Saturday, February 26, 2011
Tough Choice for Governors
Given the economic downturn, and requirement that states have to balance their budgets, the next 4 years of state budgets across the country will feature belt tightening, program reductions (and outright elimination) and challenging labor negotiations.
Here are the areas of debate, beginning with “what is the appropriate role of government in the first place?” The big four pillars in state government are education (usually biggest slice of budget), health services, transportation and corrections. And underlying all of these is state worker labor costs (direct pay, retirement and benefits), which are increasing much faster that state government revenues.
The debate in Wisconsin on state and local employees and their public union representation is just the tip of the iceberg, as all 50 states and countless municipalities are struggling with their labor costs. Should the Governor (of any given state) reduce the burden and cost of state employees (their compensation & benefits) by adjusting benefits and retirement costs or just lay state workers off (and not change benefits)? In the example of Camden, NJ, the public employees wouldn’t negotiate a less pay and benefit package and set the stage for a 50% layoff.
Other Governors are looking to sell state assets, privatize highways (convert to toll roads), privatize higher education (reduce subsidies and convert to enterprises). Some Governors of deep blue states (such as Illinois) decided to raise taxes during an economic downturn. It is unclear how increasing taxes will actually generate additional revenues, if the overall business climate and tax base is adversely impacted. Many companies are moving their headquarters and manufacturing locations from high tax states (Michigan, New York, California and Illinois) to lower tax states such as Texas. Thus simply raising taxes may not work. Now that the Federal stimulus dollars are waning and spent out (a large portion of Fed dollars were used to prop up state budget shortfalls, particularly in pro-union high labor cost states), states are having to make additional cuts in spending to balance their budgets.
By John F. Cape Senior Fellow, the Rockefeller Institute of Government 11.2010
Against this bleak background, in most areas of the country, state government has effectively lost its pricing power. In race after race, gubernatorial candidates — Republicans and Democrats alike — have rushed to assure voters that they have no intention of raising taxes. As a result, given the inherent lag between economic recovery and state revenue growth, it is likely that many states will be mired in difficult fiscal conditions until 2013 or 2014.
So, what should state leaders do? From my experience over the past 35 years working as a state budget official and consulting for state fiscal managers across the country, I would offer new governors two simple suggestions:
1) Define fundamental goals for your major programs and revenue sources to be achieved by your fourth year in office.
2) Have your budget staff do a “back of the envelope” calculation of the Year Four costs of those spending goals and the monies potentially generated by your Year Four tax goals, and see how closely they match. These are estimates, so they don’t have to balance perfectly — they just have to be close.
If you want to be the “tax-cutting education governor” (and who doesn’t?), this exercise should be eye-opening. Unless you’re in North Dakota (which has been spared most of the current economic pain), it will likely require you to repeat step one. Once affordable long-range strategic objectives are defined, then you should begin work on the upcoming fiscal plan. Simply put, the fiscal stress in the coming years will make state budgets very unforgiving of mistakes. Embarking on spending or tax strategies that are unsustainable can result in painful course-reversals later. This planning will not be easy or pretty. Suffice it to say that the next few years will see a greater debate about the fundamental role of government — at all levels — than we have had in 50 years. State programs and agencies that have survived untouched for years could face elimination or consolidation. Non-core assets such as real estate or liquor stores could be put on the sales block. Surely, we will see a restructuring of state and state-subsidized employee benefit programs to realign with broader labor market norms. And the result of those debates will color state fiscal plans going forward for at least a decade.
In short, successful governors will have to make hamburger out of what have previously been sacred cows, or risk seeing their agendas trampled by the herd. John F. Cape
See the Rockefeller Institute web site http://www.rockinst.org
Unlike the Federal Government, the state governments must balance their budgets. May the great debates continue in all 50 capitals of the United States. And the great American democratic experiment will unfold and we’ll see who can figure out how to navigate some of the roughest financial seas in the past 50 years.
© Jasper Welch, Four Corners Media, www.jasperwelch.org