By Robert D. Behn

Like other states, South Carolina has been watching its tax revenues drop. For the past fiscal year, the state had a deficit $133 million. This required South Carolina to withdraw $87 million from its rainy day fund of $148 million.

From where did South Carolina get the additional $46 million that it needed to cover the $133 million deficit? From state agencies that had saved it.

For a variety of reasons, this move made financial sense. It left South Carolina with $61 million in its rainy day fund. State Treasurer Grady Patterson told the Columbia newspaper The State that he wanted “to avoid going into the general reserve fund because that can affect our Triple A credit rating.”

But last year’s budget deficit had not come as a complete surprise. South Carolina saw it coming. It knew that tax revenues were not going to match the state’s original projections. So the state made a 1 percent across-the-board cut in agency budgets. Moreover, the legislature cut half a billion dollars from the state’s fiscal year 2002 budget, though it recognized that this might cause problems for some departments. So the legislature continued the recent practice that permitted state executives to carry forward into FY 2002 any funds saved from the FY 2001 budget. This let agency managers think about their budgets for FY 2001 and FY 2002 as a single FY 2001-2002 budget.

Some state agencies believed this. They saved their pennies — 4.6 billion pennies. The Department of Education saved $10.4 million. The Department of Health and Human Services saved more than $13 million. Now, it turns out, they won’t get to keep their savings.

Not that South Carolina responded to its budget shortfall with an approach that is widely different from what other governments do. The standard strategies include across-the-board cuts and the expropriation of any exposed resource. Moreover, these strategies appear to be perfectly reasonable. An across-the-board cut seems only “fair.” Everyone must bear the same burden. And if some resources are available, shouldn’t they be used to deal with the immediate crisis?

But what will agency managers in South Carolina learn from these responses to the budget shortfall? From the perspective of the agency executive, the lesson is clear: Don’t save money. Don’t try to be efficient. Because if you do, you will be punished. The state executives who were smart — you can call them “cynical” — spent every dime.

Nevertheless, some people continue to wonder why the managers of executive-branch agencies always spend their budgets down to zero at the end of the fiscal year.

At a congressional hearing several years ago, U.S. Representative Dan Burton reported that, as a state senator in Indiana, he had overheard an agency head saying, “We have only got what, two months left in the fiscal year. And if we don’t spend the money we have got, we are not going to be able to ask for an increase in the next appropriation.” This riled Burton: “I would like to figure out some way to give monetary rewards for people in government to come up with ways to streamline and create economies.”

Apparently, it never occurred to state Senator Burton or Congressman Burton that the first kind of monetary reward that public managers would like for streamlining and creating economies is not to be punished for doing so. A second kind of monetary reward would be to permit the managers to actually keep a portion of the savings and use them to improve other, authorized services.

A quarter of a century ago, Steven Kerr, now the chief learning officer at General Electric, wrote a classic article, “On the Folly of Rewarding A, While Hoping for B.” His title captures his point succinctly.

Political leaders — and not just in South Carolina — hope that public managers will streamline, create economies and save money. But they don’t reward it. Instead, they reward agencies that spend (or hide) every last dime. If political leaders want public managers to save money, they ought to reward very explicitly — and very visibly — agencies that do so.

Punishing efficiency won’t create more of it.

Robert D. Behn, a visiting professor at Harvard’s Kennedy School of Government, is Governing’s and Governing.com’s Manager’s Choice columnist. He is also the author of Rethinking Democratic Accountability (Brookings).

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Readers’ Responses:

CARRYING THE SAVINGS OVER