Fiscal Wisdom Among the Razorbacks

Arkansas’ unique approach to budgeting, a product of the Depression, is helping the state keep out of the red.
by | January 12, 2012 AT 5:00 PM

Around this time last year, an Arizona State University study concluded that the state's budget deficit, which had been estimated at about $825 million, was really more like $2.1 billion. That's quite a hole in an annual operating budget of around $8.6 billion.

Each January, California forecasts its budget surplus or shortfall for the next fiscal year; in 2009, the estimated deficit was more than $40 billion. This year, Gov. Jerry Brown says he'll have to make $4.8 billion in education cuts if voters don't approve a tax proposal Brown wants to put on the ballot.

One state that has escaped similar problems is Arkansas, whose annual budget of about $4.5 billion is less than the cuts Gov. Brown may have to make to education alone. Its budgetary success is in no small measure attributable to a unique budgeting process in place since the 1940s.

Every other year, Arkansas' budget process begins when agencies project what they will need to run their programs and lawmakers pass a list of appropriations. After that, things follow a course that's very different from other states.

About a dozen senior legislative leaders and the executive branch's fiscal team hold a series of closed meetings to divide potential expenditures into three categories. Category A is essential programs such as Medicaid and education; Category B includes items such as employee cost-of-living increases and new programs that fill a critical need; Category C is essentially a list of "nice to haves."

Once items are categorized, they are matched against conservative revenue projections, with first priority going to Category A items and second to Category B. If any money is left, some Category C programs are funded. The budget bill is then filed in both legislative houses and typically passes with little controversy.

The state finance department reassesses the revenue projection every month. If revenues are falling short, the chief financial officer can make across-the-board cuts. The cuts start with Category C, then move to B. During the current prolonged economic downturn, Category A programs have been cut just once, in 2010.

Some might be understandably troubled by a process in which a couple dozen high-ranking officials have so much control over the state budget. But for those of us from states in which prolonged budget standoffs have been all too common, there is appeal to the idea of legislative and executive branch officials coming together before each digs in their heels to defend the House, Senate or governor's version of the budget.

And it's hard to argue with the results. Since 2007, Arkansas has finished each year with a surplus. For the fiscal year that ended last July, it was among the two-thirds of states that completed the year in the black. But unlike other states, Arkansas did so without pushing its bills into the future, underfunding its pension system or making massive cuts.

Fiscal stability also appears to be paying benefits for Arkansas taxpayers. Without giving all-too-common big tax breaks, the state has attracted 26,000 new jobs to replace the 39,000, mostly in manufacturing, lost during the current economic downturn. And while Arkansas remains a poor state, it has gone from 49th to 44th in per-capita personal income over the last five years.

Arkansas was the only state to default on its debt during the Depression. But it clearly drew a lesson from the experience, developing the current budgetary process once it was back on its feet. In this case, lessons learned during the Great Depression are still paying benefits in the aftermath of the Great Recession.