Fix the approach, fix the problem
Public discourse in the Silver State is dominated by how state lawmakers will address a multi-billion dollar "budget shortfall" heading into the 2011 legislative session. The potential size of the projected "shortfall" could prompt calls for tax increases that would dwarf the record-breaking tax-hike package that was passed just last year, in the 2009 session.
What lawmakers should be focusing on instead is how the state's flawed budgeting process regularly creates these instances of budgetary "shortfalls." Nevada, like many states, uses a cost-plus model of state finance called "baseline budgeting." Under the baseline approach, state agencies request the amount they spent in the last budget cycle on the accumulated glut of government programs and then add in new costs to cover inflation, caseload adjustment and annual employee pay raises.
As such, the targeted "baseline" spending amount is guaranteed to increase substantially from one budget cycle to the next, regardless of any change in revenues. Over the past several years in Nevada, the baseline approach has led to spending increases of $1 billion or more every budget cycle.
Baseline budgeting evades the need for systematic reviews of state spending that evaluate whether programs are effectively achieving their goals — if goals even exist or continue to be state government priorities. Instead, the baseline calculation is seen as an entitlement by agencies, and any legislative appropriations less than that amount — even if it is just a smaller increase in funding than was desired — get labeled "cuts." This occurs with complete indifference to whether or not the program in question actually provides value to taxpayers.
Clearly, lawmakers need to adopt an alternative budgeting process that emphasizes meaningful, quantifiable results so that state government, with available revenues, can provide the most value to taxpayers. Such a process necessarily will require lawmakers to establish priorities among the types of results they think government should produce. It also involves an evaluation of the most efficient ways to produce the results sought — a process that often implies competitive sourcing and performance contracting.
Washington, Iowa, South Carolina, Michigan and Louisiana have all established this type of budgeting mechanism in recent years. Once lawmakers in these states prioritize the specific goals they would like to see their state governments accomplish, they form "results teams" that determine the most cost-effective means of achieving each goal. The team then solicits bids for each individual function that will contribute to the overall goal and allows state agencies, local governments, employee unions, non-profit organizations and private enterprise to compete for the contract to perform that function. Awarded contracts contain at least three meaningful performance metrics that are used to evaluate performance. This process ensures that the state purchases meaningful results for its citizens at the lowest price — instead of just blindly funding programs.
States that have employed this type of results-based budgeting, or Budgeting for Outcomes (BFO) approach, have been able to successfully trim government spending without sacrificing the quantity or quality of services in high-priority areas. The State of Washington, for instance, saved $2 billion over the baseline approach in 2002, when Governor Gary Locke implemented a BFO approach. Washington also spent the money it did have much more effectively.
The BFO approach is much more rational and transparent than the current, baseline approach because it is clear, through the legislatively established priorities, how state money will be spent. Results teams rank programs in order of cost-effectiveness, which establishes a clear hierarchy of funding. Programs at the top of the list are the first to receive funds, while those at the bottom of the list are the last to do so. And when revenues fail to keep up with growth, there is no need for legislative micro-managing or horse-trading under a BFO approach, as is typically the case under baseline budgeting.
If policymakers in the Silver State do not require the BFO approach now, Nevadans can be assured that the 2011 legislative session will be marked by burdensome tax increases, merely marginally useful programs still being funded, or vital programs facing reductions — or all three.
If there was ever a solution deserving embrace from intelligent lawmakers, this is it.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. This article first appeared in the June 2010 edition of Nevada Business. For more information visit http://npri.org/.