How To Address States’ Budget Deficits: Performance-Based Outcome Budgeting

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Many states are masking structural (i.e. long-term) budget deficits through accounting gimmicks. But raiding non-general fund accounts, delaying funding of enacted legislation, refusing to fully fund pensions, arbitrarily increasing pension investment return assumptions and shifting payments to the next fiscal year threaten to create an even greater fiscal crisis in the near future.

Legislators must act now to fix the broken budget process and end overspending. This requires tough decisions that impact powerful (and sometimes popular) special interests in education, Medicaid and public sector salaries and benefits. Unfortunately, legislators in the majority of states facing these structural deficits are balking at the required reforms. A state government “of the people, by the people and for the people” must be accountable and transparent to the creators of that government—the people.

How can legislators begin the process of budget reform? Recognize that the government—including specific agencies—cannot spend a single dollar without legislative approval. This “power of the purse” is a powerful tool to be used for good or for harm. Most states conduct the annual budget process by taking the current year’s funding level for thousands of programs and then adjusting these items for inflation, case load changes, and any new initiatives. Unfortunately, a review of effectiveness rarely is part of the process. Continued funding according to an established “baseline” is presumed. Agencies and programs with fundamental design flaws or even objectives in direct conflict with lawmakers’ policy views may continue unimpeded.

Restructuring state spending cannot be postponed forever. The American Legislative Exchange Council (ALEC) recommends adopting performance-based budgeting with the focus on outcomes. Performance-based budgeting views all of the agencies and functions of a state government as a single enterprise. Redesign the budget from the ground up based upon core functions of government; and each year evaluate the quantifiable results taxpayers are receiving on these investments. These measurable outcomes will be directly tied to an agency’s clearly articulated mission and strategic goals.

Performance-based budgeting is citizen-focused by enabling full explanation of budget decisions to the public and ensuring the budget remains focused on delivering measurable results to the public.

A basic summary of the process involves governors and legislators make the following determinations: (1) the forecasted revenue for the next budget cycle, (2) goals relating to essential services to deliver and objectives to accomplish, (3) proper metrics to evaluate progress in accomplishment these goals and (4) the most effective manner-including use of market forces and competition—to accomplish these goals with the resources available.

The ALEC State Budget Reform Tool Kit provides a substantive introduction to the performance based budgeting process. The former governor of Washington (Gary Locke, a Democrat) implemented many of these principles to close a multi-billion state budget gap. The model he pursued asked the right questions, provided a logical process for determining the answers, and prioritized spending accordingly.

Quick fixes such as accounting gimmicks may appear to temporarily resolve a budget gap; but the underlying budget structural problems worsen. The only solution to structural budget gaps is to junk the current budget system and move to performance-based budgeting.

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