Should Washington Budget Like the States?
Balanced-budget mandates and biennial budgeting are popular ideas for fixing the federal budgeting process. But what works in state capitols isn’t the right approach for Capitol Hill.
Now that the congressional supercommittee has failed to tame federal deficits, many will search for budget-process reforms to do the job. After all, changing the budget process is a lot less painful than actually proposing plans to cut spending and raise taxes!
But in looking for fixes for the federal budget process, we need to be careful, lest reforms we adopt either fail to do the job or actually make things worse.
Often, we look to the states as our natural laboratories to test out new ideas before they go live on the national stage. However, we should studiously avoid adopting the states' budget processes for the federal government. The nature and role of federal and state budgets are too fundamentally different to be covered by similar decision rules.
Nevertheless, many have proposed a range of ideas from the states to reform federal budgeting. Two major reforms now under consideration are balanced-budget amendments to the Constitution and biennial budgeting.
Nearly all of the states have balanced-budget requirements, although those requirements cover only the general fund, which comprises approximately 50 percent of the total budget in state government. The relative stringency of state balance requirements also differs across the states.
I do not question that the states' balanced-budget requirements make a real difference in forcing them to make hard choices during hard times. The painful steps states have taken in the past three years are a testament to their impact.
However, there are several major differences between the states and the federal government that would make the effects of a balanced-budget requirement drastically different at the federal level:
• Unlike the states, the federal government is responsible for a national economy. While the fiscal austerity forced on states during recessions may not have a major economic effect on the nation at large, the adoption of similar constraints by the federal government could well lead to an economic free-fall.
• The federal government budgets on a unified basis precisely because it must be accountable for the total impact of federal budget decisions on the economy. Washington does not have the option available to the states of focusing on only a general fund to balance. This flexibility helps states comply with balance requirements by shifting surpluses from other funds to shore up the general fund, among other accounting shifts.
• The balanced-budget requirements make a difference in the states because they are reinforced by the bond markets. States are vitally focused on earning the highest credit rating possible to reduce their borrowing costs. By comparison, the bond market to date has not proven to be a source of restraint in federal budgeting. Simply put, even in the worst of fiscal times, federal treasuries are viewed as the quintessential risk-free asset. Thus, federal officials could feel free to ignore the spirit of a balanced-budget requirement with relative impunity.
Biennial budgeting is another state-based reform that has come whistling into Washington on the heels of rave reviews, often from members of Congress who formerly served as officials of states that budget on that basis. Some states, such as Arizona and Texas, tout biennial budgeting for the focus that it affords on oversight by legislatures in the off years and the potential savings from trimming the amount of time that budgeting consumes.
Biennial budgeting, in fact, makes sense only for some states. Larger states have been trending away from budgeting every two years, as their own budgets have become more complex and more dependent on fast-paced changes in the economy. In fact, over the past 50 years, the number of states with biennial budgets has shrunk from 44 to 19. Biennial budgeting still may make sense for legislatures that meet on a part-time basis, but even here, analysis from the National Conference of State Legislatures shows that those states must meet in the off years to enact changes necessitated by shifts in the economy and priorities.
It is certainly understandable that members of Congress would want relief from the near-constant pressures of federal budgeting that seem to increasingly dominate Washington. However, biennial budgeting is not the right prescription for this malady. There are several reasons why this approach would not work at the federal level:
• The unique role that the federal budget plays as a tool for managing the economy means that two-year budget spans would make it difficult for federal officials to adapt fiscal policy to the volatile changes of a global economy.
• Unlike legislatures in some states, Congress is a full-time institution with strong interests in taking frequent actions to regulate the economy and oversee federal agencies. Two-year budgets would undermine Congressional control of both the economy and the agencies.
• A governor has extraordinary powers to impound funds and make other adjustments to keep biennial budgets on track—powers that Congress is unwilling to give the president. Accordingly, the numerous changes in budgets that will occur will call for frequent congressional action, whether budgets are presented on a biennial basis or not.
It is undeniably true that Congress and the president face tough choices, and, once we get serious about reducing federal deficits, it would be productive and appropriate for Washington to emulate some of the states' strategies for reducing spending, such as pension reforms and consolidating agencies and programs.
All too often, however, federal officials reach for process reforms to elude the political challenges associated with difficult substantive cutbacks. In doing so, it is important that we remember how different federal and state budgeting processes are, lest we reach for a cure that is worse than the disease.