Nearly every state requires local governments to adopt a balanced budget. Almost none define balance in a way that prevents an entity from meeting the requirement while steadily impairing its finances. Balance, as commonly enforced, means that budgeted resources equal budgeted uses. Structural balance means that recurring resources cover recurring uses. The gap between those two definitions is where multi-year fiscal deterioration hides in plain sight.
The four adjustments
Reading a budget for structural balance is mostly a matter of removing things that will not repeat and adding back things that were deferred.
1. Strip non-recurring revenue
Asset sales, litigation settlements, one-time intergovernmental awards, prior-year encumbrance releases, and transfers in from reserves are all resources. None recur. If they are financing operating expenditure, the operating expenditure is unfunded next year. The test is not whether the revenue is legitimate — it usually is — but whether the expenditure it funds will still exist when it is gone.
2. Strip non-recurring expenditure
Symmetry matters. A one-time capital outlay, a settlement payment, or an election-year expense inflates the expenditure side and can make a structurally unbalanced budget look worse than it is. Removing only the one-time revenue produces an unnecessarily bleak picture and, more importantly, an unpersuasive one.
3. Add back deferred cost
This is the adjustment most often skipped because it requires a judgement. Three items dominate:
- Deferred maintenance. If the asset management plan calls for renewal at a level the budget does not fund, the shortfall is a cost that has been moved, not avoided.
- Pension and OPEB contributions below the actuarially determined amount. The difference accretes with interest.
- Vacancy savings assumed at a rate the entity does not intend to sustain. Budgeting a ten per cent vacancy factor while actively recruiting to full strength is a timing device.
4. Normalise volatile revenue
Where a revenue source is genuinely cyclical — real estate transfer taxes, investment earnings, certain sales tax categories, permit fees during a construction boom — compare the budgeted amount to a multi-year average rather than to last year's actual. Budgeting the peak of a cycle as though it were the trend is the single most reliable predictor of a painful adjustment two years later.
A simple presentation that changes the conversation
Publish a two-column reconciliation in the budget document: "Adopted budget" and "Structural budget", with each adjustment on its own line. The document then states its own assumptions rather than requiring an analyst to reconstruct them. Entities that adopt this presentation report that the debate shifts from whether there is a gap to what to do about it.
What a structural gap actually looks like
Structural gaps are rarely dramatic in any single year. The characteristic pattern is a recurring shortfall of one to three per cent of the operating budget, financed each year by a different non-recurring source: this year an asset sale, next year a reserve draw, the year after a deferred equipment replacement. Each individual decision is defensible. The sequence is not.
The tell is the composition of fund balance over five years alongside the composition of one-time revenue over the same period. If unassigned fund balance is flat or declining while one-time revenue is rising as a share of total resources, the entity is consuming flexibility to maintain services. That is a legitimate policy choice during a genuine downturn and a serious problem during an expansion.
Closing a structural gap
Only three categories of action close a structural gap: recurring revenue increases, recurring expenditure reductions, and permanent changes to service level or delivery model. Everything else defers. This is worth stating explicitly in budget deliberations, because a great deal of effort is otherwise spent on measures that feel substantive — hiring freezes, travel bans, procurement holds — and produce one-time savings.
Where a gap cannot be closed in a single cycle, a published multi-year closure plan with annual milestones is materially better than an unstated intention. Rating agencies and auditors read them. So do bargaining units, which is one reason they are unpopular and another reason they work.
A note on the current environment
Entities that received large one-time federal awards in the early 2020s have now largely worked through them. Where those funds supported positions or programmes that were continued, the structural effect appears with a lag and often lands in a year when the underlying revenue picture is otherwise unremarkable. Reviewing which recurring commitments trace back to non-recurring awards is worth an afternoon in any entity that has not already done it.
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