State Budget: Reforming State and Local Spending

Issue

The state expects to have about $35 billion available during the FY 2012-2013 biennium which is about $3.7 billion more than the FY 2010-2011 budget cycle. The budget is balanced for the remainder of the FY 2012-13 biennium; however, a $1.3 billion shortfall exists for the FY 2014-15 budget period. Does the state need to change the process it uses to budget? How should the Governor and Legislature redesign state and local government services and reduce overhead expenses?

Policy

Whether the state faces a shortfall or has a surplus, the Governor and Legislature must redesign state and local spending systems and focus on priorities rather than increase taxes. The state's demographics and revenue and expenditure trends dictate it.

The state's demographics are changing in a way that will slow the rate of state revenue growth in the future. According to a 2009 analysis by the State Budget Trends Commission, the rate of growth will slow from an average of 6.8 percent in 2001 to 3.9 percent in 2033. In addition, the commission estimated that between 2008 and 2033 the average annual rate of growth in state health care costs is expected to be 8.5 percent. If this trend materialized and the state lives within the 3.9-percent revenue growth, all other state spending – including education – can grow at 0.2 percent per year. Finally, the commission noted that the long-run trend growth rate of the personal income tax and sales tax is 5.4 percent and 5.2 percent, respectively – less than the growth rate of state health care expenditures. If the state does not significantly slow the rate of growth of health care expenditures, it will need to increase taxes on a regular basis, which is not sustainable given Minnesota's already high business and personal tax burdens.

Given these trends, it is more important than ever that state and local governments change the way they budget, change the way they deliver services, and take steps to reduce overhead expenses.

Budget Process Reform

The state needs to change the way it budgets to prioritize spending and reduce the likelihood that it overcommits resources in good times. This can be accomplished by two reforms to the budget process.

• Adopt an outcomes or priorities approach to budgeting: This form of budgeting evaluates each function or outcome of government by its results per dollar. Functions/outcomes can then be ranked from highest results per dollar to lowest within each budget category. With that information, the Governor and Legislature can determine which outcomes they want to "buy" each budget cycle. When the state faces a budget shortfall, the functions/outcomes that have the highest value (results per dollar toward meeting citizens' priorities) can be kept and the lowest value can be eliminated. When the state has surplus revenue, new programs should be evaluated based on their expected results per dollar. The Legislature also will be in a better position to determine if it makes more sense to add dollars to existing programs or create new ones because it can compare the value of each.


• Change the way the state forecasts revenue growth: The Governor and Legislature should limit permanent spending and tax changes to the long-run trend rate of growth in revenue or forecasted revenue, whichever is less. Minnesota Management and Budget currently estimates the revenue that the state expects to collect during a budget cycle. For the most part, all of it is available for permanent tax and spending decisions. This results in overcommitting state resources, i.e. the Governor and Legislature make permanent commitments of spending increases and tax cuts that are not sustainable. Using the long-run trend rate of growth in revenue as a limit for permanent spending and tax changes will make less money available for permanent commitments and more dollars available for one-time expenditures. This could help build up a budget reserve, reverse budget shifts, invest in infrastructure, etc. This was a recommendation of the State's Budget Trends Commission.

Redesigning Services

The imbalance of future spending and revenue growth necessitates the redesign of state and local services. In short, the state and local governments need to find less costly, more efficient ways to deliver services. Many efforts are under way to identify redesign opportunities:

• The Legislature passed numerous redesign provisions that did not become law. They included competitive sourcing for services and a federal waiver to redesign the medical assistance program, among others.


• The Beyond the Bottom Line report commissioned by six foundations and produced by Public Strategies Group identified several strategies to redesign various areas of the state budget – e.g. buying health not sickness, delivering integrated human services, designing a dramatically different medical assistance program, and reducing the need for special education.


• Minnesota's counties sought flexibility from state mandates in exchange for being held accountable for the measurable results the mandates were designed to achieve.


• The Chamber, in partnership with the Bush Foundation, funded five local proposals where local chambers and local governments worked together to redesign an aspect of local services. For example, Crow Wing and Todd Counties and the Brainerd Lakes Chamber worked to redesign human services case management; the City of Owatonna and the Owatonna Area Chamber worked to implement Lean practices within the city; and the Rochester Chamber, the City of Rochester and others are working to implement a one-stop shop for developers.

These and other strategies should be pursued as one way to address the state's long-term budget problems.

Reducing Overhead Costs and Improving Efficiency

The state needs to reduce overhead costs and improve efficiency of its operations as a way to increase the value citizens receive from government services. The Chamber's State and Local Human Resource Redesign policy outlines recommendations on how public employee pensions, health care benefits, and human resource laws and practices could be changed to help balance the budget, reduce overhead costs and improve efficiency.

In addition, the state should continue to use modern continuous improvement programs such as Lean to drive efficiency gains. State government through Enterprise Lean has undertaken many process improvement events that have led to shorter wait times for licenses or services, streamlined processes, and better customer satisfaction. In order for Enterprise Lean to continue to produce strong results, it should be able to capture a portion of the savings that these events achieve.

Budget Reserve and Cash-Flow Account

The state's bond rating depends on sound fiscal management. The budget reserve and cash-flow account are important components of sound management. We accordingly support the following:

• Setting the budget reserve in relation to the volatility of state revenues. According to the Budget Trends Commission, that currently means the state should increase the budget reserve to $2.3 billion.

• Increasing the cash-flow account to a level the department determines is sufficient to eliminate borrowing from other state funds.

Business Impact

If the state does not fundamentally change how it budgets, how state and local government services are delivered, and its overhead costs, it will be forced to increase taxes on a regular basis to keep up with the cost pressures on existing programs.