Richards' article was published the same day as the Center on Budget and Policy Priorities (CBPP) released its study on state government budgeting. The authors' opening gambit: "The spending, tax, and other policy decisions that comprise the budget have consequences for a state's fiscal and economic security that last long beyond the budget year. Often, however, policymakers focus on the immediate effects of policy decisions and fail to account for their longer-term consequences."
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As governors, legislators and their staffs get down to the serious business of crafting their budgets, they face not only immediate political pressures -- like cutting or raising taxes, or funding or defunding programs -- but long-term fiscal questions. I talked to Elizabeth McNichols, one of authors of the CBPP report, about the hows and whys of long-term budgeting. As McNichols points out, long-term budgeting is not a partisan issue. "It doesn't lead to any particular policy solution," she says. "It helps a state project what's coming so it can thoughtfully decide what to do." What follows is a transcript of our interview, edited for clarity and length.
State economies are recovering. They're not in crisis mode. There's breathing room to look ahead. Right now state policymakers are deciding whether to restore education funding, replenish reserves or cut taxes -- decisions with long term effects. As they weigh these choices, these tools can help a state build a strong economy and weather tough economic times.
Part of what states are seeing is the end of stimulus spending. They were still getting the money in 2010 and 2011. But now, the federal pressure for deficit reduction will hit states and what it means is that states are going to have to look to their own resources to fund education and health care. In terms of long-term planning, they'll have to sit down and look at projections for spending and revenues; the portion of revenues from the feds should be included in that projection. Because of the uncertainties at the federal level, a state should get a good handle on the part of the budget it can control.
Businesses like to plan. They don't like to see spending programs put in place and taken away because they're not affordable or see taxes going up because the state put in place a program where it didn't project out the cost. A state can improve its business climate by making things more predictable and smooth. It also helps state agencies run more efficiently if they know the amount of funding they can afford to spend.
We're down to only four states that don't have rainy day funds. But for the states that do have the funds, they are now looking at increasing the size of those funds. I think it's the result of having two recessions in the last decade. In both of them, states had an aggregate of up to 10 percent of the budget in the funds, and they are realizing they need more than that going forward. We have seen states raise the cap on rainy day funds. Three states with 10 percent caps raised the caps to 15 percent. It's something the public understands -- you have to have a reserve.
Many states do multiyear forecasts on revenues but they fall short on the spending side. It's important to do both. Maybe they haven't because it's tougher to do, but it's a question of taking that next step to look at internal analyses and put it in a form that's accessible to the public. In a number of states, individual agencies do projections but the state hasn't pulled it together in a budget document.
Current service baselines is really important. Right now, states are putting together a budget for the fiscal year that starts July 1. A state will propose a certain level of funding for, say, K-12. Some just compare the proposed spending to the prior year. But current service baseline would compare it to what it would cost to pay for the same service when adjusted for inflation and if you have more or fewer students. If you flat funded -- spent the same amount in the next year -- you could say you are not cutting spending. However, there's inflation and if the number of students goes up, you actually have fewer resources.
Is it difficult to do? Most of the information you would need for the largest programs -- K-12, higher education and health care -- is available in some form. It's not terribly hard for a state to pull it together.