Budget Blues

Lessons from The Beehive State The Utah state budget is far from flush. The Salt Lake Tribune laments, as legislators do, a $313 million "structural deficit" in Utah. Having a "structural deficit" essentially means the state is spending more than it takes in. Most states have this problem, Idaho included. As noted here yesterday, the Brookings Institution's Mountain West Project has identified a variety of reasons for the fundamentally unbalanced nature of western state's budgets. The reasons range from tax policies that gave away the farm in the form of tax breaks during flush times to antiquated tax structures - like Nevada's - that overly rely on tourism and home building. As for Idaho, some have long argued that the state's tax structure, essentially unchanged since the sales tax was put in place in 1966, no longer reflects an economy built around high tech, services and recreation. If you buy that argument it begins to explain why Idaho, even given the deep cuts in state budgets over the last three years, is likely to continue - post-recession - to have revenue problems. That is a structural deficit. Still, even with its underlying budget problems, Utah looks pretty good right now having avoided much of the fallout from the burst housing bubble and having in place a sound approach to budgeting and managing state government. And, by comparison to most of her neighbors, Utah is ahead of the game in addressing its structural problems.

Utah lawmakers so far are resisting further dips into the state's rainy day fund and the state's overall approach to budget and policy making continues to earn kudos from independent analysts.

In 2008, the Pew Center on the States called Utah "the best managed state" in the nation. Utah got a A- (so did Washington) in the sober, technical Pew study. Idaho, by contrast was back in the pack with Wyoming with a B- grade. Nevada, Montana and Oregon got gentlemanly C+ grades.

One reason Utah scored so high in this analysis was the management systems instituted during the governorship of Jon Huntsman. Huntsman, who recently resigned as U.S. ambassador to China in order to reportedly launch a Republican presidential bid, instituted a number of wonkish, but effective management approaches that impressed the Pew folks.

Here's some of what was said: "Utah manages all facets of state government well, emphasizing long-term goals and performance outcomes. The executive and legislative branches work together effectively to align expenditures with the strategic direction of the state. Utah has also changed the organizational structure of agencies in order to ensure success, embedding human resources and information technology staff in every state agency to better assist with long term management needs."

The Pew study concludes with this about Utah: "In sum, routine, evidence- and process-driven review has enabled one Mountain West state to catch an incipient structural deficit early and act intentionally to rectify it before it becomes entrenched."

Words to budget - and make policy - by.

The State Fiscal Crisis

It's Worse Than You Think California's new - old - governor, Jerry Brown, delivered his State of State address to the legislature last night. Lots of gloom and doom, not surprisingly, and calls for more drastic spending cuts and the extension of taxes. California's budget deficit is $25 billion - with a B. That amounts to 30 percent of the state's budget and, if that problem and the certain prospect of additional cuts in education and social services weren't bad enough, the painful reality for California and many other states is that a sizable portion of these huge deficits are literally baked into the fiscal cake of state governments for years to come. The Brookings Institution's Mountain West project, in cooperation with the Morrison Institute of Public Policy at Arizona State University, recently analyzed these so called "structural deficits" in four western states, California included. Researchers concluded that the structural portions of the current state deficits are "the more or less permanent imbalances of revenues and expenditures that can arise from flaws in a state's fiscal structure, fundamental changes in the regional economy or the state's demographics, or, especially, imprudent or shortsighted policy choices." The study also looked at Arizona which "gave away the store in better times by handing out a series of ill-advised tax cuts (total value, adjusting for inflation and growth: $2.9 billion since 1993);" Nevada where a "narrow, consumption and real estate-oriented revenue system may well now be ill-attuned to a post-Recession "new normal" in which migration, homebuilding, and gaming are permanently depressed;" and Colorado were a "taxpayers bill of rights" has crippled revenue options and the funding for public education. As for California, the study concluded that the state had "basically enacted too many permanent spending increases (notably on education) during the dot.com boom and more recent good times even as it left in place a series of rigid voter mandates and tax limitations." To put the situation even more bluntly, many states have for two decades been spending, tax forgiving and limiting their fiscal options; in essence behaving as mini versions of the federal government. So, while the economy will eventually recover and grow again, some of these state policy choices involving taxes and spending are truly "baked" into the system. Idaho lawmakers had a rude awakening to this structural reality with the sudden discovery last week that a renewable energy tax credit coupled with routine conformance with the federal tax code is costing the state huge amounts of money. Many folks would rush, as the legislature did a while back, to embrace a tax credit to encourage renewables and the policy obviously worked. What is often missing when these policy choices are adopted is the long view. It is one thing to embrace an immediately attractive tax policy today, it is something else to consider that the diverted cash, now missing from the state budget, will come at the expense of an education or human services budget in the future. The Brookings report offered four sensible policy suggestions. States should, and I quote from the report:

• Commit to a balanced approach. Massive budget gaps cannot be responsibly closed by only cutting spending. Budgetary balance and revenue diversification are crucial. In addition to balance and diversification, broad bases and tax system responsiveness should be mantras of fiscal system repair. Tax policies that increase the base and elasticity of state tax systems reduce the need for discretionary and unpopular rate increases.
• Maintain adequate rainy day funds. Most of the Mountain states exhausted their rainyday funds well before relieving their acute fiscal stress. As the economy gets back on its feet, state governments need to not just replenish, but increase their rainy day funds so that they can better weather protracted economic downturns in the future.
• Increase local flexibility and control. States have a history of passing measures that constrain local governments’ ability to raise revenues and respond to changing fiscal circumstances. Those local governments need greater control over revenue generation and public service.
• Improve budget processes and information sharing. Good policy decisions rest on good information and common-sense processes for delivering that information to the people who need it. Decision-makers need to have good data clearly presented about real and projected conditions, the range of policy options, and their consequences.

It must be noted, in contrast to those policy prescriptions, that Idaho lawmakers are still vowing to hold the line on any revenue diversification even as the state's economy has changed dramatically in the last 30 years and more drastic cuts loom. The state's reserve funds are gone and the idea of more local control for local governments is about as popular as a skunk at a garden party. In fact, the Idaho Statesman's Dan Popkey reported that some lawmakers have hungry eyes focused on that portion of the state sales tax that flows to local government. That's not more local control, but less. And, while Idaho has a long history of transparency in its budget process, missing until last week the multi-million dollar impact on state revenues of an established tax credit indicates there is a lot of room for improvement. The Brookings report is a sobering assessment of the state budget troubles that loom ahead even as the economy starts to recover. Tomorrow, why Utah is in considerably better shape than much of the rest of the west.