The Costs of Budget Uncertainty
The routine dysfunction of the federal budget process creates real costs that are felt by all levels of government. Will Washington ever get its act together?
No one paying even casual attention to the "fiscal cliff" debacle in Washington could avoid coming away with the impression that the federal budget process is--and even this is perhaps too kind--dysfunctional. The 11th-hour haggling and brinkmanship at the end of last year, eventually resulting in legislation that left many questions unanswered, seemed very much an example of how not to make decisions.
It would be somewhat reassuring to think that this debacle was the exception, rather than the rule, and that we could now return to normal. "Normal," however, is itself no bargain, as it implies a partisan and paralyzed political system that limps along from one crisis to another, missing many real and self-imposed deadlines along the way. In fact, in the aftermath of the fiscal-cliff agreement, Washington is abuzz with talk about the next two deadlines--the new effective date of March 1 for the across-the-board cuts resulting from "sequestration" and avoiding a government shutdown at the end of that month.
The trickle-down impact of this fiscal paralysis on recipients of federal funds--from state and local governments to contractors to direct recipients of benefits--is a crippling uncertainty that leaves them unable to reliably plan their own activities.
The poster child for this routine dysfunction is the federal appropriations process. In the 37 years since the beginning of the federal fiscal year was moved to Oct. 1, there has been a grand total of four years--four--when all appropriation bills were passed and signed into law prior to the beginning of the fiscal year. It has been 16 years since this last happened.
Instead, the government routinely operates for significant portions of the year on what are called "continuing resolutions" (CRs), which fund agencies and programs at prior-year levels. These CRs have often extended three to five months into the fiscal year. In addition, many years saw multiple CRs--in fiscal year 2011, there were eight of them (if you think things are bad now, in 2001 there were 21 CRs). The current CR expires on March 27, hence the concern about a government shutdown beginning the next day.
While state governments display nowhere near the level of partisan gridlock that the federal government does, a disturbing number of states have had difficulty enacting their own budgets in a timely manner in recent years. A 2010 report by the National Conference of State Legislatures identified 19 states that had failed to enact budgets on time at least once since 2002. A high-profile impasse in Minnesota in 2011 shut down that state's government for almost three weeks and cost it its triple-A bond rating.
Still, states are extremely responsible when compared to the federal government. Late federal appropriations are so common that Washington seems almost numb to their consequences, both for federal agencies and for recipients of federal funds. The focus, by the public and the news media, tends not to be on this routine dysfunction and the problems that it creates but on the immediate crisis: How do we avoid going over the fiscal cliff? How do we avoid a government shutdown? The effects of these routine funding delays, however, are significant, as I documented in a recent report for the IBM Center for the Business of Government. The types of effects include the following:
• Agencies unsure of future funding streams engage in anticipatory hiring freezes, reducing service levels and creating skill gaps in crucial areas.
• Employee morale suffers as a direct result of workers feeling as if they are pawns in a larger political game over which they have no control, contributing to turnover among the very employees governments are most likely to want to keep.
• Because CRs require the continuation of current activities, agencies are prohibited from responding to many new problems and are required to keep funding programs that they may know are not working.
• The temporary nature of CRs may require governments to engage in short-term contracting (month-to-month or week-to-week), which significantly increases contracting workload and overhead costs. And delays in contracting can lead to higher expenses, either from costs rising during the delay or less competition.
• Delayed investment in people (as training is cancelled or deferred) or infrastructure (in the form of deferred maintenance) leads to higher future costs.
At the state and local level, the fact that a government can have its bond rating lowered through irresponsible budget practices creates incentives for timely budget action. At the federal level, the cost of these budget delays is far less transparent. Nonetheless, the costs are real, and it is time that members of Congress, who frequently rail against wasteful spending, come to grips with their main contribution to that waste and stop the practice of government by continuing resolution.