State Budget Reform Toolkit

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S T A T E B U D G E T R E F O R M T O O L K I T I

STATE BUDGET REFORM TOOLKIT

2011 American Legislave Exchange Council

All rights reserved. Except as permied under the United States

Copyright Act of 1976, no part of this publicaon may be reproduced

or distributed in any form or by any means, or stored in a database

or retrieval system without the prior permission of the publisher.

Managing Editors:

Leonard GilroyDirector of Government Reform, Reason Foundaon

Jonathan Williams

Director, Tax and Fiscal Policy Task Force,American Legislave Exchange CouncilContribung Authors:

Josh CullingState Government Aairs Manager, Americans for Tax Reform

Leonard GilroyDirector of Government Reform, Reason Foundaon

Amber GunnDirector of the Economic Policy Center, Evergreen FreedomFoundaon

Jason MercierDirector of the Center for Government Reform, WashingtonPolicy Center

Mahew Mitchell, Ph.D.Research Fellow, The Mercatus Center

Barry Poulson, Ph.D.Professor Emeritus, University of Colorado

Bob WilliamsPresident, State Budget SoluonsFounder and Senior Fellow, Evergreen Freedom Foundaon

Jonathan WilliamsDirector, Tax and Fiscal Policy Task Force,American Legislave Exchange Council

About the American LegislaveExchange Council

The State Budget Reform Toolkit has been published by

the American Legislave Exchange Council (ALEC) as part

of its mission to discuss, develop, and disseminate public

policies, which expand free markets, promote economic

growth, limit the size of government, and preserve indi-vidual liberty. ALEC is the naons largest non-parsan,

voluntary membership organizaon of state legislators,

with 2,000 members across the naon. ALEC is governed

by a Board of Directors of state legislators, which is ad -

vised by a Private Enterprise Board, represenng major

corporate and foundaon sponsors. ALEC is classied by

the Internal Revenue Service as a 501(c)(3) nonprot,

public policy and educaonal organizaon. Individuals,

philanthropic foundaons, corporaons, companies, or

associaons are eligible to support ALECs work through

tax-deducble gis.

About ALECs Tax and Fiscal PolicyTask Force

The mission of ALECs Tax and Fiscal Policy Task Force is

to explore policy soluons that reduce excessive govern-

ment spending, lower the overall tax burden, enhance

transparency of government operaons, and promote

free-market scal policies.

Public Sector Chairman: Indiana Sen. Jim Buck

Private Sector Chairman: Bob Williams

Task Force Director: Jonathan Williams

Published by

American Legislave Exchange Council1101 Vermont Ave., NW, 11th Floor

Washington, D.C. 20005

Phone: (202) 466-3800

Fax: (202) 466-3801

www.alec.org


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Leonard GilroyGilroy is the Director of Government

Reform at Reason Foundaon, a non-

prot think tank advancing free minds

and free markets. Gilroy, a cered

urban planner (AICP), researches priva-

zaon, government reform, transpor-

taon, infrastructure, and urban policy

issues. Gilroy has a diversied background in policy re-

search and implementaon, with parcular emphases

on public-private partnerships, compeon, govern-

ment eciency, transparency, accountability, and gov-

ernment performance.

Gilroy is the editor of the worlds most respected news-

leer on privazaon, Privazaon Watch, and is the

editor of the widely-read Annual Privazaon Report,

which examines trends and chronicles the experiences

of local, state, and federal governments in bringing com-

peon to public services. Gilroy also edits Reasons an-

nual Innovators in Acon report.

Prior to joining Reason, Gilroy was a senior planner at a

Louisiana-based urban planning consulng rm. He also

worked as a research assistant at the Virginia Center for

Coal and Energy Research at Virginia Tech. Gilroy earned

a B.A. and M.A. in urban and regional planning from Vir-

ginia Tech.

Jonathan WilliamsJonathan Williams is the director of the

Tax and Fiscal Policy Task Force for the

American Legislave Exchange Council

(ALEC), where he works with state legis-

lators and the private sector to develop

free-market scal policy soluons in the

states. Prior to joining ALEC, Jonathan

served as sta economist at the non-parsan Tax Foun-

daon, authoring numerous tax policy studies.

His work has been featured in many publicaons in-

cluding The Wall Street Journal, The Los Angeles Times,

Forbes and Investors Business Daily. With Dr. Arthur Laf-

fer and Steve Moore, Williams co-authored Rich States,

Poor States: ALEC-Laer Economic Compeveness In-

dex. Jonathan has been a contribung author to the Rea-

son Foundaons Annual Privazaon Report and has

wrien for the Ash Instute at the Kennedy School of

Government at Harvard. In addion, Williams is a con-

tribung author to In Defense of Capitalism (North-

wood University Press, 2010). He is also a contributor

to The Examiner (Washington, D.C.) and serves as an

adjunct scal policy fellow at the Kansas Policy Instute.

In addion to tesfying before numerous legislave bod-

ies and speaking to audiences across America, Williamsis a popular guest on talk radio shows and has appeared

on numerous television outlets, including The Glenn

Beck Program and Fox Business News.

A Mid-Michigan nave, Williams graduated magna cum

laude from Northwood University in Midland, Mich.,

majoring in economics, banking/nance, and business

management. While at Northwood, he was the recipient

of the presgious Ludwig von Mises Award in Economics.

About the Managing Editors

Acknowledgements

We wish to thank

the following pares

for making this

publicaon possible:

First, our sincere thanks go to The Lynde and Harry Bradley Foundaon for their

generous support to make this research possible. Next, we would like to thank

Ron Scheberle, Michael Bowman, Chaz Cirame, Ka Siconol, Ben Iwen, Jusne

Fink, Laura Ellio, Harris Kenny, and the professional sta members at ALEC and

the Reason Foundaon for their valuable assistance with this project.

W W W . A L E C . O R G


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Table of ContentsI. Introducon

A. Problem: The Current Budget System

B. Soluon: Priority-Based Budgeng

II. Tools to Modernize State Budgeng

A. Dene Core Governing Principles

B. Require Non-Parsan Revenue Forecasts and Independent Cercaon of Budgets

C. Pass a Strong, Balanced Budget Requirement

D. Adopt an Eecve State Spending Limit

E. Require Preparaon of Agency Mission Statements

F. Adopt Performance Assessment and Management

G. Budgeng for Outcomes

H. The Item-Reducon Veto

III. Tools to Improve Budget Transparency

A. Create a Transparent Budget Web site

B. Adopt a 72-Hour Budget Timeout

C. Require Fiscal Notes Before Acon on Spending Bills

IV. Tools to Control Costs and Improve Government Eciency

A. Adopt a State Hiring Freeze

B. Reform State Pensions

C. Restructure State Reree Health Care Plans

D. Eliminate Posions Vacant More Than Six MonthsE. Delay Automac Pay Increases

F. Adopt Acvity-Based Cosng

G. Adopt a Sunset Review Process for State Agencies, Boards, and Commissions

H. Allow the State Auditor to Conduct Performance Audits

I. Establish a System of Independent Recovery Audits for Improper Payments of Taxpayer Funds

J. Embrace the Expanded Use of Privazaon and Compeve Contracng

K. Establish a State Privazaon and Eciency Council

L. Create a Statewide Real Property Inventory and Search the

Balance Sheet for Asset Sale and Lease Opportunies

M. Achieve Savings Through Employee Incenve Programs

V. Conclusion

VI. Appendix

Index of Recommendaons

Index of ALEC Model Legislaon


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A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .vi

LECs State Budget Reform Toolkit will advance a

set of budget and procurement best pracces to

guide state policymakers as they work to solve the cur-

rent budget shoralls. The toolkit will assist legislators in

priorizing and more eciently delivering core govern-

ment services through advancing Jeersonian principlesof free markets, limited government, federalism, and in-

dividual liberty.

Today, states face structural decits created by over-

spending. Most of the legislave xes over the past

few years for state budget gaps have merely postponed

or obscured the problems rather than addressing them

directly.

A contribung factor to state budget gaps is the ex-

piraon of the federal smulus funds provided by theAmerican Recovery and Reinvestment Act (ARRA). Al-

though these federal funds temporarily supported state

budgets, the money will not last forever. When it is gone,

states will be faced with gaping holes in their budgets, as

policymakers in many states have imprudently opted to

rely on these temporary federal funds in order to avoid

making dicult, but necessary, budget reforms to align

expenses with revenues.

To solve this problem, the temptaon will be to use a

business-as-usual approach: raise taxes, raid non-gen-eral fund accounts, delay funding of some legislaon,

avoid fully funding pensions, and use federal smulus

funds to postpone meaningful budget reforms. Some

of these acons may give states a temporary patch

in their budget shorall, but when the federal funds

expire, when pension tabs for delayed contribuons

come due, and when there are few o-budget accounts

le to raid, states that did not take real acon to solve

their budgetary shoralls will face even greater budget

defecits. Addionally, as ALECs Rich States, Poor States

publicaon so aptly points out, tax increases come at a

very high cost: the erosion of state economic compe -

veness. In the words of President John F. Kennedy: Aneconomy constrained by high tax rates will never pro-

duce enough revenue to balance the budget, just as it

will never create enough jobs.

Problem: The Current BudgetSystem

A budget drives all policy within a state. For this reason,

debang, wring, and approving a state budget are the

primary tasks legislators must accomplish. However, when

budgets are built in the tradional manner of adjusngthe current budget for inaon and caseload increases,

legislators become enablers for agencies and programs

that likely have fundamental design aws or that may be

providing services that are ineecve at meeng legisla-

ve goals. This type of approach focuses almost enrely on

inputs (more money). Building budgets the convenonal

way virtually assures overspending since there is lile, if

any, focus on eciency, eecveness, or outcomes.

Legislators oen nd that the baseline budget is higher

than the esmated revenue forecast. They then focus ona combinaon of cung programs, raising taxes, or us-

ing accounng gimmicks to make general fund resources

match forecasted revenue. This approach ignores the

queson of whether exisng state programs are ecient

or eecve. Rarely are the quesons asked, How can

exisng programs be improved? or How can we maxi-

mize the outcome of the tax dollars that are collected?

Introduction

A

I.

A.


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from government. This includes removing barriers stand-

ing in the way of delivering results to cizens.

Without this approach, state budgets resemble an iceberg,

with decades worth of spending unseen and unexamined

under the water, while the debate rages year aer year

over the small part that scks up out of the water. The lon-

ger state lawmakers connue to use the cost-plus model,

the more hardwired their decit problems will become.

In 2003, Washington state actually implemented priority-

based budgeng to close a budget decit of $2.4 billion

without raising taxes. Had the tradional cost-plus budget-

ing system been used, legislators would have started with

the baseline budget and focused on cung programs or

raising taxes unl the general fund matched the forecasted

revenue. The states economy was recognized by both par-

es as too weak to withstand a tax hike. Instead, the state

priorized services and determined what the most impor-

tant things to buy or deliver were for the dollars invested.

In order to face the upcoming budget crisis, states should

change their convenonal budget system to a priority-

based budget system. Using this tool, legislators can fo-

cus on delivering eecve services to taxpayers instead

of funding costly, ineecve programs. The rst tool set

below describes steps for states to follow to modernizetheir budgeng system fully.

Convenonal Budget

System: Input-Focused

B.

Priority-Based Budget

System: Output-Focused

Table 1.

v

Baseline Budget+

Inaon+

Caseloads+

Iniave Requirements+

Addional Policy Changes=

Business-as-Usual Budget

Soluon: Priority-BasedBudgeng

This State Budget Reform Toolkit is designed to help legis-

lators address the serious nancial crises in the states by

changing their budgetary system from the convenonal

input system, which is clearly a failed policy model, to

one focused on outcomes.

This new budgetary system is called priority-based bud-

geng. Priority-based budgeng means state ocials

and cizens must rst determine the core funcons of

government. While this may seem like an elementary

step, it is seldom taken before legislave appropriaons

are made. Gaining control of a state budget means the

following quesons must be answered:

What is the role of government?

What are the essenal services government

must provide to fulll its purpose?

How will we know if government is doing a

good job?

What should all of this cost?

When cuts must be made, how will they be

properlypriorized?

Only by carefully considering the proper role of govern-ment can legislators and governors do an eecve job

protecng individual rights, while providing essenal

services to taxpayers in an ecient, cost-eecve man-

ner. This is not an an-government philosophy; rather

it is ensuring that what government is supposed to do, it

will do well. Furthermore, great savings can be obtained

if legislators and agencies do not spend me determining

how a parcular funcon can be performed beer, faster,

and cheaper if it is not a core funcon of government.

Priority-based budgeng views all of state governmentall of its agencies and funconsas a single enterprise.

It evaluates new proposals in the context of all that state

government does, and develops strategies for achieving

priority results with an eye on all available state resources.

Priority-based budgeng helps to keep a cizen-focused

perspecve on the budget. It assumes we can change

the rules, if necessary, to maximize the results we can get

Core Funcons of Governme+

Performance Measuremen+

Priorized Spending Adjustme=

Priority-Based Budget


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8 A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .

Tools to Modernize

State BudgetingII.

tates need innovave strategies to modernize their

budgeng system. The rst secon of our State

Budget Reform Toolkit gives state policymakers a step-

by-step process to implement priority-based budgeng.

Tools in this secon include: dening core governing

principles, requiring independent cercaon of thebudget, and passing a strong balanced budget require-

ment. Addional tools in this secon also include: adopt-

ing an eecve state spending limit, requiring agencies

to prepare mission statements, adopng performance

management, and budgeng for outcomes.

Dene Core GoverningPrinciples

A rst step in reforming state budgets is to determine

the core funcons of state government. Every state con-stuon, which lawmakers swear to uphold, contains

language that cannot be ignored when building a frame-

work for eshing out core government funcons.

When deciding the core funcons of government, the

following quesons should be asked:

Is this a proper funcon of government, or is it best

le to the individual (family) or charitable organi-

zaon?

If intervenon is necessary, is it best le to local

government which is closer to the people? Does it further increase taxes, regulaons, or the

size of government? If so, is this jused?

Many lawmakers are unwilling to determine the core

funcons of government because:

It is hard work and may take years to get right.

Fierce philosophical bales must be waged with the

end result being a compromise that may please no

one.

Sll, the ulmate responsibility of lawmakers is to looktaxpayers in the eye and honestly report to them that

government is funconing excellently within its bound-

aries and its means. Starng the governing process with

sound core principles is a necessity. However, developing

a meaningful set of core governing principles requires

me and courage. Many ocials will publicly embrace

the noon of developing budgets around a model of

more carefully priorized spending, but most will also

vigorously oppose or undermine that model in day-to-

day operaons.

Some legislators may disagree with the already-dened

core funcons, or may disagree with the newly draed

core funcons. While absolute consensus is not likely,

legislators should use the core funcons as a starng

place to develop the legislave agenda. This would result

in healthy debates about the states core responsibilies.

In some states, the legislature may not wish to wait for

its governor to develop a list of core funcons. In other

states, it will be a joint endeavor between polical pares

and the branches of government. A biparsan racaonof agreed-upon core funcons should be sought within

the rst few weeks of budget-wring sessions. This would

dramacally increase the producvity of standing com-

miee hearings because everyone would know the terms

and the budget limitaons. Once the core funcons for

S

A.


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the state have been developed, they will serve as a lit-

mus test for the hundreds of currently funded agencies,

boards, commissions, and programs. Agencies should be

asked to submit their budgets based on delivering one or

more of the states idened core funcons.

Washingtons core funcons are detailed at:

www.ofm.wa.gov/budget/pog/default.asp

In Washington state, this approach considered revenue

for all sources (not just the general fund) and assumed no

spending commitments were sacrosanct. The legislature

chose which spending to add to the budget in order to

deliver the core funcons and priorized acvies within

those funcons.

Recommendaon: All exisng programs shouldt within one of the core funcons or they should be

abolished. Measurable outcomes for each core funcon

should be idened and agency acvies priorized.

Addional Resources: The Evergreen Freedom Foundaon, The Steward-

ship Project, Olympia, WA, June 2003. www.ewa.

org/pdfs/stewardship2003.pdf

Require Non-Parsan Rev-enue Forecasts and Indepen-dent Cercaon of Budgets

The current budgeng process allows far too much room

for discreon in revenue projecons, creang the oppor-

tunity for unrealisc projecons to serve as the founda-

on for state spending. Two interrelated reforms can help

to address this problem: (1) have a non-parsan revenue

forecast council that meets quarterly and publishes an

ocial state revenue forecast, and (2) have an indepen-

dent, third-party cercaon of the budget.

Using non-parsan revenue forecastswhich should

account for all taxes, fees, and charges by state govern-

mentcan help eliminate the bureaucrac tendency to

rely on higher-end revenue esmates just to balance the

budget. However, states should go further by undertak-

ing the second reform. Requiring the state treasurer (or a

similar comptroller or state auditor) to cerfy the budget

would help to ensure that the budget relies on realisc

revenue forecasts. Further, this approach creates a poli-

cal incenve for accurate budgeng since the treasurers

professional credibility (and potenal polical future) is

on the line.

The Texas Constuon gives the comptroller in that state

the authority to cerfy the states budget. In advance of

each regular legislave session, the comptroller prepares

and submits to the governor and legislature a statement,

under oath, showing the nancial condion of the state

treasury at the close of the last scal period and an es-

mate of the probable receipts and disbursements for

the current scal year. The statement also contains an

itemized esmate of the ancipated revenue based on

the laws then in eect from all sources, showing the fund

accounts to be credited during the succeeding biennium.

Except in the case of emergency or imperave necessity

and with a four-hs vote in each house, no appropria-

on is considered valid if it exceeds the cash and anci-

pated revenue of the funds from which such appropria-

on is to be made. No bill containing an appropriaon

can be considered as passed or be sent to the governor

for consideraon unl and unless the comptroller cer-

es that the amount appropriated is within the amountesmated to be available in the aected funds.

Recommendaon: State policymakers should closethe current gap in their budgeng process by adopng

provisions similar to Texas. Giving the states chief nan-

cial ocer the ability to prevent unrealisc budgets from

being adopted unl the budgets match expected reve-

B.

Using non-parsan revenue

forecasts can help eliminate the

bureaucrac tendency to rely on

higher-end revenue esmates just

to balance the budget.


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nues would be an important step towards ghtening and

strengthening scal control systems to keep the price of

government in check.

Addional Resources: State of Texas, Senate Research Center, Budget

101: A Guide to the State Budget Process in Texas,

Ausn, TX, January 2005. www.senate.state.tx.us/

SRC/pdf/Budget101_2005.pdf

Texas State Constuon, Arcle 3, Sec. 49a, Finan-

cial Statement and Esmate by Comptroller of Pub-

lic Accounts; Limitaon of Appropriaons.www.

statutes.legis.state.tx.us/Docs/CN/htm/CN.3.htm

ALEC Model Legislaon: Balanced Budget Cercaon Act

Independent Revenue Forecasng Act

Pass a Strong, BalancedBudget Requirement

One major aw in state spending is that the legislature,

which is responsible for draing state spending, rarely

produces a balanced budget. While most states do have

balanced budget requirements, all too oen state leg-

islators also take advantage of accounng maneuvers

that push expenses into future budgets, for exampleissuing specious and unsustainable bond programs.

The balanced budget requirement needs to be carefully

structured to include all funds so legislators dont use

accounng gimmicks to push the operang decit into

future budgets. Ideally, legislators should adopt the 98-

2-60 approach. This means the state should spend no

more than 98 percent of forecasted revenue on previ-

ously idened priories of government, put 2 percent

away in reserves and require a 60 percent supermajority

to change the 98 percent-2 percent rule.

The primary benet of this policy recommendaon is

that it would allow states to stop the bleeding. There

are many budgetary repercussions that will take me to

solve. First and foremost, incumbent ocials must be

able to guarantee to voters that reckless spending is a

thing of the past.

Recommendaon: Pass a balanced budget require-ment, mandang that the expenditures included in the bud-

get for the next scal year shall not exceed esmated rev-

enues, and create a protected emergency reserve account.

Addional Resources:

Washington Policy Center, Cizens Guide to SJR

8206, Budget Stabilizaon Account, Olympia, WA,

September 2007. www.washingtonpolicy.org/

publicaons/notes/cizens-guide-sjr-8206-budget-

stabilizaon-account

Adopt an Eecve StateSpending Limit

Many states have aempted to curtail spending (or,more accurately, spending growth) with mixed success.

In fact, a majority of states maintain some sort of spend-

ing limit or rainy day fund, but their eecveness varies

greatly.

The importance of using both a spending limit and a

rainy day fund is to help smooth out expenditures over

the business cycle and avoid the dangerous boom-and-

bust cycle of budgeng. The purpose of the spending

limit is to provide the scal discipline necessary during

strong periods of revenue growth, to not overextend thebudget, and to avoid creang a structural decit caused

by overspending. This two-pronged policy would make

state budgets more resilient in the face of unancipated

expenses. The inaccessibility of the emergency funds

would mandate biparsan eort to solve problems in-

stead of relying on tenuous party-line votes.

C.

D.

First and foremost, incumbent

ocials must be able to guarantee

to voters that reckless spending is athing of the past.


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When properly designed and implemented, Tax and Ex-

penditure Limits (TELs) have proven to be eecve in

constraining the growth of government spending, and

stabilizing government budgets over the business cycle.

ALECs model legislaon incorporates features that make

TELs eecve and successful:

Incorporate TELs into state constuons, rather than

in easily evaded or ignored statutes.

Use TELs to limit the rate of growth of revenue and/or

expenditures to the sum of inaon plus populaon

growth.

Do not link TELs to some measure of aggregate eco-

nomic acvity, such as personal income. This type of

limit is less eecve in constraining the growth of

spending and stabilizing the budget.

Apply TELs to a broad measure of revenue and/or

expenditure, exempng only federally funded expen-

ditures.

Use TELs to provide for the disposion of surplus rev-

enue above the TEL limit.

A poron of surplus revenue should be placed inan emergency reserve fund. Use of this emergency

reserve fund should be limited to natural disasters,

as opposed to revenue shoralls.

With an emergency reserve fund in place, a poron

of surplus revenue should be allocated to a budget

stabilizaon fund. The budget stabilizaon fund

should only be used to oset revenue shoralls in

periods of recession.

A poron of the surplus revenue should be allocatedto tax cuts or tax rebates to constrain the growth of

spending. Tax cuts and tax rebates reveal to taxpay-

ers the opportunity cost of allowing government to

spend the surplus revenue.

The most eecve TELs require voter approval to

increase taxes, issue debt, or spend surplus revenue.

When taxpayer approval is required on ballot mea-

sures, taxpayersnot elected ocialswill deter-

mine how much government spending they want and

are willing to pay for.

Recommendaons: States should adopt a cons-

tuonal revenue or spending limit. Such a limit would

impose much needed discipline on proigate spending

paerns.

Addional Resources:

Poulson, Barry W., Colorados Taxpayer Bill of

Rights (TABOR) Amendment: An Experiment in

Direct Democracy, Americans for Prosperity Foun-

daon, Washington, DC, 2009. www.voteontaxes.

com/images/Colorado_s_taxpayer_bill_of_rights_

tabor_an_experiement_in_direct_democracy.doc

Poulson, Barry W., What is at Stake in the Cur-

rent Bale over Colorados Tax and Spending

Limits?, The Independence Instute, Lakewood,

CO., March 2009. www.old.i2i.org/main/author.

php?author_id=90&cycle=2012-3

Segal, Georey F. and Adam B. Summers, The

Sky Isnt Falling: Proven Strategies for Budget

Reconciliaon, Americans for Prosperity Founda-

on and Reason Foundaon, Washington, D.C.,

October 2005. www.reason.org/les/d54cd-b9ddc42fd6dd894005e25c.pdf

Laer, Arthur, Stephen Moore, and Jonathan Wil-

liams, Rich States, Poor States: ALEC-Laer State

Economic Compeveness Index, American Legis-

lave Exchange Council, Washington, D.C., 2010.

www.alec.org/AM/PDF/tax/10RSPS/RSPS2010-

Final.pdf

ALEC Model Legislaon: Tax and Expenditure Limitaon Act

Require Preparaon ofAgency Mission Statements

Unbelievably, only half of the states require their agen-

cies to develop mission statements. Many problems

arise when agencies do not have clear goals and ob-

jecves. Requiring agencies to prepare mission state-

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mentswith goals and objecves that link back direct-

ly to core funcons of governmentswould help solve

the business-as-usual budgeng problem. Agency mis-

sion statements describe the agencys reason for exist-

ing in general terms that capture its unique purpose and

funcons.

Agency goals should be broad, high-level, issue-oriented

statements of an organizaons desired future direcon

or the outcomes that they strive to achieve. Goals elabo-

rate on the organizaons mission statement, arculang

the overall expectaons and intenons for the agency.

They should t well with the mission statement and an-

swer the queson: What do we need to achieve to carry

out our mission? Objecves break down the goals into

smaller, more specic outcome-oriented pieces. They

describe the measurable results an agency is expected

to accomplish within a given me period.

The benets of this recommendaon are clear: with

well-dened roles, local and state government can work

in concert to provide services. Red tape and burden-

some, overlapping of roles can be eliminated. Taxpayers

benet in understanding exactly which agencies to go to

for services. The agencies themselves benet because

they avoid being forced to assume addional respon-

sibilies when other agencies face budget cuts, or are

eliminated enrely. Lastly, policymakers benet becauseit will be clear to see exactly which agencies require an

increase (or decrease) in funding.

Recommendaon: The legislature should requireeach agency to have a mission statement with goals and

objecves linked to the states core funcons of govern-

ment.

Adopt Performance Assess-ment and Management

Once the budget is built, policymakers and administra-

tors should compare those expenditures against the

expected performance outcomes, using the lessons

learned to make necessary adjustments to build the next

budget. All agencies should have clear performance indi-

cators so that policymakers and voters can easily moni-

tor their eciency. If there is no performance monitor-

ing, several problems may arise.

Legislators face a Samaritans dilemma in that failing

agencies receive increases in funding despite being

poorly run, when properly run agencies that are under

duress should receive addional funding. Conversely,agencies may be facing a decreased workload, but re-

ceive the same amount (or even addional) funding

when a reducon of funding is pernent.

Agencies should have at least one performance outcome

measure for each major acvity in their acvity inven-

toryif not, the acvity should be eliminated. An eec-

ve acvity performance measure:

Indicates whether the acvity is achieving its pur-

pose or is contribung to statewide results. Imme-diate and intermediate outcomes are preferable,

although in some cases, output and eciency mea-

sures help tell the story.

Is reliable, accurate, and veriable.

Is understandable and relevant to cizens and

stakeholders who may have lile or no knowledge

of agency operaons.

Is stated in posive terms (or in terms of the

desired outcomes).

Is connected to challenging, yet achievable, targets.

Can be obtained at reasonable cost and for reason-able eort.

To help improve budget accountability, high-level perfor-

mance outcome measures should be placed directly in

the budget. By doing so, state ocials and cizens can

quickly determine whether performance goals have been

met, evaluate the eecveness of acvies purchased

F.

The benets of this recommendaon

are clear: with well-dened roles,

local and state government can work

in concert to provide services.


13/42


in the budget, and gauge whether the investment has

proven its worth versus the cost (see discussion under

Secon II.G: Budgeng for Outcomes).

Many governments have taken steps to require agencies

to start monitoring their performance, but this concept

can be taken much further by instung a process to reg-

ularly review all state programs for performance, rele-

vance, and eciency. While the benets of performance

measurement may seem obvious, merely measuring

agency and program performance is insucient by itself.

Without a corresponding mechanism for oversighta

process designed to ensure performance on an ongoing

basis across all agenciesnothing will change.

In this process, each agency should be required to regu-

larly demonstrate how each acvity it performs directly

relates to achieving its core mission. This process can

idenfy immediate opportunies for streamlining, con-

solidaon, and alternave delivery. Ulmately, the pro-

cess should integrate into the larger budgeng process,

fully funding performing and eecve programs, while

reducing or eliminang funding to ineecve, redun-

dant, or poorly performing programs. The review should

include, but not be limited to, making recommendaons

for eliminaon or alternave delivery systems.

The Bush administraon developed a robust process

model at the federal level that can serve as a template.

The Oce of Management and Budget (OMB) developed

the Program Assessment Rang Tool (PART) in 2002 to

evaluate programs based on their purpose, strategic

design, management, and results. OMB takes these as-

sessments into account while reviewing agency budget

requests, and the results are reported in the Presidents

budget submission to Congress. Between 2002 and

2008, the administraon evaluated the performance of

over 1,000 programs constung 96 percent of all feder-al programs. During that me, program rangs increased

across the board, and programs whose results could not

be demonstrated due to a lack of relevant informaon

declined from a whopping 50 percent to 19 percent.

Congress has been slow to use PART informaon to make

budget allocaon decisions, and the administraon has

enjoyed only limited success in convincing the legislature

to eliminate or reduce funding for poorly performing

programs. However, over the life of PART, high perform-

ing programs have generally received larger funding in-

creases than those that did not perform well.

Indiana Governor Mitch Daniels has adopted a similar

process in Indiana, launching an aggressive review of

the size, scope, funcons, and budget of each agency,

dubbed PROBE (Program Results: an Outcome Based

Evaluaon). PROBE reviews each state program to jus-

fy its work and demonstrate results, and is concep-

tually similar to the federal PART analysis established

under Daniels leadership as federal OMB director. The

ndings of the rst PROBE reports revealed that over

half of the 420 state programs examined did not havemeasures that suciently reported on the performance

of the program. Following the publicaon of the PROBE

report, agencies were requested to develop appropriate

program measures, which will feed into a larger perfor-

mance-based budgeng process within Governor Dan-

iels Oce of Management and Budget.

Recommendaon: Aer requiring that all agenciescreate a traceable monitor of their performance, a sepa-

rate process should be instuted at the enterprise level

to regularly assess their performance.

Addional Resources:

Pew Center on the States, Policy Framework to

Strengthen Government Planning, Budgeng, and

Accountability, Government Performance Project,

Washington, D.C., March 2010. www.pewcen-

teronthestates.org/report_detail.aspx?id=57708

Tradionally, state budgeng

focuses only on the increase to a base

budget, and rarely are the big picture

quesons askedin essence, the

budget is on autopilot.


14/42



Osborne, David and Peter Hutchinson, The Price

of Government: Geng the Results We Need in an

Age of Permanent Fiscal Crisis, Basic Books, New

York, NY, 2004. www.psg.us/reinvenon/pogbfore-

invent.html

Segal, Georey F. and Adam B. Summers, The

Sky Isnt Falling: Proven Strategies for Budget

Reconciliaon, Americans for Prosperity Founda-

on and Reason Foundaon, Washington, D.C.,

October 2005. www.reason.org/les/d54cd-

b9ddc42fd6dd894005e25c.pdf

The Evergreen Freedom Foundaon, The Steward-

ship Project, Olympia, WA, June 2003. www.ewa.

org/pdfs/stewardship2003.pdf

Government Management Accountability and Per-

formance, Publicly Measuring Performance, State

of Washington, November 2010. www.account-

ability.wa.gov/default.asp

ALEC Model Legislaon:

Council on Ecient Government Act

An Act Relang to Performance Audits of Govern-

mental Enes

Budgeng for Outcomes

The adopon of a priority or outcome-based budgeng

system would help state policymakers to more easily

idenfy the governmental acvies most important to

cizens, as well as to make dicult trade-o and cost-

benet decisions more easily. It would also result in the

provision of beer, more ecient state government ser-

vices, while protecng taxpayers and maintaining scal

responsibility.

Surely, state governments can stop providing some func-

ons, but unfortunately, the tradional budgeng pro-cess fails to facilitate this sort of downsizing. Tradion -

ally, state budgeng focuses only on the increase to a

base budget, and rarely are the big picture quesons

askedin essence, the budget is on autopilot. The

logic of autopilot budgeng is simplein order to main-

tain current service levels, agencies need to spend what

they did last year plus an increase to account for ina-

on and populaon increases. Put simply, this moves

the discussion to the margins of spendingthe annual

spending increase requests from agencies. Unfortunate-

ly, the other 90 to 95 percent of spending is le out of

the debate and is seldom analyzed for relave merits.

In fact, it is generally assumed that the acvies should

connue to receive funding. The tradional budgeng

process eecvely establishes a default posion that

state government will just connue to expand over me,

represenng an unsustainable approach to state scal

management.

Several states (and also cies and counes) are chang-

ing their views about government budgeng. Priority

or outcome-based spending treats spending as an in-

vestmentthe type and amount of investment should

change yearly as revenue, results, performance, and

needs change. Budgeng this way shis the focus on

the investments and what can be accomplished with

available resourceswhen resources run out, spendingstops. Using this model, decits are nearly impossible.

States need to follow the lead of Washington state, Iowa,

and others (see Table 2 on the following page) and begin

shiing to an outcome-based budgeng systemalso

known as Budgeng for Outcomes (BFO)in which poli-

cymakers and the public collaboravely rank programs.

It helps leaders rank programs according to how cost-

eecve they are at achieving the results cizens want.

The state government then goes down the list, funding

the most important programs rst, buying down withavailable revenues unl it runs out of money. This en -

sures that vital services are being funded before less-

crical ones, and services not deemed of the highest im-

port are reduced or eliminated. Kitchen table budgeng

works this way, and theres no reason the state shouldnt

do the same.

G.


15/42


Jurisdicons That Have Used Budgeng for Outcomes

States Counes

Washington

Iowa

South Carolina

Michigan

Louisiana Dept. of Culture, Recreaon, and

Tourism

Snohomish, WA

Multnomah, OR

Mesa County, CO

Polk County, FL

Larimer County, CO

Coconino County, AZ

Cies School Districts

Azusa, CA

Spokane, WADallas, TX

Ft. Collins, CO

Northglenn, CO

Redmond, WA

Eugene, OR

Savannah, GA

Balmore, MD

Tacoma Metro Parks, WA

Jeerson County, CO

Billings, MT

Washington StatePrioriesof Government BudgengModel

Budgeng for Outcomes was rst employed by Gover-

nor Gary Locke in Washington state in 2002 and was

called the Priories of Government (POG) model. At the

me, Washington faced a potenal $2.4 billion budget

shorall (approximately 10-15 percent of the size ofthe general fund operang budget). Signicant changes

were needed to plug the hole in the budget. In an eort

to make the most of limited resources and ensure that

the most important governmental funcons were prop-

erly funded, the Locke administraon called for a top-

to-boom evaluaon of what services the government

provides and how.

The Public Strategies Group, led by reform expert David

Osborne, developed the POG approach with the Locke

administraon as a central means of closing the budget

decit. The administraon idened a set of ten key re-

sults that cizens expect from government:

Improve student achievement in elementary, mid-

dle, and high schools.

Improve the quality and producvity of our work-force.

Improve the value of postsecondary learning.

Improve the health of Washington cizens.

Improve the security of Washingtons vulnerable

children and adults.

Improve the economic vitality of business and indi-

viduals.

1.

Table 2.

Source: David Osborne, The Next California Budget: Buying

Results Cizens Want at a Price They Are Willing to Pay,

Policy Study 380, Reason Foundaon, April 2010, p.2.


16/42



Washington State POG Example

Reducons: $2.4 Billion

Source: Washington State Oceof Financial Management

Figure 1.

$24Billion

FUNDEDP

RIORITIE

S

Purchased: $24 Billion

$109m

$221m$112m

$187m

$389m$277m

$774m

$112m

K-12 educaon for

1,000,000 students

Higher educaon for

215,000 students

Health care for 979,000

children & needy people

Protecng vulnerable children,

adults and families

Public safety, including

prison for 15,500

Economic development

Natural resources and parks

Legislature

Judicial

Government operaons

Dept service on capital projects

Pension contribuons

Reserves

(General Fund = $214m,

Health Services = $78m, Emergency

Reserve Fund = $67m)

$10.2b

$2.7b

$3.7b

$3.8b

$1.4b

$125m

$310m

$133m

$82m

$369m

$1.3b

$55m

$344m

$2.4Billion

Lower costs in higher educaon

Future class size reducon

K-12 programs beyond basiceducaon

Lower-priority programs for

vulnerable children and adults

Future expansion of Basic Health Plan

Health coverage for 68,000 adultsnow on Basic Health Plan

Pay increases/benets for state-funded employees, pensions savings

Consolidaon and sta reducons of2,600 FTE

Improve statewide mobility of people, goods, infor-

maon, and energy.

Improve the safety of people and property.

Improve the quality of Washingtons natural

resources.

Improve cultural and recreaonal opportunies

throughout the state.

Result teams were formed to analyze government ac-

vies in each of the ten result areas. In Washington,

result teams were comprised of six to eight subject-

maer experts from state agencies, and were led by the

Oce of Financial Management. These teams analyzed

and ranked government acvies according to how well

they achieved the desired outcomes as outlined in the

ten governmental goals. The result teams were aided by

a 10-member guidance team comprised of leaders of

the public, private, and nonprot sectors. The guidance

team was tasked with overseeing the priorizaon pro-

cess and reviewing the work of the result teams.

In order to aid in the decision-making process, result

teams were each given a dollar allocaon to serve as an

upper spending limit for their purchase plans. Washing-

ton reached several key conclusions regarding the alloca-

on limit:

The priorizaon process is oen more meaningful

when the allocaon is less than the amount cur-

rently spent in that area.

A dollar constraint encourages creavity, keeps

proposals grounded in nancial reality, and forces

people to arculate priories and choices.

The priority rankings established by the result teams

were then used to develop the 2003-05 biennial execu -

ve budget proposal. Acvies were funded from the

top of the list down unl the spending limit was reached.Figure 1 oers an illustrave example of some of the

spending priories that were established.

Washington state sll uses the POG model under the

current administraon, demonstrang the longevity of

the approach and its resilience to changes in leadership.

UN

FUNDEDP

RIORITIES


17/42


Why Budgeng forOutcomes Works

Across-the-board cuts are generally ill-advisedthey

treat and aect the highest performing and most im-

portant services equally with the lowest performing and

least important services. By focusing on performance

and priories, policymakers can target their cutsrid-

ding taxpayers of poor performing, non-essenal, and

non-core services.

Since policians, special interests, and bureaucrats oen

focus on narrow interests and spending priories, ignor-

ing the larger picture and the sacrices necessary to ac-

commodate those desiresperhaps the greatest ben-

et of the Budgeng for Outcomes (BFO) approachis

simply making budgetary priority and trade-o decisions

clear to all. As a 2005 U.S. Government Accountabil-

ity Oce (GAO) report of innovave state performance

budgeng eorts noted:

One Washington legislator said that [BFO] provided

decision makers with proposed priories in a clear

and easily understood format that encouraged con-

strucve debate. . . Legislave ocials said that the

greatest contribuon of [BFO] was that it provides a

strong, clear means of communicang budgetarytrade-os to both decision makers and the public.

The BFO approach to budgeng has several other ad-

vantages over the tradional incremental line-item

approach:

Focuses on achieving results and developing state-

wide strategies for realizing goals, instead of focus-

ing narrowly on agency silos.

Illustrates not only which programs are cut, but

which programs are funded.

Presents trade-os and cost-benet decisions in away that is clear and easy for decision makers and

cizens alike to understand.

Makes performance informaon more relevant

and useful to budget decisions.

Allows decision makers to reward programs and

acvies that best serve state goals and helps

reduce waste by idenfying ineecve and dupli-

cave programs and services.

Helps idenfy statutory limitaons that obstruct

more eecve service delivery.

Recommendaon: States should adopt a BFO ap-proach to bring sanity and scal sustainability to the

state budget process. BFO integrates strategic planning,

zero-based budgeng, and performance-based budget-

ing into a workable, common-sense system that has

been replicated in numerous state and local govern-

ments. State policymakers would be well-advised to be-

gin implemenng a similar transformaon in their bud-

geng process to ensure that taxpayer dollars are spent

with maximum eecveness and that the trade-os

among dierent categories of spendingespecially in a

budget crisisare made clear and explicit.

Addional Resources:

Osborne, David, The Next California Budget: Buy-

ing Results Cizens Want at a Price They Are Will-

ing to Pay, Reason Foundaon, Los Angeles, CA,

April 2010. www.reason.org/les/california_bud-

get_david_osborne.pdf

Osborne, David and Peter Hutchinson, The Price

of Government: Geng the Results We Need in an

Age of Permanent Fiscal Crisis, Basic Books, NewYork, NY, 2004. www.psg.us/reinvenon/pogbfore-

invent.html

Oce of Financial Management, Priories of Gov-

ernment homepage, Washington State, Olympia,

WA, November 2010. www.ofm.wa.gov/budget/

pog/

U.S. Government Accountability Oce, Perfor-

mance Budgeng: States Experiences Can Inform

Federal Eorts, Report No. GAO-05-215, p. 14,

Washington, D.C., February 2005. www.gao.gov/

new.items/d05215.pdf Evergreen Freedom Foundaon, Next step in prior-

ity-based budgeng, Olympia, WA, November 18,

2003. www.ewa.org/main/arcle.php?arcle_

id=240&number=51

2.


18/42



There is a widespread belief in the public sectorand

among many policymakersthat as the state populaon

increases and incomes rise, government spending should

increase at a roughly equivalent rate. This assumpon

reveals a key dierence between private sector manag-

ers and government managers. While it is true that the

burden on state government grows as the populaon in-

creases and the economy uctuates, it is also vital that

policymakers learn from the private sector, and connu-

ally work to reduce taxes and regulaons through inno-

vave and entrepreneurial government reform.

In the private sector, the cost of producing a product

connually reduces over me because compeon en-

courages companies to increase eciency in their deliv-

ery of services. As a result, costs go down and consumers

get beer value for their tax dollars. The following tools

will give legislators valuable ideas to control costs and

improve government eciency.

The Item-Reducon Veto

From 1950 to 2009, U.S. state and local government

spending grew 33 percent faster than the private sector.

More recently, from 2000 to 2009 state and local spend-

ing growth outpaced the private sector by nearly 90 per-cent. This is not sustainable. State and local governments

depend enrely on the private sector for their resources

and cannot connually outpace the wealth-creang sec-

tor of the economy. State policymakers looking for ways

to limit government spending have a number of opons.

One potent and lile-discussed means of liming spend-

ing is the item-reducon veto.

Like the president, every governor in the naon pos-

sesses the power to veto pieces of legislaon. Unlike

the president, however, governors in all but four statespossess a line-item veto, allowing them to reject cer-

tain secons of bills without striking the enre piece of

legislaon. In just twelve states, however, the governor

possesses an even more-potent veto power: the item-

reducon veto.

The item-reducon veto is similar to the line-item veto

but it permits the governor a further power: It allows

him or her to reduce the amount budgeted for a par-

cular item without striking the item altogether (it does

not, however, allow a governor to increase the amount).

The power gives governors superior agenda-seng au-

thority. More importantly, it has been an eecve tool

to combat excessive spending.

Using observaons from 47 states over a period of nearly

30 years, economist Mark Crain compared the potency

of various instuons that can aect state spending.

Aer controlling for various demographic factors, Crain

examined the impact of the item-reducon veto. Among

all instuonal controls on spending, the item-reduconveto stood out. Its ability to limit per capita spending is

nearly ve mes as great as that of the other instuons.

State and local spending has been growing at an unsus-

tainable pace for decades. According to the GAO, state

and local governments long-term scal posion will

steadily decline through 2060 absent policy changes.

One policy change that might help states avert scal cri-

sis is a line-item reducon veto.

Recommendaon: Adopt an item-reducon vetopolicy.

Addional Resources: Crain, Mark, Volale States: Instuons, Policy,

and the Performance of American State Econo-

mies, Ann Arbor, MI: University of Michigan Press,

H.

More recently, from 2000 to 2009,

state and local spending growth

outpaced the private sector by

nearly 90 percent. This is notsustainable.


19/42


2003. www.press.umich.edu/pdf/0472113038-fm.

pdf

Crain, Mark and James C. Miller III., Budget Pro-

cess and Spending Growth., William and Mary Law

Review 31, no. 4, pages 1021-46, Williamsburg,

VA, 1990. hp://scholarship.law.wm.edu/cgi/

viewcontent.cgi?arcle=1983&context=wmlr

Government Accountability Oce, State and Local

Governments: Fiscal Pressures Could Have Implica-

ons for Future Delivery of Intergovernmental Pro-

grams,Washington, D.C., 2010, www.gao.gov/

new.items/d10899.pdf

Mitchell, Mahew, State Spending Restraint: An

Analysis of the Path Not Taken, Mercatus Center at

George Mason University Working Paper, no. 48,

Arlington, VA., August 2010. www.mercatus.org/

publicaon/state-spending-restraint

New, Michae, Proposion 13 and State Budget

Limitaons: Past Successes and Future Opons,

Cato Instute, Washington, D.C., 2003. www.cato.

org/pubs/briefs/bp83.pdf

ALEC Model Legislaon Item-Reducon Veto Constuonal Amendment


20/42



Create a TransparentBudget Web site

At some point most cizens wonder, Just how, when,

and where does government spend our tax dollars?

What do our elected representaves want to accomplish

when they spend public money, and what results are ac-

tually achieved?

Considering state lawmakers will spend billions eachbudget cycle, these are basic quesons to which any tax-

payer should be able to get answers quickly and conve -

niently. This is especially true since modern technology

makes accessing large amounts of informaon easier

than ever.

Since adopng model language to promote budget trans-

parency in 2007, ALEC has witnessed dozens of states

pass comprehensive legislaon to improve transpar-

ency and accountability by establishing central, search-

able databases of government expenditures. These Websites have streamlined the process of budget research,

reduced the burden of paperwork on state agencies, and

generated millions of hits, demonstrang real public in-

terest in such an eort.

The purpose of ALECs model Taxpayer Transparency

Act is to provide a searchable budget Web site to show

Tools to Improve

Budget TransparencyIII.

We might hope to see the nances of the Union as clear and intelligible as a merchants books,

so that every member of Congress and every man of any mind inthe Union should be able tocomprehend them, to investigate abuses, and consequently, to control them.

- Thomas Jefferson

cizens where their tax dollars are spent and for what

purpose. Among the types of informaon typically in-

cluded on such sites are:

State expenditures by fund or account.

Expenditures by agency, program, and subprogram.

State revenues by source.

State expenditures by budget object and sub-object.

State agency workloads, caseloads, and perfor-

mance measurements. Historical informaon on state spending as well as

access to state service contracts.

States can easily implement transparent budget Web sites

at minimal cost. The state of Nebraska placed its expendi-

tures online for $37,000, down from a previous $1.3 mil-

lion price tag. Oklahoma implemented budget transparen-

cy at minimal cost to taxpayers. According to the sponsor

of the legislaon, the soware to build the Web site only

cost $8,000. The cost of such Web sites is minimal, and al-

most always overstated. Inated cost esmates occur for afew reasons, most commonly, a lack of informaon and a

desire to kill the project as it threatens business-as-usual.

Transparent budget Web sites are also an asset to poli-

cymakers and agencies because they idenfy and elimi-

nate waste and ineciencies in their expenditures. For

example, Texas Comptroller Susan Combs idened $8.6

A.


21/42


million in savings as a direct result of the implementa-

on of Open Book Texas, a database similar to the one

called for in ALECs Taxpayer Transparency Act. Stream-

lining government and eliminang wasteful spending is

much easier when nancial data is provided in a conve-

nient and useable format.

It is important for taxpayers to have detailed informaon

about how their money is spent. ALECs model Taxpayer

Transparency Act codies this fundamental right, making

the data searchable and easily available to any taxpayer

with an Internet connecon. This means that the site al-

lows users to download data from the site, and sort the

gures as they see t, free of cost. It is imperave to al -

low taxpayers to quickly and easily navigate a massive

amount of complex expenditure and revenue data. The

move towards transparency in governance is inevitable,

and the sooner states decide to embrace it, the beer

o they will be.

Public School DistrictTransparency

Not only do educaon budgets constute a massive

annual expenditure for all states, but they also play an

important role in shaping the next generaon of Ameri-

cans. Parents, voters, and taxpayers have a vested in-terest in specic informaon about how public dollars

are spent educang the states children. ALECs model

Public School Financial Transparency Act mandates that

all school districts put their expenditures and revenues

online in a searchable database available free of charge,

increasing accountability in the states educaon fund-

ing system. This represents a massive jump forward for

transparency and accountability, as sorng electronic

data is innitely more user-friendly than sorng through

thousands of pages of budget documents.

The bill also contains specic privacy protecons with re-

spect to what data is allowed to be displayed on the site.

The site is to contain data that is already publicly avail-

able under the states freedom of informaon laws. It

simply makes that informaon easier to obtain, stream-

lining the process for parents and taxpayers without any

violaons of privacy. By empowering ocials to idenfy

cost eciencies, students can get more bang for their

parents buck, ushering in a new era of accountability in

educaon budgets.

Recommendation: States should develop search-able online budget transparency tools for state and

local budgets.

Addional Resources: The Sutherland Instute, Transparency in Govern-

ment, Salt Lake City, UT, 2008. www.sutherlandins-

tute.org/uploads/transparencyingovernment.pdf

www.kansasopengov.org

www.scalaccountability.org

www.SunshineReview.com

www.buckeyeinstute.org

ALEC Model Legislaon: Taxpayer Transparency Act

Public School Financial Transparency Act

Transparency and Government Accountability Act

Adopt a 72-Hour BudgetTimeout

A detailed review of budget priories, by pares other

than just the budget-writers, improves the transparencyand accountability of state government, and may also

improve the quality of proposed legislaon.

To help facilitate public involvement, legislators should

adopt a 72-hour meout period once a tax or spending

bill is introduced or amended, and before hearings or

legislave votes occur.

Consider the fact that a states combined budget (oper-

ang, capital, and transportaon) can be hundreds of

pages long. Despite the length and complexity of thesedocuments, hearings are usually held the same day the

budget is introduced, and the bill is amended and en-

acted with inadequate me for meaningful public input.

Allowing an opportunity for a detailed review by the

public prior to hearings or votes on budget bills would

help increase public trust in government and enhance

accountability for the spending decisions being made.

B.1.


22/42



Timeout, January 2009. www.ewa.org/main/

arcle.php?arcle_id=2644

ALEC Model Legislaon: The 72-Hour Budget Review Act

Require Fiscal Notes BeforeAcon on Spending Bills

Fiscal notes provide value for legislators and the public

by forecasng revenue changes in proposed legislaon

However, many mes bills are introduced and voted on

before the data on scal repercussions are made avail-

able to those vong on the bills. State ocials can eas-

ily feign surprise at the state of the budget when it is

obvious that the long-term budget forecasts have either

been unseen or uerly disregarded.

State ocials and the public should know the full impact

of a spending proposal before any acon is taken. Bills

proposing increased spending should not receive hear-

ings or votes unl a completed scal note is available.

The purpose of this recommendaon is clearproi-

gate spending bills cannot be pushed through legislave

bodies without the full scal consequences being made

known to legislators. This is in line with several other rec-ommendaons that in totality demand more account-

ability from ocials on both sides of the aisle.

Washington state is moving toward required scal notes.

For the me being, scal notes only have to be created

when requested and they are not always prepared by

the me a hearing or vote is held. This gradually evolving

access to the scal impact of legislave acon is unprec-

edented and commendable.

Recommendaon: Require completed scal notesbefore bills can be acted on.ALEC Model Legislaon:

Fiscal Note Act

C.

Far too oen, state government has

approved wasteful spending as big spenders

exploit its opaqueness.

This would allow lawmakers and the public at least a

three-day period to review and calmly consider the pro-

posed budget, new taxes, or new spending before hear-

ings or nal vong occurs.

Too oen, state government has approved wasteful

spending as big spenders exploit its opaqueness. By en-

suring proper consideraon of legislaon before passage,

it helps to increase the public trust in government and

enhances the respect for the legislature by ensuring that

its operaon is conducted with the openness, order, and

dignity beng the state. This good government bill

nudges the state in the right direcon by fostering pub-

lic parcipaon in the legislave process and allows the

opportunity for detailed review by interested pares. Ci-

zens deserve legislators who have the me for a detailed

review prior to hearings or votes on legislaon.

The bills should be made publicly available, meaning

that the bills will be posted on the legislatures Web site

and published in a bill report, commiee report, and/or conference report. The 72-hour me period excludes

Saturdays, Sundays, and holidays, except when the leg-

islature is in session on such a day. Amendments oered

to the bills will not be considered unless they are made

publicly available 24 hours prior to any vote (excluding

Saturdays, Sundays, and holidays). Because of a built-in

exempon for emergency legislaon, there is no cred-

ible argument against the 72-Hour Budget Timeout.

If a lawmaker wants to appropriate public funds, those

foong the cost have every right to a detailed, delibera-

ve review by their elected ocials.

Recommendaon: Legislators should adopt a 72-hour meout period for all future budget and tax bills.

Addional Resources: Gunn, Amber, Evergreen Freedom Foundaon,

Olympia, WA, Lawmakers Need a 72 Hour Budget


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2

Tools to Control Cost and

Improve Government EfciencyIV.

Adopt a State Hiring Freeze

During a budget crisis, all state agencies will argue

their services are essenal. These cries will become

even louder if layos are discussed. Unions and other

special interests will line up against layos and cry loudlyagainst disrupng the status quo. This can be avoided by

implemenng a hiring freeze and analyzing which needs

are the most pressing.

Adopng a exible freeze on state hiring would reduce

state employment growth while allowing agency

managers to maintain exisng stang levelspriorizing

new hiring where it is most needed, while ensuring

the overall size of state government doesnt grow. This

approach maintains the exibility necessary for agency

managers to focus on the most important programs andmaintain adequate service levels.

During a temporary freeze, the state should conduct an

audit assessing the need for the budgeted posions.

States should consider freezing all posions, not just

those unlled today. These are vacancy savings, in

other words, jobs have gone unlled. There have been

no layos. An excepon to this could be if a department

oers to layo exisng employees to be replaced by new

hires that are less costly. Substung higher cost labor

for lower cost labor could save agencies money and haveminimal impact on their ability to provide services.

In 2008, the Thomas Jeerson Instute and Reason

Foundaon found that simply not lling more than 7,600

non-crical posions (i.e., not public-safety, university

faculty, and management-related posions) budgeted,

but unlled, at the beginning of 2008 would save the

Commonwealth of Virginia over $500 million a year

or more than $1 billion during the two-year budget.

Former Arizona Governor Janet Napolitano took a similar

acon in February 2008, freezing all state posions except

those directly involved in public health and safety orcollecng and invesng state revenues. At that me, the

workforce aected by the freeze numbered 38,954 full-

me employees. By that September, Gov. Napolitanos

oce reported that the hiring freeze had resulted in a

5.3 percent reducon in the number of jobs covered by

the freeze, and a reducon of the overall state workforce

of 2.8 percent.

Recommendaon: Adopt a state hiring freeze

encompassing all departments.

ALEC Model Legislaon Commission on Economy and Producvity in State

Government Act

Reform State Pensions

In recent years, state governments have encountered

a funding crisis in their pension plans for public

employees. This crisis in the states has resulted from

many factors, including:

Escalaon in health care costs

Signicant losses in the stock market

Costly pension and health benets provided in

dened-benet plans

Public employees rering earlier and living longer

A.

B.


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Reducon and postponement of employer contri-

buons to the pension plans

Many state pension plans are fundamentally awed.

Using more realisc assumpons regarding the rate of

return on assets, as well as assumpons regarding the

actuarial value of liabilies, it is highly unlikely that these

plans will achieve actuarial balance over the amorza-

on period. In scal year 2008, the states had a 1 trillion

dollar gap in funding their pension plans. Furthermore,

pension systems are likely to experience signicant fund-

ing shoralls in future years, even if the economy recov-

ers and nancial markets stabilize. These funding short-

falls will impose a heavy burden on future generaons.

Recommendaons to reform state pensions includecapping o the exisng pension system and forming a

dened-contribuon system for all new employees.

State policymakers can also consider capping o pension

ballooning in state employees nal years of service. Ad-

dionally, policymakers can also require increased em-

ployee contribuons, limit reree and rehire costs, and

raise the rerement age for new employees. Utah also

provides an excellent case study in successful state pen-

sion reform.

Recommendaon:Everything should be on the ta-ble, including changes in benets and increased employ-ee contribuon rates, as well as employer contribuon

rates. Most importantly, states should consider replacing

their dened-benet plans with dened-contribuon

(401(k) style) plans for new employees.

Addional Resources: Poulson, Barry and Arthur Hall, State Pen-

sion Funds Fall O a Cli, American Legislave

Exchange Council, Washington D.C., January, 2010.

www.alec.org/AM/Template.cfm?Secon=State_Pension_Funds_Fall_O_a_Cli&Template=/CM/

ContentDisplay.cfm&ContentID=12363

Unfunded Teacher Pension Plans: Its Worse Than

You Think, The Foundaon for Educaonal Choice,

Indianapolis, IN, April 13, 2010. www.edchoice.

org/Research/Reports/Underfunded-Teacher-Pen-

sion-Plans--It-s-Worse-Than-You-Think.aspx

California Pensions Underfunded by 500 Billion,

Stanford University, Stanford, CA, April 11, 2010.

www.sierrasun.com/arcle/20100411/NEWS/100

419995/1066&ParentProle=1051

ALEC Model Legislaon: ALECs Statement of Principles on State and Local

Government Pension and Other Post Employment

Benet (OPEB) Plans

Restructure State RereeHealth Care Plans

Current state reree health care plans are also scally

unsustainable. Recent esmates suggest that the states

have $558 billion in unfunded reree health care liabili-

es for current and future benets, according to the

Center for State and Local Government Excellence. As of

scal year 2008, the Pew Center on the States reports

that states had only funded $32 billion, or 5 percent, of

the total cost funded for reree health care liabilies.

State and local government Other Post Employment

Benet (OPEB) plans for public employees are generally

in worse shape than their pension plans. Most govern-

ments connue to fund these OPEB plans on a pay-as-

you-go basis. To meet Governmental Accounng Stan-

dards Board (GASB) accounng standards, governments

must now show the unfunded pension plan liabilies as

debt in their nancial statements. For OPEB plans, liabili-

es only need to be recognized in a footnote. Govern-ments must also meet the 30-year me frame for elimi-

nang unfunded liabilies in pension plans, though not

in OPEB plans. Few state and local jurisdicons are meet-

ing the 30-year amorzaon standard for either pension

or OPEB plans. Many of these state governments would

have to double their actual contribuon rates to well

over 20 percent of salaries to meet this standard.

C.

Current state reree health

care plans are also scally

unsustainable.


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2


It is likely that unfunded liabilies in state and local gov-

ernment pension and OPEB plans are over $2 trillion. Tax-

payers are no longer willing to bear the increasing cost of

these plans in the form of higher employer contribuon

rates or decreased government services. They are de-

manding reforms that will bring these plans into line with

pension and OPEB benets oered in the private sector.

States may no longer be able fulll their health care prom-

ises to rerees unless the system is restructured. Typically,

states fund state employee reree health care plans by

paying current rerees medical expenses as they occur.

States that oer generous health care benets may strug-

gle to aord the massive price tag in the near future.

Unlike pension reform, state lawmakers have a greater

opportunity to successfully restructure reree health

care benets. Recommendaons to reform state reree

health care plans include examining what percentage of

the states public employees are eligible to rere within

the next ve years. Other recommendaons for reform

include increasing employee contribuons to health care

plans, improving governance and oversight, lowering

health care benets, and increasing the rerement age.

State lawmakers can also follow the reforms that Idaho

and Indiana recently made, using these successes as their

guide to a more sustainable reree health care model.

Recommendaon: Freeze dened-benet OPEBplans, and replace them with dened-contribuon plans

for new employees. One approach is to oer oponal par-

cipaon in Health Savings Accounts (HSA) for state work-

ers. Indianas experience has been highly successful, with

70 percent of state workers choosing the HSA planswith

Indianas taxpayers saving millions in the process.

Addional Resources:

Promises With A Price, Pew Center on the States,Washington, D.C., April 30, 2008. www.pewcen-

teronthestates.org/uploadedles/Promises%20

with%20a%20Price.pdf

At a Crossroads: The Financing and Future of

Health Benets for State and Local Govern-

ment Rerees, Center for State and Local

Government Excellence, Washington, D.C.,

July 2009. www.slge.org/index.asp?Type=B_

BASIC&SEC={3A23B0F5-96FC-40AE-91D1-

0DE488D5F17E}&DE={9CED9932-83D5-4183-

B5F3-16C59BA66A12}

State and Local Government Reree Health Ben-

etsLiabilies Are Largely Unfunded, but Some

Governments Are Taking Acon, GAO, Washing-

ton, D.C., November 2009. www.gao.gov/new.

items/d1061.pdf

Poulson, Barry and Arthur Hall, Public Employee

Other Post Employment Benet Plans, The

American Legislave Exchange Council, Washing-

ton, D.C., January 2011. www.alec.org

ALEC Model Legislaon

ALECs Statement of Principles on State and Local

Government Pension and Other Post Employment

Benet (OPEB) Plans

Eliminate Posions VacantMore Than Six Months

State public employment levels are measured using a

number of dierent methods. One measure, typically used

by agency managers when requesng budget increases, is

the number of posions for an agency to meet its desired

stang level. In many cases, this measurement includesposions that have been vacant for a long me. Typically,

hundreds of unlled posions in state government exist on

paper.

If a posion remains open for more than six months, it is

reasonable to assume the agency can do its work without

an employee in that posion. By eliminang all posions

that have gone unlled for six months, the state can cut

budgeted payroll in areas not crical to public safety or

the basic operaon of state government.

This recommendaon will bring more accurate budget

informaon and lower personnel costs for providing

services for the taxpayers.

Recommendaon: Create a tracking system where-by any posion that is vacant for more than six months

is eliminated.

D.


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ALEC Model Legislaon Commission on Economy and Producvity in State

Government Act

Delay Automac PayIncreases

During an economic downturn, many people in the pri-

vate sector face a reducon in pay or the loss of their jobs,

while government workers are assured employment with

regular raises and generous vacaon, health, and rere-

ment benets. This is an unsustainable personnel policy

that virtually ensures steady, annual spending increases.

In mes of decit, policymakers should delay automac

pay increases for state employees unl the state achievesscal sustainability. This decision will certainly be un-

popular with the public ocials that are having their pay

increases delayed. However, during a me of nancial in-

solvency, private sector employees dont get the benet

of automac pay increases either. If the legislature wants

to avoid this problem, it must carefully monitor the bud-

get to prevent this emergency step from occurring.

The budgetary benets of this decision are clear. Howev-

er, aenve voters will noce other benets. By opng

to delay the automac pay increases, policymakers showthat both the public sector and the private sector take

the budget crisis seriously. It also shows that public sec-

tor employees are held accountable and dont brazenly

plunder the public purse.

Recommendaon: Policymakers should delay auto-mac pay increases for state employees unl the rising

costs of government are brought under control.

ALEC Model Legislaon: Commission on Economy and Producvity in State

Government Act

Adopt Acvity-Based Cosng

Agency managers consistently face dicult decisions

about the best way to administer state services. Of-

ten managers simply do not have access to the infor-

maon they need to make important decisionssuch

as whether to provide a service in-house or through a

contractor, or whether the cost of a service outweighs

the benets. Put simply, the queson, How many state

employees does it take to change a light bulb, and at

what cost? oen cannot be accurately answered in

government bureaucracies because they are not set up

to answer it.

The true cost of any acvity in government is dicult,

if not impossible, to accurately measure because agency

budgets typically do not capture the full costs of con -

ducng that acvity. For example, some of an agencys

overhead costs may be covered by a separate general

services agency (e.g., prinng, energy, informaon tech-

nology, payroll, human resources, etc.).

Acvity-based cosng is a method of cost analysis de-

signed to describe all the cost elements of a certain ac-

vity, not just the major factors like labor, fringe benets,

supplies, and depreciaon. In the private sector, acvity-

based cosng accounts for every hour of work and each

piece of equipment involved in a project, including capi-

tal, facility, and overhead costs for an organizaon, al-

lowing managers to make informed decisions about the

use of scarce resources.

Acvity-based cosng is not a novel, untested concept.

It has proven eecve in cies and states across the na-

on, saving money me and me again without forcing

legislators to compromise on the quality of service they

provide for their constuents.

In 1992, Indianapolis Mayor Steven Goldsmith imple-

mented acvity-based cosng in agencies throughout the

city. Using the new analysis tool, city workers reduced the

cost of plowing snow from $117 per mile to $38 per mileand cut the cost of sealing cracks along the highway from

$1,200 per lane-mile to $737 per lane-mile.

In another example, acvity-based cosng helped the

Iowa Department of Transportaon generate $200,000

in new revenue in 1996 and reduced the me needed to

paint stripes on state highways. By developing a compre-

E.

F.


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2


hensive cost analysis of three major acviescenter

line and no-passing marks; edge-line markings; and curb,

island, and miscellaneous markingsthe Department

reduced unproducve down-me and began performing

work for other governments during the me they saved.

Recommendaon: Lawmakers can improve theperformance of state agencies by implemenng acvity-

based cosng.

Adopt a Sunset ReviewProcess for State Agencies,Boards, and Commissions

Once created, government agencies or programs are

rarely reevaluated to see if circumstancesor agency

performance itselfjusfy their connued existence.

Naturally, this promotes government sprawl and spiral-

ing public sector costs. In the absence of any mechanism

to connually prune away at government, it is typically

far more dicult to shut down an agency or program

than it is to create it in the rst place.

Luckily such mechanisms exist, one of the more power-

ful being the use of a sunset review commission. Texasoers a powerful example of what a funconal, eecve

sunset commission can achieve. The Texas Legislature

established a 12-member Sunset Advisory Commission

in 1977 to conduct regular assessments of more than

150 state agencies to determine: (a) if each agency is sll

needed, and (b) idenfy and eliminate waste, duplica-

on, and ineciency in state government.

The scal impact of Commissions recommendaons

over me has increased government eciency. Since

the sunset process began in 1978, 58 state agencies have

been abolished and another 12 agencies have been con-

solidated. Based on reviews conducted between 1982

and 2009, the Commission esmates a potenal 27-year

revenue savings of approximately $783.7 million through

the sunset process, compared with expenditures of

$28.6 million for the Commission. Hence, for every dol-

lar spent on the sunset process, Texas taxpayers have re-

ceived $27 in return.

Each sunset review must include a recommendaon to

either abolish or connue the agency, and it may in-

clude addional recommendaons for policy changes,

eciency improvements, and the like. Notably, the TexasLegislature has approved a large majority of the recom-

mendaons of the Sunset Commission over me. If the

Commission recommends connu

State Budget Reform Toolkit

Documents

Transcript of State Budget Reform Toolkit