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Main introduction page THE GOVERNMENT PERFORMANCE PROJECT
Introduction: 50-State Average Grade: B
So, as we declare a nationwide trend toward fiscal conservatism — in both Democratic and Republican states — it’s worthwhile remembering that just a scant decade ago, the world was a different place. Everyone didn’t have a desktop computer. People still occasionally listened to vinyl records. And Rhode Island had to close state offices because overspending on programs kept the government from paying its employees. New York used a couple of billion dollars in one-time revenue to balance its ever-precarious budget. Illinois was saddled with more than half-a-billion dollars in unpaid bills. And Massachusetts wound up fiscal year 1990 with a $1.2 billion deficit, and demands for continued growth “eating us alive,” as a budget officer reported at the time.
Now, just as it’s easy for Bill Gates to be a charitable sort of a guy, it’s not so hard for states to act fiscally sensible when they’ve been through a series of years in which one of the biggest problems has been keeping up with ever-increasing revenues.
But there’s ample reason to believe that states have genuinely got fiscal religion — in ways they didn’t have during past periods of surplus. Recall that the states were raking in cash through much of the 1980s as well, and they didn’t seem to manage their finances rationally then. That’s the main reason many of them suffered so badly in the recession that hit around 1990.
They aren’t repeating those mistakes. Today, if there’s one concept that budget officers from most states hold close to their hearts, it’s the significance of structural balance. They are simply not going to build up permanent spending to levels that will be unsustainable when times turn sour again. “We’re really very good about not using one-time revenue for ongoing expenditures,” says Nan Madden, director of the Minnesota Budget Project. “The Department of Finance is very clear about that.” Don Langston, policy coordinator for finance and economic analysis in Florida, says essentially the same thing. “We balance on a recurring basis and that’s how we avoid structural problems.”
Even in a poor state such as Mississippi, controls are in place. First of all, the state isn’t allowed to budget more than 98 percent of projected revenues. Occasionally, it needs to appropriate one-time money to balance a budget. But, when that happens, it is careful to identify a revenue stream that will be picking up the expense in the following year.
There are states that break the rules, of course; sometimes because legislators haven’t quite gotten the message. In Wisconsin last year, the legislature decided to spend $475 million more than was coming in and then went home in June. John Montgomery, the deputy state budget director, was not a happy Badger. “We’re not pleased by that,” he says. “We said there was a problem, and our job is tougher because of it.”
As much as most states deserve credit for dealing reasonably with the benefits of a booming economy, there’s a more mixed picture when it comes to two relatively new sources of income: money from the tobacco settlement with the big cigarette companies, and cash from a complicated wrinkle in Medicaid payments.
Of course, there’s been a fair amount of debate about the proper way to spend the $246 billion that the states are expected to receive over the next quarter-century in the tobacco settlement (see Governing, October 2000), but that’s a matter of policy. Fiscally, the question is whether or not to treat this money as an endless source of new funds, as a one-time windfall or as something in between. The factors involved are complex. First of all, the actual dollar amount received will be based on how much profit the cigarette companies make. That leaves the states in a kind of Match-22. If they persuade people to stop smoking — which is at least part of what the money is for — they’ll get less in the future. Then, too, there is always the possibility that tobacco companies might not be able to afford to pay up in future years.
Massachusetts has taken the high road here. Most of its tobacco money was placed in a trust fund and none can be used to supplant or replace any other state obligations. California, on the other hand, has decided simply to dump its tobacco money into the general fund, with no immediate decisions as to how it will be spent.
Then there’s the Medicaid/Medicare situation. Details are a little arcane, but in essence it amounts to the idea that states get more federal reimbursement for various services, including nursing home beds, from the Medicare program (which mainly provides aid to the elderly) than they do from Medicaid (which generally helps the poor). For about seven years, a growing number of states put in for the cost of these services under Medicare reimbursement limits and then paid for them at lower Medicaid rates. And they got away with it. This resulted in a neat profit for 25 states, which knew they were getting away with murder. It’s a “money-laundering scheme,” as one Minnesota official readily admits.
The way things stand, it appears the feds are going to let the states that have been at this for a while keep doing it for a few years, while stopping new “launderers.” But the funding will likely disappear in the next five years or so, creating a significant budgetary gap for states that have depended on it, including Michigan, Illinois and New York. States that steered clear of this device may have deprived themselves of some free money, but at least they won’t have to worry about finding a way to replace it. “We have tried to keep ourselves out of such schemes,” reports one Ohio official.
Notwithstanding a few questionable ploys like that one, financial management information gathered for the GPP reveals generally positive trends. A few examples:
Rainy day funds: A growing number of states have used flush times to prepare for bad ones, and only a handful lack some kind of formal bankroll to deal with contingencies. Michigan, Florida, Minnesota, Massachusetts, Pennsylvania and Ohio all have more than 5 percent of general fund revenues set aside. Illinois, New York and California, with long histories of ignoring the need for rainy day funds, now have begun putting cash in. California budgeters used to argue that they maintained a $1 billion year-end balance, and that was just as good as a rainy day fund. At the time they had triple-A bond ratings. Then the recession hit, the billion dollars disappeared and the ratings cascaded downwards. Finally, starting from scratch in 1998, the state managed within two years to create a true rainy day fund and sock away 2.4 percent of general fund revenues.
Long-term planning: While long-term estimates aren’t easy to make, they inform legislators about potential future obstacles. The use of this practice is mixed, as is the skill with which it’s done. Some states, such as Pennsylvania, Virginia and Missouri, have been doing it for awhile. Others, such as Idaho, Arkansas and Oklahoma, still focus on the short term. But the number engaged in this practice is growing. Maine started in 1996, and budget director Jack Nicholas says he’s become a true believer. “I think it has changed the dynamic of the budget process,” he says, “and it has become a very serious focus of the governor, the appropriation committee and the legislative leadership. We don’t get too far out on a limb in how we deploy and allocate our resources.”
Financial reporting: The number of states in compliance with Generally Accepted Accounting Principles has been growing, slowly but surely. The last holdout, Kansas, finally decided to join the club last year.
One area in which the states could use substantial improvement is contracting. Even though they are contracting out a growing number of jobs and services, there’s a propensity to forget that these deals remain state responsibility after the contract is signed. A number of states are adding performance criteria to their contracts, but many still focus fundamentally on due dates and dollars.
All of these trends taken as a whole paint a rather rosy financial picture. But the most important question of all remains: What will happen when the economy turns? A number of states, including Florida, Michigan, Minnesota and New York, have enthusiastically given surplus tax dollars back to citizens. And there’s a solid foundation to the idea that taxpayers deserve to spend their own money when the state doesn’t really need it for ongoing operations. But ultimately, it’s a lot harder to raise taxes than it is to cut them. And when the money stops rolling in, the capacity of these and other states to keep budgets in balance, without resorting to the nasty little tricks of years past, is impossible to measure for now.
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It’s tempting to assume that the way things are is the way they’ve always been. Ask a teenager how he or she could have existed without CD players and computers, and likely as not, you’ll be rewarded with a look that says, “You mean, there were such days?”