Across-The-Board Budget Cuts May Not Bring Real Savings

When states determine to make some kind of cut with regard to agencies, it's important to differentiate between them.

Utah has 44 state-operated liquor stores. All of them are money makers, bringing in about $100 million worth of profits for the state and local governments.

In late 2009, the state alcoholic beverage control agency was asked to make a 2 percent cut in its budget. How to accomplish that? The agency closed one of its stores. Remember, the store made money. So by closing it, Utah wound up with less money than it had before it made that particular cut.

This is precisely the kind of questionable activity that goes on all the time when states must save cash. Realistically, this requires making hard decisions -- the kind that are based on careful reviews of priorities and benefits. Instead, all too often, states and cities treat their agencies like one-size-fits-all hats that really don’t fit anybody well.

The point here is that no two agencies are created alike. And when states determine to make some kind of move with regard to them -- whether it’s cutting budgets, raising budgets, requiring regulatory changes or a number of other activities -- it’s important to differentiate between them. To do otherwise makes little sense to us. “Anytime you are looking at across-the-board cuts,” says Rep. Kelda Roys of the Wisconsin State Assembly, “you are doing it because it is politically easy and it is politically easy because it is intellectually lazy.”

It almost got worse in Utah, when the decision this year was to exact a 7 percent cut on the Department of Alcohol and Beverage Control, which would have forced the closure of nine more outlets. However, there was such a citizen outcry that the state had to take a second look at the issue. “People were asking, ‘Why are you closing a profitable liquor store?’” says Vickie Ashby, the department’s public information officer. She notes that even people who don’t drink wanted the stores open. That’s because 10 percent of all liquor sales go to the school lunch program. So the state figured out a way to keep the stores open -- at least for the time being.

Consider California. Nancy Vogel, principal consultant for California’s Senate Office of Oversight and Outcomes complains that many of the 2009 and 2010 furloughs foisted on state agencies either failed to save money or actually cost more. Vogel says she can appreciate the immediate impulse. “In the heat of the moment, I can understand why the Schwarzenegger administration put out blanket furloughs -- they wanted to save cash quickly. I can understand why they wouldn’t want to wrestle with the nuances.” But then the short-term policy on furloughs went on for a while, which leads Vogel to wonder whether policymakers should have taken the time to figure out whether the policy was effective in reaching its goal. “There could have been time to ask, ‘What is the source of this money?’ and ‘Does it even save money in the general fund? Does this cost us money? Is it just imaginary savings?’”

In a report Vogel wrote, she points to several different types of organizations that should have been spared furloughs:

  • self-funded operations, such as the Department of Motor Vehicles;
  • round-the-clock organizations that had to pay out overtime to make up for the furloughs;
  • other agencies that have an exceptionally high volume of work: “State officials estimate that furloughs have ‘saved’ $27 million in federal money for salaries and benefits through October, but the ‘savings’ have been used to hire more employees and finance overtime to deal with an exceptionally high volume of unemployment insurance claims”; and
  • tax-collecting agencies.

Indeed, cuts to tax-collecting agencies, as mentioned by Vogel, may well be the poster child for these kinds of misbegotten actions. In Montana, according to Taryn Purdy, the principal fiscal analyst at the Montana Legislative Fiscal Division, analysis has shown that beyond a certain point, the state loses $3 in revenues for every $1 it makes in revenue department cutbacks.

“This is a classic in government finance,” says John Petersen, professor of public policy at George Mason University (and Governing columnist). “Probably the highest payoff you have is hiring tax auditors. Auditors pay for themselves many times over.” The cuts may be easy to make, he suggests, “because their activities are unpopular.”

There’s yet another wrinkle to this sad story. If cities or states agree that they should subject their fiscal decisions to careful analysis, then they clearly need the kind of staff that can provide them with the necessary data. As we’ve bemoaned in the past, too many cities and states have pounded their analytic arms relentlessly, leaving them with less of this kind of capacity than they had before. Just consider the defunding of two well-respected analytic agencies, the Oregon Progress Board and the Kentucky Long-Term Policy Center. Meanwhile, a series of cuts to Florida’s well-respected office of Program Policy Analysis & Government Accountability were enacted recently.

Honestly, we just don’t get it.

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