.S. federal system.  The budgetary decisions made at these levels of government have a tremendous influence on the lives of citizens, public agencies, community organizations, and businesses.  For example, some areas affected by state and local budgeting include public safety services, lifestyle choices and living arrangements; spending patterns; business development or relocation.  In order to attract citizens and businesses, states and local governments must contribute to the development of a welcoming, economically rewarding, and sustainable economic environment.  New residents wishing to settle down and raise families, building their personal and professional lives in a place where they feel secure, often need the assurance of a lasting commitment on the part of government and the nonprofit and private sectors where they wish to reside.  In many ways durable commitment is a key element in sustainability.  Commitment to a secure quality of life in a specific place on the part of the public, nonprofit and private sectors often requires dedicated, reliable, and persistent revenue investment in sustainable governance and enterprise support.

In a real sense, revenue collected from taxpayers represents a commitment on the part of citizens to sustainability: commitment, after all, is a two-way street of mutual obligation.  Most satisfying to community members is the view that the money being paid to the government in the form of taxes and fees is based on a fair and equitable foundation.  Likewise, revenue collected must be steady and predictable so that government can build budgets that focus on meeting the commitment of sustainability.   Agreement on equitability and predictability, however, is a major challenge to state and local revenue collection systems, and both inequitability and unpredictability are frequently the source of public dissatisfaction.

Taken in combination, state governments collect approximately one half trillion dollars per year in revenue.  This revenue is collected in a variety of ways, to include the following typical categories of state receipts:

Commonly Recognized Taxes

• Sales and gross receipts taxes
• Personal income taxes
• License fees
• Corporate income taxes
• Property taxes
• Severance taxes
• Inheritance taxes

Other taxes:

• Death taxes
• Gift taxes
• Stock and documentary transfer taxes

Sales and gross receipts taxes:  Sales taxes are those taxes paid on everything sold in retail transactions ranging from clothing to food in the goods category, to personal and corporate services such as medical and Internet services in the services category.  Forty-five states and the District of Columbia impose sales taxes.  Each state has the authority to set its own sales tax rate, and these rates often differ considerably leading to cross-state travel to avoid higher taxes in “border areas” (e.g., high “sin taxes” on tobacco and alcohol in Washington versus low taxes in Idaho).  In most American states unprepared food items are not subject to a sales tax: only five states make unprepared food subject to sales tax, with Tennessee imposing the highest tax rate on unprepared food (six percent).  Taxing unprepared food is often thought to impose a higher cost on low-income individuals and families, and this type of tax can be viewed as unfair or inequitable as a clear consequence.

Sales taxes fall within the general category of excise taxes — these are taxes related to consumer consumption behavior.  Beyond sales taxes, three other commonly known forms of excise taxes are motor fuel taxes, cigarette taxes, and distilled spirits taxes.  Motor fuel taxes generally are used to fund road construction and road and bridge maintenance.  Cigarette taxes are used generally by state governments to fund public health and education programs.  In many states where cannabis has been legalized for medical and recreational use, these excise revenues are dedicated to public education and public health purposes.  Tobacco product taxes are potentially inequitable, given that smokers are commonly from lower income brackets.  Nevertheless, it is thought that by increasing the cost to smokers through high excise taxes the state can cause demand for tobacco products to decline, likely leading to improved community health and economic sustainability.  Nearly all states have cigarette and distilled spirits taxes,  but the rates vary significantly from state to state.

According to a 2024 Tax Foundation study (2024):

• Local sales taxes are collected in 38 states (e.g., counties and cities).
• The five states with the highest Average Combined State and Local Sales Tax Rates:
  • Louisiana: 9.56%
  • Tennessee: 9.55%
  • Arkansas: 9.45%
  • Washington: 9.38%
  • Alabama: 9.29%
• Sales tax rates differ by state, and the tax base also impacts revenue collection and economic effects.
• The sales tax rate differentials can influence consumer behavior, causing them to shop across borders or buy some products online.

Table 11.1 Effective State and Local Tax Rates—2024

Higher Rates		Lowest Rates
New York	15.9%	Alaska	4.6%
Connecticut	15.4%	Wyoming	7.5%
Hawaii	14.1%	Tennessee	7.6%
Vermont	13.6%	South Dakota	8.4%
California	13.5%	Texas	8.6%
New Jersey	13.2%	Michigan	8.6%
Illinois	12.9%	North Dakota	8.8%
Virginia	12.5%	South Carolina	8.9%
Delaware	12.4%	Georgia	8.9%
Maine	12.4%	Oklahoma	9.0%

Personal Income Tax:  One common method of collecting state and local revenue — state-level individual income tax — is used in 43 states and the District of Columbia.  According to another Tax Foundation study on income taxes (2024).

• Individual income taxes are a major source of state government revenue, accounting for 36 percent of state tax collections.
• Forty-three states levy individual income taxes.  Forty-one tax wage and salary income, while two states — New Hampshire and Tennessee — exclusively tax dividend and interest income.  Seven states levy no income tax at all.
• Of those states taxing wages, eight have single-rate tax structures, with one rate applying to all taxable income.  Conversely, 33 states levy graduated-rate income taxes, with the number of brackets varying widely by state.  California and Missouri each have ten brackets, the most in the country.
• The lowest bracket income tax rate is found in Iowa (0.36%), and the highest bracket rate is found in Oregon (9.9%).  Six states have a flat rate for state income taxes.  The highest flat rate state income tax is in Massachusetts (5.1%).  State personal income taxes are the second largest source of revenue for states with income taxes (and the District of Columbia).

License Fees:  License fees are collected by state government for a variety of activities.  States collect license fees from businesses and individuals who incorporate within their borders.  Businesses usually identify states with low incorporation fees (for example, Delaware and Nevada charge quite minimal fees) to reduce their costs of operation.  Fees may also be collected for use permits for hunting, fishing and recreation in state parks.  License fees are the third largest source of revenue for the states in total. License fees are usually “visible” only to those individuals and corporate entities that are required to pay them.  Nevertheless, the cost associated with the fees, particularly in the case of business-related license fees, generally are passed on to consumers in the form of higher prices.  License fees associated with hunting, fishing and outdoor recreation may be more visible to individuals, but only to those individuals interested in doing hunting, fishing and recreation in particular locations.  In regard to sustainability, license fees can be used to encourage certain types of business and recreational behavior deemed beneficial to states and communities; at other times, license fees may actually drive away business development needed for sustainable economies or encourage overuse of state recreational areas, producing environmental degradation.  Fees associated with extractive water use and recreation on lakes and waterways are of particular importance in this regard, and many sustainability efforts are aimed at the strategic imposition of fees that promote the conservation of natural resources.

Corporate Income Taxes:  Corporate income taxes are another important source of state revenue.  Business development and retention is a key element in developing a sustainable economic base.  Businesses provide jobs to individuals, which in turn help finance other aspects of local economies.  Businesses also contribute to other forms of state revenue, such as license fees.  In order to attract and retain businesses, state corporate income tax rates must be competitive with other states and communities.  If tax rates are too high, corporations might find it more lucrative to relocate their corporate offices and manufacturing facilities elsewhere.  In many cases, corporations find overseas locations more economically beneficial because corporate income tax rates typically are very low and prevailing wages are likewise low.  Many states in the Northeast and California in the West have relatively high corporate income tax rates, ranging from 7 to 9 percent.  The highest state corporate income tax rate in 2024 is found in New Jersey, at 11.5%.  The lowest state corporate income tax rates can be found in several Midwestern and Western states.  Most American states that have corporate income taxes impose flat rates, meaning a single rate regardless of income level (Tax Foundation, 2024).

Severance Taxes:  Severance taxes are tax payments imposed on the extraction of natural resources.  States own sub-surface mineral rights, some own forestlands, and many protect fish runs through their ownership of surface waters.  When natural resources are extracted through activities such as mining, timber harvesting or fishing, the states can collect excise taxes on earnings derived from those extractive activities.  From a rights-based perspective, the state collects taxes on resources that technically belong to all citizens.  The tax money collected represents a portion of the price the state is charging extractors for the resource; viewed that way, severance tax rates illustrate the very low price American private enterprise pays for extractive rights to natural resources such as oil, coal, natural gas, and water.  Of particular note, American agriculture is a particularly highly subsidized sector of the U.S. economy.

High quality, well-protected, and readily accessible natural resources are key factors in maintaining sustainable states and local communities in many areas of the country.  Unless the resources in question are renewable, the extraction of resources could represent a decline in sustainability potential.  Hydrocarbon fuels are destroyed through combustive processes, making them non-renewable as energy sources; and while use of these resources is not a sustainable practice, hydrocarbon-based fuels remain the principal foundation of the world’s energy portfolio.  Technically, fisheries and timber are renewable resources, but due to restraints on habitat (for example, hydroelectric dams blocking salmon runs) and aggressive timber harvesting, these natural resources require the collective aid of humankind and the power of government regulation and planning to retain or regain levels of sustainability.  Additionally, the viability of plant and animal communities may be compromised during the process of resource extraction by mining, fishing, and large-scale timber harvesting.

In the now famous case, Northern Spotted Owl v. Hodel 716 F. Supp. 479 (W.D. Wash. 1988), U.S. District Court Judge Thomas Zilly decided in favor of the preservation of an endangered species over the continuation of intensive timber harvesting, particularly old growth timber in the Pacific Northwest.  The case represents a landmark decision that illustrates a governmental commitment to sustainability and the active pursuit of social and environmental justice through governmental action.  This federal court decision has had a widespread impact on state and local governments throughout the country.  This decision made it clear that the pursuit of sustainability entails much more than the sustainability of a regional lifestyle and the continual meeting of societal demands for natural resources and products derived from their extraction.  Rather, human needs and wants must be understood in the context of a broader view of ecological sustainability, not solely constructed as a zero-sum game in which the natural environment loses while human society gains (in the short term).  The court’s interpretation of the Endangered Species Act as seen in the Spotted Owl decision dictates that those extracting natural resources must consider much more than profits gained.  Severance taxes go a small way towards the recognition of the environmental loss associated with many forms of resource extraction.  Additionally, the taxes levied in this area raise the price of resources extracted, accounting for the hidden costs associated with the reduction of environmental degradation and reducing the demand for non-renewal natural resources.

Revenue: Past and Future

Spending is up in state and local government, nonetheless revenue streams are tightening.  How is this seemingly imbalance possible?  Good revenue streams exist, but balancing concerns for equity and sustainability is a key aspect of sustainable budgeting.  In the past, property taxes and income taxes were highly touted methods of revenue generation.  In recent decades, however, the property tax has come under severe political attack.  In 1978, California voters passed a property tax limitation measure known as Proposition 13 that severely constrained the property tax as a revenue stream for state and local government in that state.  In the decades since the passage of Proposition 13, voters in several other states have supported tax and expenditure limitation measures (TELs), resulting in decreased reliance on broadly based taxes (specifically property taxes: Here are some examples:

• Massachusetts: In 1980, voters approved Proposition 2½, which limits property tax increases to 2.5% per year and restricts the amount of property tax revenue a city or town can collect to 2.5% of the total value of all taxable property.
• Oregon: Measure 5, passed in 1990, limits the property tax rate for schools to $5 per $1,000 of assessed value and for other government services to $10 per $1,000 of assessed value.  Measure 50, passed in 1997, further reduced property tax rates and capped annual property value increases at 3%.
• Colorado: The Taxpayer’s Bill of Rights (TABOR), approved in 1992, restricts revenue growth for state and local governments and requires voter approval for any tax rate increases, new taxes, or the incurring of debt.
• Florida: The Save Our Homes Amendment, passed in 1992, caps the annual increase in assessed value of homestead properties at 3% or the rate of inflation, whichever is lower.
• Arizona: Proposition 117, approved in 2012, limits the annual increase in the assessed value of real property to 5% for tax purposes.

Primary reliance on income and sales taxes persists in America, but questions of equity remain.  Elderly and low-income individuals, for instance, may be unduly burdened by income taxes.  Sales tax rates have risen, and in many cases, rate increases have been linked to specific program needs such as the building and maintenance of transportation infrastructure.  For example, California has increased sales taxes to fund transportation projects through measures such as Proposition 1B.  Similarly, in Washington State, the Sound Transit 3 Plan raised sales taxes to finance regional transit expansions.  In their study of California taxes, Crabbe and his associates conclude that citizens may find tax rates and increases (specifically sales tax rates) acceptable if taxes can be clearly linked to specific program benefits (Crabbe et al., 2005).  Arguably, this finding is largely consistent with a more market-oriented society wherein individuals have become accustomed to think in terms of specific governmental expenditures for tangible products.

With respect to predictability, it must be noted that both sales and income taxes are closely tied to economic cycles.  In this regard, the rise and decline of the “tech bubble” left some state and many local government revenue streams in a rather precarious situation at a time of great need.  Between March 2000 and October 2002, the NASDAQ fell from 5,048 to 1,139, erasing nearly all its gains during the dot-com bubble.  By the end of 2001, most publicly traded dot-com companies had failed.  State budget processes have generally adjusted to revenue instability by tightening up spending commitments and through the artful display of political leadership.  Government’s demonstration of fiscal restraint as a timely action and government accountability as a priority are principal examples this political leadership.  Former Arkansas Governor Mike Huckabee [a candidate for the Republican Presidential nomination in 2008] argued that political leaders must make citizens aware of fiscal constraints and their impact on budget choices (Lauth, 2003).  Making empty promises about budget inclusions only sends false signals to citizens about governments’ ability to provide services in times of financial stress.  Sustainable budgeting requires honest and open government and thoughtful leadership alike, with leaders taking on the responsibility of citizen education.

Despite prospects for another recession, the longer-term future may not be unduly grim with respect to government revenues; nonetheless, contemporary state and local government budgeters will need to make tough decisions regarding the three Es of sustainability – a vibrant economy, a healthy environment, and the active promotion of social equity.  Writing during an earlier period of fiscal constraint, the proponents of reinventing government David Osborne and Ted Gaebler called upon state and local government leaders to become more entrepreneurial in their search for revenue and the operation of their agencies, to look for major bargains in their acquisitions processes, and to experiment actively with new methods and techniques of governing (Osborne and Gaebler, 1992).  Budgeting in today’s challenging times calls for the same level of pragmatism, being realistic about revenues, expenditures, and the needs of citizens.

Revenue management in state and local government also entails making well-considered investments.  Osborne and Gaebler’s model for budgeting during tough economic times shows the importance of concentrating spending in areas that produce future revenue, even though that type of prioritization might cause some pain and inequity in the short run (Bowen et al., 2006).  In another model of budgetary allocations in times of highly constrained budgets, Bowen and his colleagues found that budgetary expenditures (“investments”) made in urban areas produced a greater return on investment than similar investments made in rural areas.  Such calculations are rather commonplace in U.S. state governments since the U.S. Supreme Court’s ruling in  Reynolds v. Sims, 377 U.S. 533 (1964).  This was a landmark case in which the Supreme Court ruled that the electoral districts of state legislative chambers must be roughly equal in population.  Rural areas lost much of their earlier influence as upper chambers open featured the disproportionate representation of rural areas.

Revenue collection and management in state and local government is more than simply fine-tuning a tax system — it is also about effective enforcement and prevention of tax evasion.  State and local government systems operating under fiscal stress must strive for both efficient and effective tax enforcement and debt collection.  Enforcement may be easier today than in the past given the advent of electronic banking and financial transactions.  Former Nevada State Controller Kathy Augustine, as with her counterparts in other states, found during her term of office that the use of evermore powerful digital information technology in tax enforcement was highly effective (Augustine, 2002).

One major revenue stream for state government comes from the 1998 tobacco settlement discussed in earlier chapters.  One element of the Master Agreement requires that “U.S. tobacco companies…pay approximately $229 billion between 1999 and 2025 to 46 states, the District of Columbia, and five U.S. territories (Johnson , 2004).  Johnson found that states are using the tobacco settlement monies primarily for health care provision, public education, infrastructure projects, and as the basis for debt issuance.  Nevertheless, state budget makers consider this funding a short-term fix to any future revenue problems beyond 2025.

The 2021 National Opioids Settlement is providing additional future funding as the tobacco settlement fades out of the fiscal picture for state governments. The National Opioids Settlement includes several agreements with major pharmaceutical companies, including Johnson & Johnson, and the three largest drug distributors: McKesson, Cardinal Health, and AmerisourceBergen.  The settlement involves payments totaling up to $26 billion over 18 years. Additionally, Purdue Pharma, the maker of OxyContin, reached a separate settlement that includes billions of dollars and a major restructuring of the company.  The major provisions of the settlement include:

• Funding for Opioid Abatement Programs:  States will receive significant funds dedicated to addressing the opioid crisis.  This includes programs for prevention, treatment, recovery, and harm reduction.  The funds are intended to support a range of initiatives, such as expanding access to addiction treatment services, providing support for affected families, and enhancing educational campaigns about the risks of opioid misuse.
• Budget Relief:  The settlement funds will provide financial relief to state budgets strained by the costs of addressing the opioid crisis.  This includes healthcare costs, law enforcement, social services, and other expenses related to the epidemic.  By offsetting these costs, states can allocate more resources to other critical areas of need.
• Long-Term Financial Planning:  The multi-year nature of the payments allows states to plan for long-term strategies to combat the opioid epidemic.  This sustained funding stream ensures that states can implement comprehensive and sustained efforts rather than short-term fixes.
• Legal and Administrative Costs:  A portion of the settlement funds may be used to cover the legal and administrative costs associated with the litigation and settlement process. This includes attorney fees and the costs of administering the funds at the state and local levels.

Overall, the National Opioids Settlement represents a significant financial infusion for states to address one of the most pressing public health crises in recent history.  It offers a crucial opportunity for states to invest in long-term solutions and mitigate the devastating impacts of the opioid epidemic on their urban and rural communities. ​​

Federal Grants-in-Aid:  A Key Source of Revenue

Federal grants-in-aid are transfers of governmental revenues from the national to state and local governments.  There are a variety of types of federal grants.  Categorical grants entail funds given to the state and local level for the accomplishment of specific purposes specified in federal statute and enumerated in considerable detail in administrative rules and regulations.  When the federal government offers categorical grants to state and local governments, it expects goals to be accomplished and attendant conditions to be maintained in the course of grant-funded work being done (e.g., workplace safety standards, the use of prevailing wage rates, nondiscrimination in hiring and in workplace treatment, etc.).  In contrast, the amount of federal grant money available to a state or local government in a formula grant is not tied to goal accomplishment, but rather is dependent on the population of individuals living in the recipient state or local government who qualify for a benefit or service to be provided by the state or local government involved.

As with categorical grants, formula grants are usually given to a state or local government to accomplish a national policy goal adopted by Congress.  Categorical and formula grants are usually directed towards specific state and local units of government facing particularly difficult policy dilemmas (e.g., high incidence of domestic violence, the presence of endangered or threatened specifies, a high level of incidence of infectious disease) or are widely available to all state and local governments willing to make an effort to address a public problem (e.g., conduct a hazardous material in transport study for emergency management planning, promote the recycling of waste materials, etc.).  Alternatively, competitive grants require that state and local governments demonstrate their need for resources as well as develop innovative policy proposals for how a national public policy goal would be addressed in a favorable way if the requesting government was awarded the grant monies.

Unlike competitive grants, block grants do not require a state or a county or municipal government to follow strict grant guidelines in policy development or implementation.  Rather, grant recipients exercise a great deal of discretion in establishing policy goals and developing innovative implementation strategies.  The goal of block grants is to provide seed money for the development of local government policy innovations.  While block grants have the obvious potential to be misused and wasted, they typically have been used to great benefit to promote sustainable community development, globalization of the economic processes, and mediation of the effects of global climate change.

Federal Grants for Transportation

Beyond doubt, sustainable communities will require more energy-efficient modes of transportation.  The cost of fossil energy is high and vehicle emissions are a growing concern for climate change phenomena.  Renewable energy and hybrid vehicles face escalating demand and short supply.  Mass transportation systems might be one very important method of reducing demand for fossil energy.  Alternative energy mass transportation vehicles are becoming increasingly visible in society — natural gas and clean bio-diesel-powered buses are now quite common across the nation.  Similarly, cutting-edge hydrogen powered buses are part of several mass transportation demonstration projects in the U.S., and in major several cities abroad.  Nevertheless, it is fair to say that federal transportation-related grant trends would seem to provide more support for a tenuous status quo than promote more efficient and sustainable transportation schemes.

For leaders and administrators functioning at the state and local level, sustainable transportation requires grassroots policy innovation and funding.  Many states have instituted their own transportation and energy initiatives to counteract the rather tepid commitment of the federal government to support transportation policy renewal through more generous grants-in-aid.  Also, rebuilding city centers and developing high concentration housing units, such as condos, may increase use of public transportation and bring about subsequent reductions in our longstanding reliance on the personal automobile.

President Biden’s infrastructure bill, formally known as the Infrastructure Investment and Jobs Act (IIJA), was signed into law on November 15, 2021.  This landmark legislation represents a significant federal investment in the nation’s infrastructure, addressing a wide range of needs across various sectors.  Here’s an overview of the bill and its impact on state and local budgets.  The IIJA allocates approximately $1.2 trillion over the next decade to various major infrastructure projects, with $550 billion in new federal spending above baseline levels.  The funding targets critical areas such as transportation, broadband Internet access, public water systems, energy infrastructure, and more.  Key features of the IIJA include:

• Transportation: $110 billion to repair and upgrade roads, bridges, and major projects; $39 billion to modernize public transit systems; $66 billion for passenger and freight rail, including Amtrak improvements; $7.5 billion to build a nationwide network of electric vehicle chargers.
• Broadband: $65 billion to expand broadband access, particularly in underserved and rural areas.
• Water Infrastructure: $55 billion to upgrade water systems, replace lead pipes, and ensure clean drinking water.
• Energy and Power: $65 billion to modernize the power grid and support clean energy initiatives.
• Environmental Remediation: $21 billion to clean up Superfund and brownfield sites, reclaim abandoned mines, and cap orphaned oil and gas wells.
• Resilience and Western Water Infrastructure: $50 billion to improve infrastructure resilience against climate-related risks and enhance water infrastructure in the western United States.

The impact of the IIJA on state and local government budgets is enormous (Bonakdarpour et al., 2021; Suárez-Cuesta et al., 2023):

•  States and local governments will receive significant federal funds to support infrastructure projects.  This influx of capital reduces the need for states to finance these projects entirely through state budgets, bonds, or other financing mechanisms.
• Many federal grants require matching funds from state and local governments.  This means states will need to allocate a portion of their budgets to complement federal funds, potentially leading to increased state spending in some areas.
•  The infrastructure projects funded by the IIJA are expected to create millions of jobs and stimulate economic growth.  This can lead to increased tax revenues for state and local governments, helping to improve their fiscal health over time.
• Investing in infrastructure improvements can lead to long-term savings for state and local governments by reducing maintenance costs, improving efficiency, and preventing costly failures or emergencies.
• The improvements in transportation, broadband access, public water systems, and energy infrastructure will enhance the quality of public services, potentially leading to better outcomes in health, education, and economic opportunities for residents.
• State and local governments will incur administrative costs associated with planning, implementing, and managing the funded projects.  These costs may require adjustments in local budgets to ensure effective use of the federal funds.

Overall, President Biden’s infrastructure bill represents a historic investment in the nation’s infrastructure, providing substantial benefits to state and local governments.  It offers opportunities for economic growth, job creation, and improved public services, while also posing challenges related to matching funds and project implementation.

Federal Grants for Education

Education grants have risen steadily since 1990.  Funding for education workforce enhancement and training has increased most noticeably, largely due to the heightened emphasis on teacher quality and retention.  Education and social services funding has also grown in response to a new understanding of the link between educational achievement and the social conditions of student learners.  Federal funding for special education and the education of disadvantaged students constitutes a significant portion of the federal funds transferred to states and local governments in the form of grants-in-aid.  However, funding for school building improvements has declined, despite growing awareness of classroom overcrowding and school building disrepair.  School building infrastructure grants are not only crucial for current education quality, but are also vital for the sustainability of public schools as a core component of civic infrastructure.

One notable example of declining funding for school building improvements is seen in the reduction of the federal government’s investment in the modernization and repair of K-12 school facilities through programs such as the Qualified Zone Academy Bonds (QZAB). QZABs were introduced in 1997 as part of a federal initiative to help schools in low-income areas finance renovations, repairs, and improvements (Driessen and Stupak, 2016).  These bonds allowed schools to borrow at little to no interest cost.  In recent years, the funding for QZABs has been significantly reduced.  For instance, the Tax Cuts and Jobs Act of 2017 effectively eliminated new issuances of QZABs after December 31, 2017.  This legislative change marked a significant reduction in the availability of federal funds specifically earmarked for school building improvements.  The reduction and eventual elimination of QZAB funding meant that many public schools, particularly those located in underserved areas, faced greater challenges in securing the necessary funds for critical infrastructure improvements.  This decline in federal support has forced many schools to rely more heavily on state and local funding sources, which are often inadequate to meet the growing needs for technology modernization and structural repair.

Federal Grants for the Least Advantaged — Public Health and Income Security

Federal grants for public health services for the least well-off in society are critical in efforts to create and maintain sustainable communities.  A community’s level of success or failure depends on achieving both individual and collective goals.  While individual goals may be highly varied, collective goals are defined by what we share, and our common responsibility to one another as citizens.  Recognition of our collective commitment legitimizes the social contract to which we have agreed.

Our commitment to the neediest members of society is and always will be a work in progress, as we learn more about the nature of our society and the social ills shaped by demographic, socioeconomic, political, and even environmental change.  Since 1990, the federal government’s grant commitments have more than quadrupled and will likely rise even more significantly in the years ahead.  While a strong federal commitment is noteworthy as a feature of past public policy, federal grants-in-aid will continue to be necessary as states and local communities struggle to establish and maintain sustainability along multiple dimensions.

For example, the COVID-19 pandemic created unprecedented challenges for public health systems worldwide.  In the United States, federal grants played a crucial role in supporting state and local responses to the pandemic, particularly in those communities with limited resources.  The 2019 Coronavirus Aid, Relief, and Economic Security (CARES) Act, the 2021 American Rescue Plan Act (ARPA), and other federal relief packages provided billions of dollars in grants to state and local governments to manage the dislocations occasioned by the pandemic. These funds were used for a variety of critical activities.  Federal grants enabled the rapid expansion of healthcare infrastructure, including the establishment of temporary hospitals, procurement of ventilators, and enhancement of testing and mass vaccination capacities.  This support was essential in preventing healthcare systems from being overwhelmed in many areas of the country.

Funding was allocated to state and local health departments to facilitate mass vaccination campaigns. Grants supported the setting up of vaccination sites, the logistics of COVID-19 vaccine distribution, and public education campaigns to increase vaccine uptake and booster administration.  Federal grants also provided direct economic relief to individuals and businesses affected by the pandemic.  Programs such as the 2019 Paycheck Protection Program (PPP) and enhanced unemployment benefits helped stabilize the economy by supporting those who lost jobs or faced business disruptions.  Federal grants during the COVID-19 pandemic exemplify the importance of federal support in managing public health crises.  These grants helped mitigate the immediate impacts of the pandemic, supported recovery efforts, and provided a foundation for building more resilient public health systems.  By addressing urgent health needs and supporting economic stability, federal grants contributed significantly to the overall well-being and the  sustainability of communities across the nation.

Federal Grants for Children, Families, and Veterans

Commitment to children and families has risen enormously since 1990.  While some might applaud the growing commitment, it signals critical disparities in our states and local communities that American society, through private actions, public policy, and budgetary choices, has determined must be overcome if sustainability is to be achieved.  The decline in Temporary Assistance to Needy Families (TANF) in terms of grant funding might in part be explained by the success of President Clinton’s collaborative efforts with a Republican congressional majority to hammer out welfare reform provisions; those reforms resulted in moving many individuals off welfare rolls and into the active workforce.  Alternatively, it has been argued that TANF and welfare reform has resulted in an ebbing commitment to families (Byers and Pirog, 2003; Chernick and Reschovsky, 2003) — the decline in grant funding started shortly after Republicans regained control of both chambers in Congress in 2003.  While TANF has succeeded in reducing welfare rolls, it has been criticized for not adequately addressing poverty and for the challenges it poses to recipients in meeting work requirements and navigating state variations in program support.

During the COVID-19 pandemic, Temporary Assistance for Needy Families (TANF) underwent several changes and adaptations to address the unique challenges posed by the public health crisis.  These changes were aimed at providing additional support to families in need and ensuring the continuity of services despite disruptions.  States were given increased flexibility to modify TANF program requirements and eligibility determination processes (Shantz et al., 2020).  This included waivers for certain work participation requirements, allowing states to temporarily suspend or adjust these rules to accommodate the realities of the pandemic, such as job losses and reduced availability of work opportunities.  States were encouraged to use TANF funds to provide emergency assistance to families affected by the pandemic.  This included one-time payments or short-term assistance to help families meet urgent needs such as rent, utilities, medicine, and food.

Another significant federal social program that states implement is the Supplemental Nutrition Assistance Program (SNAP).  SNAP is primarily funded by the federal government, which covers the cost of benefits and splits administrative costs with the states.  The federal government pays for 100% of the benefits and about 50% of the administrative costs.  States are responsible for administering the program, determining eligibility, and ensuring compliance with federal guidelines.  While the direct cost of SNAP benefits does not impact most state budgets significantly, the administrative expenses shared with the federal government do.  These costs can be substantial, especially in states with high participation rates.  States need to invest in eligibility systems, staffing, and infrastructure to effectively manage the program, which can be a significant budget item.  SNAP benefits have an economic multiplier effect, as funds provided to recipients are spent primarily on food, stimulating local economies.  This can indirectly benefit state economies and potentially increase state tax revenues.  During serious economic downturns, increased SNAP enrollment can provide a counter-cyclical boost to the economy, which can be beneficial for state budgets (Canning and Stacy, 2019).

In summary, both TANF and SNAP can have substantial impacts on state government budgets through their funding structures, administrative responsibilities, and economic effects. TANF, funded by federal block grants and state contributions, requires states to balance the allocation of fixed federal funds and their own Maintenance of Effort (MOE) spending.  States must navigate the financial realities of managing limited budgetary resources while ensuring that low-income individuals and families receive adequate support.  This balancing act requires efficient management and innovative approaches to maximize the effectiveness of TANF and SNAP programs.  Both programs’ economic impacts underscore the importance of aligning state budgets with broader goals of reducing poverty, enhancing food security, and actively promoting economic stability and resilience.  Thus, the financial implications of TANF and SNAP extend far beyond immediate budgetary concerns, influencing long-term economic and social outcomes for states.

Federal grants for veteran’s programming at the state and local level has been flat for several years, despite the rise in the number of disabled veterans resulting from having conducted warfare in Afghanistan and Iraq.  Veterans of the Second World War, Korea, Vietnam, and the Persian Gulf War eras have been joined by veterans of more recent military commitments arising from the Global War on Terrorism.  Rather incredibly, federal grant monies have remained rather steady in nominal terms — and if inflation were factored in, the amount of grant money being provided for veterans’ programming has actually declined in real terms (Nelson, et al., 2024).

State and Local Budget Expenditures

Budget expenditures are a good way of determining the priorities of state and local governments.  In looking at total state budget expenditures, it is evident that education and public welfare represent over one half of all state budget expenditures.  The third most common expenditure is for Insurance Trust Funds, an allocation that covers public employee retirement benefits and private sector unemployment insurance.  Highways and bridges and health/hospital expenditures also constitute large portions of state government expenditures.  All other functions of government — for example, law enforcement, corrections, state and local courts, natural resource management, and utilities — are covered by less than one quarter of the total state budget expenditures.  The area of Veterans’ Services garners only minute fractions of total state budget expenditures.  State governments allocate their budgets to various critical areas such as education, welfare, and healthcare, among others.  Here is a breakdown of the typical largest state government budget expenditures based on the most recent data available:

Education:  Education remains a pivotal area of expenditure for state governments, reflecting its critical role in fostering economic growth and promoting social well-being.  In 2022, the average spending per student in public elementary and secondary schools reached $16,340, marking a significant increase from previous years.  This expenditure encompasses both federal contributions and state funds, highlighting the collaborative effort to support public education systems.  The allocation of these funds covers a wide range of educational needs, including teacher salaries, classroom resources, infrastructure maintenance, and the provision of special education programs.  State governments also invest in early childhood education, after-school programs, and other initiatives aimed at improving educational outcomes and closing achievement gaps.

The federal government provides education funding through various programs, such as Title I grants for disadvantaged schools, Individuals with Disabilities Education Act (IDEA) funding, and nutrition programs such as the National School Lunch Program.  These funds are essential for supporting specific student populations and ensuring equitable access to an elementary and secondary education.  State governments are primarily responsible for funding public education.  They allocate a significant portion of their budgets to ensure that schools can meet operational costs, implement state-mandated educational standards, and offer competitive salaries to attract and retain qualified teachers (National Association of State Budget Officers, 2022).

In the United States, there is significant variation in how much states spend on public education per pupil.  As of 2024, New York is the state with the highest expenditure on education, allocating $30,282 per student.  This high level of spending is followed by other states such as Vermont, New Jersey, Connecticut, and Massachusetts, all of which spend over $22,000 per pupil annually.  These New England states prioritize education funding significantly above the national average of around $12,612 per pupil.  On the other end of the spending spectrum, states such as Idaho and Utah spend the least on public education.  Idaho spent approximately $8,748 per student in 2024, while Utah spends about $7,628 per student in that fiscal year.  Other states with low per-pupil spending include Oklahoma, Arizona, and Mississippi, all of which allocate less than $10,000 per student annually.  These figures illustrate the broad disparities in educational investment across different states, with some states investing substantially more resources into their education systems compared to others​ (Data Pandas, 2024).

Welfare Programs:  Welfare expenditures, which include Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP) funds, also constitute a significant portion of all state budgets.  Medicaid, a major component of welfare spending, saw a notable increase of 11.5% in fiscal year 2022 (National Association of State Budget Officers, 2022).  Both TANF and SNAP were previously discussed in this chapter, however a third large program is Medicaid is a critical component of welfare spending, representing a significant share of state budgets.  Medicaid provides health coverage to low-income individuals and families, including children, pregnant women, elderly adults, and people with disabilities.  In fiscal year 2022, Medicaid spending saw a notable increase of 11.5%, reflecting the growing demand for healthcare services and the expansion of Medicaid eligibility under the Affordable Care Act (ACA) in some states (National Association of State Budget Officers, 2022).

Healthcare:  State governments allocate substantial portions of their budgets to healthcare services beyond Medicaid.  These expenditures are essential for maintaining public health, supporting mental health services, and developing healthcare infrastructure.  States fund a variety of public health programs aimed at disease prevention, wellness-focused health promotion, and emergency preparedness.  These programs include vaccination campaigns, infectious disease control, health education, and initiatives to address chronic diseases such as diabetes, respiratory illnesses, and heart disease.  Public health funding also supports maternal and child health services, environmental health programs, and efforts to combat public health crises such as the opioid epidemic.

State budgets often include significant funding for mental health services.  These services provide crucial support for individuals with mental health conditions through community mental health centers, inpatient psychiatric hospitals, and outpatient treatment programs.  Funding is also allocated for crisis intervention services, substance abuse treatment, and initiatives to reduce the stigma associated with mental health issues.  Mental health funding aims to ensure that individuals receive the care they need, improve overall community health, and reduce the burden on emergency services and the criminal justice system.  States also invest in healthcare infrastructure to ensure that clinic and hospital facilities are available and equipped to meet the needs of their populations.  This includes funding for the construction, renovation, and maintenance of hospitals, clinics, testing laboratories and other healthcare facilities.  Investments in healthcare infrastructure also cover the implementation of social media-based public health information technology systems, computer-based networks which improve the efficiency and quality of care through better data management and coordination among healthcare providers (National Association of State Budget Officers, 2022).

In the United States, spending on social welfare programs varies significantly among states, largely due to differences in fiscal capacity and public policy priorities.  States with higher per capita incomes tend to spend more on social welfare programs per capita compared to states with lower mean incomes.  States such as Massachusetts, New York, and California are among the highest spenders per capita on social welfare programs.  Massachusetts, for instance, is well known for its generous social services and healthcare programs.  These states have robust state-funded programs in addition to federal assistance, resulting in higher overall per capita spending on social welfare.  On the other hand, states such as Mississippi, Alabama, and Arkansas spend the least per capita on social welfare programs.  These states generally have lower fiscal capacities, which limits their ability to allocate state funds towards these programs.

Local government expenditures in the United States are heavily focused on education, with approximately one-third of total local government spending dedicated to elementary and secondary education.  Public assistance expenditures account for roughly one-quarter of local government budgets, reflecting the significant role local governments play in social welfare programs.  Allocations to insurance trust funds, which include pensions and other employee benefits, represent between 15-20 percent of total local government expenditures.  The remaining expenditures, slightly over a quarter, cover a range of other government services such as fire departments, parks and recreation, and criminal justice functions, including courts, jails, probation services, and law enforcement.  This broad distribution of funds highlights the diverse responsibilities local governments have in providing essential services to their communities while managing fiscal constraints and prioritizing budget allocations effectively (National League of Cities, 2021; United States Census Bureau, 2021).

Key expenditure areas for local governments typically include:

• Education:  Funding for K-12 education is one of the largest expenditures for local governments.  This includes salaries for teachers and staff, infrastructure maintenance and improvements, transportation, and educational materials; local governments often support public libraries, providing funds for operations, new acquisitions of books and internet-based services software and hardware, and community programs.
• Public Safety:  Significant portions of local budgets are directed towards law enforcement, including salaries, vehicles, equipment, communications channels, training, and community policing crime prevention initiatives.  Funding for fire services includes salaries, equipment, vehicles, maintenance of fire stations, and emergency response programs; local governments often fund Emergency Medical Services operations to ensure timely medical responses in emergencies.
• Public Works and Transportation:  Infrastructure maintenance, which includes the upkeep of water systems, public roads, bridges, and public transit systems.  It also covers waste management and recycling services; local governments may invest in public transportation systems to improve mobility and reduce traffic congestion.
• Health and Human Services:  Public support for health clinics, disease prevention programs, mental health services, and health education; local governments can also provide support for programs such as child welfare, senior services, and assistance for low-income families.
•  Parks and Recreation:  Parks maintenance including the upkeep of public parks, recreational facilities, and community centers; local governments can also fund various recreational programs and activities for residents, including sports leagues, fitness classes, and cultural events.
• Utilities and Environment: Local governments manage water supply, sewage treatment, and storm water management; they provide environmental services that include waste management, recycling programs, and initiatives to promote environmental sustainability.
• Housing and Community Development:  Funding for programs aimed at increasing affordable housing availability and supporting housing stability; local governments can invest in urban renewal projects, neighborhood revitalization, and various types of economic development initiatives.
• General Government and Administrative Services:  This includes salaries for government officials and staff, office supplies, and operational costs for government buildings; funding for local courts, public defenders, and legal aid services.

These expenditure areas highlight the broad range of responsibilities that local governments have in providing essential services and maintaining infrastructure for their communities.  Managing these diverse needs requires effective budget planning and resource allocation to ensure that all critical services are adequately funded.

Budget Reforms

Over the years, state and local governments have tried to use various techniques to manage expenditures more effectively while accomplishing goals related to good governance.  In many cases, budgetary techniques have been driven by partisan politics, and these techniques have proven to be myopic in design and self-limiting in execution (Gosling, 2009; Musso et al., 2006).   At times, attention has been focused on the input side of budgeting — essentially, tightly controlling agency spending as a method of increasing efficiency in the budget process.  Spending control has been attempted through state-level debt limitation measures and the use of the executive line-item veto.  At other times, some states and local governments have focused on the output side of budgeting — through control of public spending.  Finally, the methods by which services are delivered have also been related to the budget process and the promise of more efficient and effective budgeting and related policy outcomes.

Debt limitation measures are commonly found at the state and local level.  Most states (Hou and Smith, 2006) and virtually all-local governments require that annual budgets be balanced.  Revenue in balanced budgets could be in the form of tax revenue, intergovernmental transfers, or revenue derived from bond issuances.  These forms of revenue are monitored and approved by state and local governments.  Debt issuance limitations prove to be very important in maintaining a long-term rational budgeting process (Denison et al., 2006).

Another method of controlling the input side of budgeting is the executive line-item veto.  We often hear about the line-item veto in terms of presidential politics.  Presidents have requested a long-term solution to the budgeting process that would result in line-item veto authority.  The line-item veto is often believed to be a solution to out-of-control wasteful spending habits.  In a study of Georgia’s line-item veto, it was found that the executive power was often not used for the purpose of removing spending categories (Lauth and Reese, 2006).  Instead, Georgia’s governors have used the power principally to influence the construction of budget documents.  Interviews with former governors, such as President Jimmy Carter, find that the threat of line veto is far more common than the actual use of the power in the budget process.

Performance-based budgeting is an important part of connecting expenditure to outcomes (Kelly and Rivenbark, 2003).  Performance-based budgets link requests for resources with detailed documentation illustrating the outcomes of budget choices made in previous years.  If sustainability is to be attained under budget constraints it will be necessary for budget writers to understand how efficiently and effectively expenditures are at accomplishing stated legislative goals.  Since the budget process is cyclical and iterative, accurate verifiable information about outcomes in the previous budget cycle can lead to better informed budgetary decisions in future years.  Performance-based budgeting is observed most commonly in bureaucratic agencies or related to a specific major program funded by intergovernmental transfers.  All-encompassing performance evaluations are not very common in the U.S. states.

Performance budgets are potentially critical to long-term sustainability goals despite the significant amount of time and effort necessary for their preparation.  Documentation on previous performance must be linked with previous expenditures, and then tied directly to justifications for future expenditures.  As with all budgeting techniques, performance-based budgeting remains a work in progress as better monitoring and analytical tools are developed and public sector administrators become more highly skilled in their use.  However elegant it may be in its current form, this budgeting practice will always need to be improved because public policies, societal circumstances, and budget conditions are constantly changing; this dynamism is especially true for sustainable communities.

Finally, the contracting out of government functions is frequently hailed as a method of reducing costs and creating better-managed public sector budgets.  Contracting out means that private sector providers are paid to accomplish certain government functions and the government discontinues its direct delivery of services.  Irene Rubin concludes that contracting out cannot be equated with better budgeting because contracting authority and costs are oftentimes hidden within program or agency budgets and are largely invisible to most decision makers (Rubin, 2006).  She suggests that contracting should become a budget line independent of agency or program general funds; in this way, contracting out would become more visible and its outcomes would be better understood.

Sustainable Budget Focus:  Five Key Areas of Future State and Local Budget Needs

The traditional budget categories discussed previously will continue to consume much of state and local budget revenues, but a sustainable future will require a continued and likely stronger budget commitment to growing areas of need.  Projecting need is indeed tricky business because so much about the future remains unknown to us.  Nevertheless, it is a fairly safe bet that the following five categories of expenditure will require substantial increases in state and local budget commitment soon and for the foreseeable future:

Alternative Energy Sources & Energy Conservation:  It is projected that “peak oil” will occur within in the next fifteen years — that is, if it has not already occurred.  Towards the end of the 21st century, much of the globe’s accessible petroleum will have been depleted.  Reliable access to energy is a prerequisite for modern society, and key to sustainability.  Alternative energy will likely be produced using a variety of methods.  So-called “4th Generation” nuclear energy is very likely to play a significant role in electricity generation, as is thermal energy generation.  Fossil fuel-based energy sources will continue to be harnessed in the form of coal and natural gas.  Renewable energy in the form of solar electric, solar thermal, wind generation, ocean thermal energy conversion, tidal generation, and geothermal will be used to provide a sizeable portion of state and local energy needs in future years in those locations where state and local governments have access to those renewable sources.  As we near a time when greenhouse gas emission restrictions and carbon sequestration will become quite common terminology, the development of locally suited alternative forms of renewal energy will be priority concerns for American state and local governments.  Sustainable communities will require significant participation from state and local government in the form of financial commitments to public-private partnerships and tax incentives for the development of alternative energy systems that will contribute importantly to community sustainability.

Climate Change Impacts:  Significant climate change impacts are projected to occur within the next few decades.  Depending upon the location of a community, climate change may lead to rising ocean levels and flooding, periods of severe heat and drought, increased extreme weather behavior, and more frequent occurrence of range and forest fires – to name but a few possible adverse climate-related phenomena.  The widespread destruction witnessed along the Gulf Coast produced by Hurricanes Katrina and Rita during the 2005 hurricane season; the multi-year drought in the early years of the 21st century impacting the South; and devastating wildfires in California and other Western states have all been attributed to climate change.  Preparing for highly probable and disruptive climate-related events is a key part of the pursuit of sustainability and community resiliency, and such preparation will require significant budgetary resource commitments. Climate change studies frequently tie back to the issue of carbon emissions from fossil energy use.  The development of alternative energy, as discussed previously, is an important part of meeting future energy demands, but it is also beneficial in terms of reduced carbon emissions into the atmosphere which lead to scientifically verified ozone depletion.

Infrastructure Renewal:  Infrastructure renewal is a multi-faceted phenomenon. Tremendous resource commitments are required just to maintain current infrastructure.  In the long run, commitment to maintaining infrastructure is less costly than neglect and subsequent failure.  While the previously discussed 2021 Infrastructure Investment and Jobs Act will invest heavily in aging infrastructure, here are several recent broadly publicized examples that highlight major infrastructure failures in the United States:

• Water Crisis in Jackson, Mississippi:  In 2021, Jackson faced severe water infrastructure issues.  A winter storm caused pipes to freeze and burst, leaving many residents without safe drinking water for weeks.  The aging infrastructure was unable to withstand the extreme weather conditions, highlighting the urgent need for investment in water systems.
• Texas Power Grid Failure:  During the severe winter storm in February 2021, Texas experienced widespread power outages.  The state’s power grid, operated by ERCOT, failed to meet the demand due to equipment freezing and a lack of winterization.  This resulted in millions of residents losing power and heat in freezing temperatures, leading to numerous deaths and extensive property damage – particularly in the Houston area.
• Minneapolis I-35W Bridge Collapse:  Though it occurred way back in 2007, the collapse of the I-35W bridge in Minneapolis remains a stark reminder of the horrendous consequences of infrastructure neglect.  The failure was due to a combination of a design flaw and persistent lack of proper maintenance, causing the deaths of 13 people and injuries to 145 others in the vicinity of the bridge.
• Michigan Dam Failures:  In May 2020, the Edenville and Sanford dams in Michigan failed after heavy rainfall, leading to significant flooding and property damage.  The failures displaced thousands of residents and caused extensive environmental and economic impacts.

In addition to this long-neglected problems, it is very likely that the suburban sprawl of U.S. cities, and the long commutes to and from work that are associated with this sprawl, are not sustainable.  It may well be the case that infrastructure renewal may require a commitment to re-design as well as selective renewal.  Rising energy costs may likely affect residential choice and give rise to the need for new forms of transportation infrastructure in many American population centers.

Beyond roads, many government buildings such as schools, hospitals, administrative offices, and corrections facilities are aging and beginning to show signs of disrepair.  The technology available in these buildings is often insufficient to the needs of e-government and effective data management, analysis, and transfer.  Older buildings frequently “leak” thermal energy, as well as entail the inefficient use of electricity due to poor use of natural light and antiquated ventilation.  Sustainability means, among other things, investing in upgrades and making a sincere commitment to good (“green”) design and timely maintenance.

Bio-Equity:  Bio-equity calls for equal treatment for both human society and other elements of the “biosphere,” and acting on a commitment to building communities that do not develop at the expense of the environment in which they exists.  Understanding and mandating bio-equity through regulation may have begun with the National Environmental Policy Act (NEPA) in 1969 and the passage of the Clean Air Act, the Clean Water Act, and the Endangered Species Act, but has been interpreted and has evolved on the local level to encompass much more.

Technology and Innovation:  Sustainable communities will manifest lower demands for transportation corridors and transport infrastructure if technological development and digital communications innovation continue into the future.  Public-private partnership commitments to the promotion of new environment-regarding technologies will make resource use more efficient, creating well-paying jobs while simultaneously reducing the relative cost of living.  For example, it is possible that many of the industrial manufacturing jobs of the future could be completed from home computers managing robotic systems on a distant factory floor.  In fact, much of the technology needed to expand these systems is already readily available; a budgetary commitment on the part of government might speed the process towards more widespread use of these digital technologies.  And, of course, what the long-term future holds in the way of related communication technology innovations will likely only bring us even closer to the achievement of sustainable communities.

Budgeting and the Core Dimensions of Sustainability

Budgeting establishes or formalizes communal or individual priorities.  Accomplishing goals within the core dimensions of sustainability will require effective budgeting.  Budgeting for sustainability is not a one-time event — within the sustainability paradigm, circumstances evolve and priorities change due to a combination of increased understanding and changing preferences.  The social objectives of sustainability, for instance, will change as demographics change.  As the Baby Boomer generation fades into history, a new demographic will likely emerge — a more youthful, more energetic, more mobile, and more diverse society lies ahead.  Investing in human capital will become more complex as traditional transmission of human capital within traditional family units becomes less common and as the changing educational needs of a mobile workforce become increasingly evident.  Traditional perspectives of social capital — e.g., lifelong commitment to civic institutions in particular communities — continues to decline and is replaced by non-profits that draw youthful participation and which change as times and conditions change.  Budgeting plays a big role in the ever-changing sustainable communities, offering tax incentives and grant resources to help support the public welfare, life-long learning-oriented education, and community needs of a future society.

As with the social objectives of sustainability, economic objectives can be encouraged or discouraged through the state and local government budget process.  Tax incentives to sustainable industries can encourage growth of new green economies, while restrictive tax codes might discourage polluting or non-sustainable industries.  In creating equitable market conditions and reducing economic disparity, budget resources in a communities built around the elements of the sustainability paradigm will likely offer a helping hand to the least benefitted members of states and the poorest local communities through redistributive policy.

Environmental objectives are substantively advanced through annual budgeting for environmental regulation.  The sustainability paradigm will require that state and local government strictly regulate polluting industries and their products.  Regulation, however, requires a legally strong, adequately staffed and well-financed bureaucracy that effectively monitors environmental quality and ensures industry, commercial and broader community compliance.

Finally, the institutional change needed to advance the sustainability paradigm will most likely occur if clear priorities are established through the budgeting process.  Agencies and policy objectives that are of higher priority can be bolstered through a strong financial commitment on the part of state and local government budgeters.  Social welfare, education, and environmental policy agencies and policies, for instance, would likely receive even greater financial assistance.  In the future, particularly when the health and welfare costs of the large Baby Boomer generation have abated, budget resources will likely shift in new and different directions to meet the evolving objectives of sustainability.

Current Trends for State and Local Budgeting

In recent years, several key trends have emerged in U.S. state budgeting, reflecting a fiscal landscape shaped by persisting economic uncertainty, many public policy changes, and evolving priorities among citizens and elected officials alike. Among some of the most salient trends would be included the following:

Revenue fluctuations and federal aid impact:  State budgets have been significantly influenced by fluctuations in revenue and the impact of federal aid.  States enjoyed substantial revenue growth due to federal pandemic relief funds, leading to budget surpluses in fiscal years 2022 and 2023.  However, as federal aid recedes, many states are now facing troublesome budget shortfalls.  The normalization of fiscal conditions has revealed underlying structural deficits that were temporarily masked by the influx of federal funds.  For example, Pennsylvania and Alaska have reported persistent serious budget deficits despite temporary relief from federal aid during the pandemic (Pew Charitable Trusts, 2024).

Tax cuts and spending increases: Many states have implemented significant tax cuts and spending increases.  For instance, Texas has introduced substantial tax relief measures, including property tax cuts and increased funding for education and infrastructure.  Similarly, Utah and Virginia have enacted income tax cuts and increased spending on public education and environmental programs. These policy decisions were feasible during periods of higher revenue but pose long-term sustainability challenges as states adjust to some nagging post-pandemic fiscal realities (S&P Global Ratings, 2024).