The Fiscal Conversation We Need

The budget stress that governments face now is structural, not cyclical. What’s called for is an examination of the entire public enterprise.
by | September 28, 2011

With the dust settling on this summer's government budget battles, I took a few minutes to do a search on "budgets" on GOVERNING's website. What jumped out was a disturbing fiscal version of Yogi Berra's "it's déjà vu all over again." Consider the following comments:

2001: "...We're guessing that any number of cities, states and counties are even now beginning to make exactly the kinds of cuts that will eventually leave them less able to deliver services efficiently."

2008: "Hold on to your seat belts: ... housing starts at their lowest levels in 15 years ... sagging real estate markets may, in fact, trigger a downturn ... continuing malaise in pension finances ... the latest fiscal joker — the unfunded employee retirement health benefits ... states approach future uncertainties with dwindling reserves, which is likely to mean quicker and deeper cutbacks as deficits emerge."

2011: "The way we responded to recessions in the past was to do less of the same, with the hope of having more money later so we could do more of the same."

That last observation really caught my eye: In New Jersey, a nonpartisan group of former state officials has begun a statewide effort to engage both public officials and citizens in a broader civic conversation about the unprecedented structural deficits faced by the state—and the implications for services in the long term if substantial changes are not made.

Their report, Facing Our Future, prepared with research by a respected former state treasury official, consolidated and analyzed all public revenue and spending among state, municipal, school district and county units of government. The forecast, even under optimistic economic scenarios: If the public sector at all levels of government did not proactively address the imbalance between the cost of services and likely revenue, it would end up in five years with a hollowing-out of services at all levels of government by a minimum of 20 percent—before taking into account the corrosive cost of inflation.

(Full disclosure: I participated in Facing Our Future, and the William Penn Foundation, of which I was president through June, helped to fund the research.)

This is structural, not cyclical budget distress. While most states have not undertaken a full accounting of all public revenue and spending, I suspect the majority would benefit from a comparable analysis; while New Jersey's situation may be at the extreme end, fiscal pressures expose two universal features:

First, the fiscal situations at the state and local levels are deeply entangled in most states. Every state is unique, but New Jersey illustrates the situation: Over 40 percent of the state budget consists of state aid to municipalities, counties and school districts. Reductions in state aid coupled with property-tax constraints shift the budget cuts to another venue. The result: A problem solved at one level simply moves the fiscal stress to another.

Second, natural political instincts often default to incremental adjustments or, occasionally, to political opportunity. And, because the budget action shifts from level to level, and each unit of government takes as a given that it is dealing only with the hand it has been dealt, rarely are more dramatic structural changes—shared services, consolidations of agencies, realignment of delivery systems, restructuring of tax systems—pursued in the face of political opposition if a less controversial solution can push the problem to the next fiscal year.

New Jersey's continuing fiscal malaise and its fragmented local-governmental delivery systems make it the poster child for problem and opportunity. Will the state look ahead at its fiscal trajectory and make purposeful decisions that will chart a new course, or, as the fiscal pressures continue, will state and local officials just whack away incrementally at public services until they are surprised one day by how degraded those services have become?

No one may notice an increase of one or two children per classroom, but will they understand as the class sizes creep up what alternative choices might have prevented it? In a New York Times article assessing the value of technology in elementary education, an Arizona teacher observed, "You can't continue to be effective if you keep adding one student, then one student, then one student. I'm surprised parents aren't going into the classrooms saying ‘Whoa.'" What comes after "whoa"? Will citizens have any idea of the choices made by school-district leaders that have resulted in the large class their children sit in? Will anyone have raised more global, long-term trends and argued for greater structural examination of the delivery of services? We know the answer, absent proactive leadership.

In New Jersey, the leadership group that produced Facing Our Future sought to provide independent, fact-based, no-blame research that laid it all out in ways that prompted important civic discussion. They believe that there is no silver bullet and that no option should be discarded because, as the budget expert who compiled much of the research concluded, the entire public enterprise must be examined, since tweaking parts of the equation will not be sufficient remedy.

I recall a sign in a budget official's office that was probably wishful thinking: "There's nothing like a budget cut to stimulate the imagination." But the words of Oregon Gov. John Kitzhaber ring true: "There's a once-in-a-generation opportunity to do some things we should have done a long time ago but couldn't make the politics work."

To twist an old metaphor, we're looking at the different parts of the elephant in the room, when we should be taking a fresh look at the whole animal we call state and local service delivery.

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