The economic effects of this recession will hit state and local government in six months to a year as revenues and budgets catch up with economic conditions. Right now, public managers have three choices: ignorance, illusion or innovation.
This is a particularly bad time for a recession. State and local governments have only just recovered from the last one. This time they will have even less to work with. Back in 2000, state reserves were equal to about 10 percent of budgets, and were on an upswing when the Internet bubble burst and the recession hit. This time reserves are just 7 percent, and falling. Furthermore, governments continue to face backbreaking increases in costs, especially for health care, that have been running well ahead of revenues in good times. Now the health care vise will crush state budgets, crippling education, human services, public safety, and environmental programs.
When state and local governments face these circumstances, they almost always do one of two things:
1. Ignore it and hope that it will go away. This is the Scarlett O'Hara approach: "I can't think about that now. I'll think about it tomorrow." It's still early, they tell themselves, let's not overreact. We can plug whatever holes we have now and wait to see what happens. History is clear about what happens to folks who choose this course. Special sessions have to be called, and executive orders issued, to fix the even bigger holes that develop later.
2. Create the illusion that government can keep on spending at current levels, and possibly even increase it, but without raising taxes, fees, etc. This is done in the name of protecting vital services or as a way to provide even more stimulus. It takes a special alchemy to turn a revenue shortfall into more spending. It can be done best by practicing what David Osborne and I called the "Seven Deadly Deceptions" in our book, The Price of Government. Disciples of these deceptions will combine interfund robbery, accounting gimmicks, borrowing, selling off assets, data manipulation, saving nickels and dimes at the expense of employees, and deferrals to make the impossible seem possible. As soon as they're done with this trickery, they will hold a press conference to announce their "creative" solution to a difficult problem. The truth, of course, is that they will have actually made a bad problem worse. These are nothing more than seven different ways to use onetime money to combat what will certainly be a multiyear problem. Next year the shortfall may well be deeper -- costs will continue to rise twice as fast as revenue, or even more, if revenue shortfalls worsen.
There is a third choice.
3. Get real about changing or eliminating those elements that create costs for government but don't create a commensurate amount of public value for citizens. Here are the big ones:
o Health: 20-30 percent of costs in health care don't make us healthier, and may actually make us worse. o Mistrust: Up to a third of government's overall costs pay to enforce rules, regulations and red tape. All too frequently, the corresponding level of compliance does not justify the cost of all this mistrust. For example, we spend a fortune trying and failing to get people to obey the speed limit, while we spend almost nothing to get those same people to voluntarily recycle. o Education: The real cost to educate our kids has skyrocketed, and yet there has been little measurable impact on learning. o Monopoly: Competitive contracting, even when government wins the competition, results in costs 15-30 percent lower than continuing government's monopoly.
We cannot address these costs, or create the value citizens expect, if we think that our only choice is more of the status quo. This recession is going to hit us pretty hard. We can ignore it and hope it won't get worse, and we can use fiscal illusions to paper over the problem in the short-term. Or we can get real, and use these tough circumstances as an opportunity to free ourselves from the status quo by finding innovative ways to deliver more value, not more illusions, to our citizens. Good managers balance budgets (or make the budgets appear balanced) while maintaining the status quo; leaders balance budgets by challenging the status quo and winning the competition for public support.
