Seven Habits of Unsustainable Budget Building: A State Policy Perspective

By LaPlante, Josephine M. | Journal of Public Budgeting, Accounting & Financial Management, Summer 2011 | Go to article overview

Seven Habits of Unsustainable Budget Building: A State Policy Perspective


LaPlante, Josephine M., Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT.

The magnitude and immediacy of threats to the sustainability of state government programs call for significant changes in how we think about and make policies that influence the public budget. The Great Recession's prolonged battering of state budgets exhausted cutback strategies and has left policy makers with few options, producing a decision gridlock that is inescapable using traditional functional and line-item budget perspectives and embedded practices. Transforming state budgets requires an uncommon view. This paper identifies and describes seven overarching and pervasive habits in state policy making that contribute to unsustainable budgets. Although the applicability and commonness of each habit will vary by state, both individually and as a set the seven habits impart important handles for gaining greater control over a state's fiscal directions and fortunes.

INTRODUCTION

Although many state policy makers are treating current spendingrevenue imbalances as temporary, the "fiscal gap" has both a cyclical component, which caused "public spending to outstrip revenues in the short to medium term," and a structural component exacerbated by the Great Recession (DeLoitte Research, 2010, p. 3). The structural portion of the gap has roots in trends, policies and practices of the past twenty-five years or more. In 1995, Gold (p. 5) explained that state fiscal crises experienced at the beginning of the 1990s were "caused by a combination of factors, some beyond the control of state officials, [while] others were the legacy of misguided

policies pursued in the 1980s." Today's difficult fiscal forecast is a convergence of overestimation of long-term fiscal capacity, cost escalation effects of known and previously obscured accumulated spending choices, citizen and legislative actions that have reduced access to key tax bases and restrict future revenue growth, and multiple economic and demographic trends including tax bases that are declining in productivity and facing difficulties capturing transitions in the nature and loci of economic activity, an aging population, and rapidly rising health care costs.

As Justice (2009, p. 1) explains, revenue and expenditure policies may be reshaped to acknowledge constraints imposed by the fiscal environment: "over the long term, adaptation positions" a governmental jurisdiction "to sustain a politically and economically appropriate level and mix of services consistently across the business cycle ... without ... requiring future taxpayers to pay for past and present" policy choices and expenditure commitments. Failure to adapt adequately produces an enduring imbalance and eventually financial distress, a state of significant and perpetual revenue shortages. Distress may kindle a speeding treadmill approach to budgeting: in the face of dwindling resources, spiraling service needs are met with budget reallocations, expenditure reductions and tax increases. The experiences of large central cities during the 1970s and 1980s inform us that frenzied responses are likely to induce fiscal feedback, a process in which budget actions contribute to tax base erosion and escalation of needs, which in turn trigger another round of budget reallocations, cutbacks, and tax increases.

Effective adaptation depends upon an effective combination of two processes. First, states must determine realistically their sustainable revenue capacity. Second, states must bring the scope of spending commitments and the accompanying price tag into line with real and lasting revenue constraints. As Scorsone and Plerhoples (2010, p. 183) pointed out, organizations must not only economize "but also ensure success in the future." Meeting mounting fiscal challenges while also addressing key policy goals necessitates leaner governments, carefully prioritized, targeted spending, and greater returns on the investment of tax dollars.

Budget reviews and cutback management strategies typically involve two views of the document, with both focusing on spending levels and trends. …

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