The state budget drives all policy within a state. Debating, writing, and approving a state budget are the primary tasks of legislators. Most states continue to use a broken budget process called “baseline budgeting,” (e.g. simply adjusting a current budget item for inflation along with anticipated increases in program participation). Few, if any hearings on held to determine whether the agencies spent their money efficiently or fulfilled any performance metrics. It’s no surprise that baseline budgeting typically results in budget shortfalls.
Under baseline budgeting, a proposed $2 billion actual year over year increase in spending can be viewed as a $2 billion “cut” if a $4 billion increase would have occurred under a routine baseline adjustment. As a result of this inaccurate messaging, legislators often choose to increase funding to agencies, regardless of whether legislative goals are being accomplished.
As we explained in May, many states resorted to questionable tactics in order to balance budgets. These included across the board cuts, raiding non-general account funds, delaying the funding of already-passed legislation, or underfunding pensions. Unfortunately, refusing to act immediately and decisively now intensifies fiscal crises in future years.
Addressing the broken budget process requires fundamental reforms that will certainly impact powerful special interests in popular spending areas such as education, Medicaid, and state employee salaries and benefits— including pensions.
Legislators become “enablers” for agencies and programs with fundamental design flaws through use of baselines budgeting. In fact, many of the funded services are sure to directly conflict with lawmakers’ own policy views. Focusing on inputs (i.e., more money) virtually assures overspending and sub-par effectiveness of those programs.
Legislators may temporarily continue to focus only on short-term solutions, but fundamental restructuring of state spending cannot be postponed forever. Now is the time for legislators to replace the current budget system and stop deceiving themselves and the taxpayers. Accounting gimmicks, delaying essential maintenance, and fictional income or borrowing projections disserve the public.
A performance-based, or priority-based, budgeting approach focused on the core functions of government and outcomes is the solution. This ensures adequate analysis before tax increases or spending cuts. Performance-based budgeting views all of a state government’s many agencies and functions as a single enterprise. New proposals are evaluated in this context, and the strategies for achieving results are developed with a knowledge of the limited state resources available.
A firm understanding of the goals, performance metrics, and available resources enables clear explanations to the public of this citizens-focused budget. Furthermore, priority-based budgeting frees legislators to more adeptly shift resources when necessary. Implementation of the solution means determining the proper role of government, the essential services government must provide, relevant performance metrics, prudent costs, which levels of government are best equipped to deliver particular core services, and prioritization of any spending cuts.
Furthermore, governors and legislators must obtain unbiased revenue forecasts for the next budget cycle and determine how market forces could possibly further control costs and enhance quality.
Cash-strapped states will find that this process greatly increases spending efficiency and delivers superior results... Legislators can use this current budget shortfall crisis as an opportunity to transform their state budget process from an input system to an outcome, performance-based budgeting system. Both taxpayers and recipients of government services will benefit from the result.