Managing Through Endless Fiscal Uncertainty

States and localities are emerging from the Great Recession to face a "new normal" of scarcity. How will managers deal with it?

In a previous column, I discussed the chronic uncertainty created for federal agencies and other recipients of federal funds by the dysfunction of the federal budget process. Uncertainty is not a condition, of course, that affects only the federal government. State and local government budgets have been anything but predictable in recent years, and there is reason to believe that this uncertainty may continue for years to come. The challenges facing state and local elected officials and public managers, struggling to maintain their governments' viability as deliverers of crucial services, are not going away anytime soon.

If anything, it's going to be harder for state and local governments to meet the challenges to come, given the painful steps they've already taken to deal with budget deficits during the economic downturn. Between fiscal years 2008 and 2012, 45 states made targeted spending cuts (cuts that eliminated particular programs, for example) and 35 of those states imposed across-the-board cuts, according to an analysis of data from the National Association of State Budget Officers (NASBO). Thirty-eight states dipped into their rainy-day funds, 32 states had to resort to layoffs and 25 states furloughed their employees.

State general-fund budgets have recovered somewhat, and are now growing after actual declines during the height of the recession. The 3 percent growth rate of the past three fiscal years, however, compares unfavorably to the 35-year average growth rate of 5.6 percent. It also is lower than the growth rate after the last recession; in the first three years after that downturn (2004 to 2006), spending grew by an average of 6 percent.

Local governments face their own continuing budgetary challenges, with a couple of additional wrinkles. First, because property- tax assessments tend to lag behind the housing market, local tax revenues may continue to be stagnant or even in decline. Second, local governments face not only the challenge of federal budget cuts but also the probability that states will continue to respond to their own fiscal pressures by cutting back on aid to cities and counties. Thirty-two states reduced aid to their localities between fiscal 2008 and 2012, according to the NASBO data.

What does all of this mean for the future? In the past, many actions taken by state and local governments to cope with recessions could be viewed as temporary, likely to be reversed when things returned to normal. However, state budget officials are now talking about a "new normal" in which revenue (and therefore expenditure) growth continues to be slower than in the past and where the federal government no longer can be counted on to moderate the effects of future economic downturns. The across-the-board cuts known as sequestration and the more general need to reduce the federal deficit make help from Washington increasingly unlikely.

In this context, elected officials and managers at the state and local level face substantial challenges in planning for this uncertainty. If past is prologue, they are likely to respond to this uncertainty by taking such steps as delaying hiring, not filling vacant positions, freezing salaries, imposing furloughs, or deferring maintenance or equipment purchases.

These strategies may be useful in addressing short-term problems, but they are less effective in combating continuing budgetary stagnation. These sorts of cuts may leave many programs' capacity to deliver effective services so diminished that they end up looking like (to borrow a phrase heard from one manager) the "walking wounded." Moreover, because many of these strategies were already employed in the recent recession, there may be practical constraints to their further use now.

Instead of resorting to these approaches, this is a crucial time to return to questions of what works and what doesn't. In other words, it is time for the much ballyhooed "performance budgeting" reforms to deliver on their promise.

In the end, governments cannot pretend that they can just continue to do everything they have before, only with fewer resources. The effective functioning of government will require not just doing the same with less, but also actually doing less. The only way to address this will be to make choices, which is what budgeting is supposed to be about. The more informed these choices, the better.

Professor at the University of Maryland School of Public Policy