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Breaking the Cycle of Federal Dependency

Creating A Fiscally Independent State
State Budget Solutions | by Kristen De Pena | November 22, 2011

Lately, all the attention in Washington D.C. is on the fiscal irresponsibility of the Administration, marked by the national deficit surpassing $15 trillion. As the media highlights the fiscal failures of the federal government, the spotlight inevitably falls on the many failures of the states as well; in fact, aggregate state debt exceeds $4 trillion, indicating equally devastating financial woes.

The best time for legislators to deal with and put an end to overspending is now, but it requires immediate, fundamental reforms to state governments and budget systems. With automatic cuts to state funding looming, states need to take decisive action in three areas.

Problem: Federal Budget Cuts

In the wake of the failures of the famed "Super Committee," $1.2 trillion in automatic cuts go into effect in 2013, including a 7.8% reduction to funding for non-defense discretionary programs. In fiscal year 2010, $654 billion in federal grants went to states and localities, equaling about 26 percent of all state and local spending. The American Recovery and Reinvestment Act (ARRA) funded these payments, but the program is dwindling and reducing payments to about $60 million in the future. This program, in addition to countless indirect benefits through federal tax deductions and credits are on the chopping block; the loss of these perks will prove extraordinarily costly to state governments. Although multi-faceted, the problem is clear: states must learn to fend for themselves financially.

Solutions:

  • Passing legislation requiring state agencies and political subdivisions to report all receipts of federal funds and the percentage of thei budget that comes from federal fundsing. Agencies and subdivisions should be required to create and report a contingency plan in case of a reduction in federal funding. Developing contingency plans will allow organizations time to prepare for eventualities and work with other organizations to fill needs that may arise. Additionally, requiring state agencies to report how much federal money each receives and how those funds are utilized will better ensure accountability.
  • Developing a rainy day fund to offset the effects of federal budget cuts to state funding. The fund signals to credit rating agencies that the state is fiscally responsible, thereby possibly staving off a downgrade.
  • Planning for an immediate 15 percent cut, followed by an additional 15 percent cut later. The more detailed the contingency plans, the less the legislature must rely on last minute, reactive cuts in the face of less state revenue.
  • Creating new revenue: states can consider tax increases to close budget gaps and prepare for cuts.

Problem: Credit Agency Downgrades

Shaking investor confidence and leading to drastic stock market losses, Standard & Poor's recent downgrade of the United States from an AAA to AA+ rating immediately impacted investors and consumers alike. State governments now face the same fate. Credit ratings vary by state; the agencies base their ratings on several factors, including reliance on federal funding and management capabilities. Many factors will play significant roles in determining which ratings change, according to S&P. Both downgrades and super-downgrades result primarily from unfunded long-term deficit reduction plans, many of these plans heavily reliant on federal aid.

Solutions:

  • Contingency plans serve a dual purpose. In addition to serving as a backup plan, the existence of contingency plans indicates to credit agencies that the state government is viable enough to deal with crisis. Avoiding deadlock, midnight deadlines, and passing the buck may keep credit agencies from additional downgrades.
  • Demonstrating accountability and transparency. Allowing the public as well as credit agencies to carefully review revenue and expenses will demonstrate confident management and fiscal discipline.
  • Addressing and amending long-term, unfunded programs into sustainable plans.

Problem: Maintaining the Independent State

Many state legislators start the budget process by focusing almost entirely on "inputs" (i.e., how much needs to be put in to sustain current programs and expenses). They take existing programs, adjust costs for inflation, add caseload increases, splice in a few new initiatives, and call this their baseline budget. This could also be called a "cost-plus" or "iceberg" model, where decades worth of spending and programs remain unseen and unexamined under the surface while the debate rages year after year over the small part that sticks up above the surface. In this model, the cost, effectiveness and demand for existing programs is rarely considered.

Conventional budgeting never truly considers how to maximize every tax dollar spent. It doesn't analyze the efficiency, effectiveness and necessity of existing state programs and spending. It rarely asks how a service can be improved or purchased differently. It virtually guarantees overspending.

Solution: Reality-Based Budgeting

Priority and reality-based budgeting views all of state government -- all of its agencies and functions -- as a single enterprise. New proposals are evaluated in the context of all that state government is responsible for doing, and the strategies for achieving the best results are developed with an eye on all of the state's resources. Agencies and services are not sealed in fortified towers where they siphon large portions of state revenue with few questions asked; they are all under one tent where they can be constantly evaluated to ensure they are delivering the highest priorities as efficiently and effectively as possible. Nothing is sacrosanct.

Priority and reality-based budgeting serves citizens well by ensuring government delivers essential services as efficiently and effectively as possible. It maximizes the value of each hard-earned tax dollar, which is an important responsibility of legislators. It protects vulnerable programs from election-year rhetoric. It provides a logical place for legislators in cash-strapped states (i.e., most of them) to begin meaningful debate and restructure spending.

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