How States Can Better Manage Their Fiscal Futures
Projecting spending beyond the next budget cycle has a lot of advantages for states that make the effort.
Every year, state legislatures across the country draft, debate and approve their operating budgets for the year ahead (or two years for those that operate on biennial budgets). Weeks of debate and controversy establish policy and program priorities and levels of spending for everything from education to transportation to social services. Unfortunately, however, that's where too many states end their fiscal planning.
In fact, according to a report published in February by the Center on Budget and Policy Priorities, only 18 states project spending beyond the upcoming budget cycle, and only 13 of those provide further detail at the agency or functional level, such as education or health care. (See the map below).
So why do these 18 states undertake this exercise? First, it provides a forum and impetus for agencies and state leaders to look beyond the immediate term and prepare and plan for larger trends. As private companies and even the Defense Department know, using a larger aperture to analyze the trajectory of agencies, programs and states as a whole can facilitate longer-term investment discussions and help to prevent reactionary short-term tactical moves.
For example, instead of a sudden, multimillion-dollar spike in spending to pay for and implement a new technology system, agencies can demonstrate how preparatory spending one year will lead into the larger spike in their funding requests, followed by lower operations costs in the future in a particular functional area. This kind of story is harder to tell -- and ultimately justify -- with a narrower vision into the budget.
Second, larger economic or demographic trends, as well as tax and spending proposals and shifts in national policies, can be integrated into the budgeting process earlier for more accurate projections of their impact, helping to inform the sustainability and health of state-level programs. Minnesota, for example, saw higher-than-expected revenues for its two-year 2012-2013 budget due to the improving economy. If planning had ended there, surpluses likely would have been claimed. However, updated legislative projections revealed shortfalls in other areas, including education, which rendered the temporary surpluses unsustainable and provided the political impetus needed for the funds to be saved in reserves.
Finally, independent bond-rating agencies ask for this level of projection in their evaluation of a state's fiscal health. For those states without existing processes in place, straight-line or back- of-the-envelope estimates are used, often relying on inflation indexes. But for those states with more robust and detailed planning mechanisms, even a fifth-year-out projection that ends up being 10 percent off would still provide a better understanding of what future spending and revenues would look like based on current policies and plans.
With the economy stabilizing across several indices, federal stimulus funding to the states on the decline, and growth returning in many sectors, the timing is right for states to introduce a more robust approach to their long-term budget planning. Conversations can begin at the program level, be rolled up by department, and be communicated to state budget staff who have the tools to organize the projections. The result is a state whose leaders have the ability to project the impact of their decisions in terms of years instead of months. That's a big step toward stronger reserves and sounder fiscal management.
VOICES is curated by the Governing Institute, which seeks out practitioners and observers whose perspective and insight add to the public conversation about state and local government. For more information or to submit an article to be considered for publication, please contact editor John Martin.