New Democrat Update - February 2009
SOLVING COLORADO’S BUDGET CRISES
The state is grappling with an incredible $1 billion budget deficit over the next 18 months. Among other painful measures, Governor Bill Ritter is recommending the closure of two prisons, cutting public and higher education, furloughing state workers, eliminating a planned expansion of the Children’s Basic Health Plan, raiding cash funds and temporarily getting rid of a property-tax break for seniors. Earlier, he had imposed a statewide hiring freeze and stopped a number of needed construction projects.
This fiscal crisis is not going away any time soon. In fact, count on more of these crises, effectively making them into a big permanent one. The problem is not cyclical so much as it is structural.
The old ways of doing business simply do not cut it. Colorado can no longer balance its budget simply by beginning with last year’s costs and then starting the process of subtraction. Instead of focusing exclusively on what should be cut, a much better way is to hone in on what functions should stay - a budget built from the ground up.
If Democrats want the public sector to continue to play a meaningful and necessary role, they must start treating government as if it were a family. Figure out how much money it can raise, take its shopping cart down the aisles, and, based on what its goals are, decide what to buy and what to leave on the shelf. In practice, that means estimating how much revenue the government should expect, determining what results people most want and need, getting creative about the ways departments and agencies go about producing them, and then “purchasing” services and programs that contribute most effectively to those desired outcomes.
A growing number of state and local governments across the country, including the City of Fort Collins and Jefferson County Schools, are embracing this new way, Budgeting for Outcomes (BFO). In addition to balancing their budgets, they are rethinking their priorities and developing more cost-effective ways to deliver services. Obsolete or low-value activities are being eliminated, generating real savings for important new investments, elevating the general interest over special interests, ensuring accountability for performance and making the budget much more understandable to citizens.
BFO also gets rid of the infamous and continual departmental budgetary games, like padding costs and hiding excess funds, that public employees feel they have to play to protect themselves from cuts. Rather than encouraging that behavior, BFO puts the focus on where it should be - producing results citizens value at a price they are willing to pay.
Former Washington Governor Gary Locke successfully used this strategy to fix a deficit even larger than Colorado’s (his was a whopping $2.5 billion). He directed state agencies to rate their 1,400 activities as high, medium or lower priority (at least a third of an agency’s budget was required to be listed as lower priority).
Locke then enlisted teams of business leaders and government officials to identify the state’s 10 broad goals - ranging from boosting student achievement to improving the business climate to strengthening homeland security - against which all spending recommendations were measured. Another set of teams developed “purchasing plans” to produce results that contributed to the 10 broad goals.
A top-to-bottom review of every state service was taken, ranking each government function and suggesting which ones should be kept. The services and programs were prioritized by function, not by agency, empowering the teams to focus on state government as a single enterprise, achieve results at less costs through creative solutions, reprioritize spending, eliminate programs and consolidate similar activities in different agencies.
In this age of Internet citizen activism, this new approach also lends itself to much more meaningful taxpayer involvement. For example, in Iowa, then-Governor Tom Vilsack (now U.S. Secretary of Agriculture) implemented BFO and allowed everyone to see how state departments were progressing toward their goals in the current year and over the next five.
The web site also included information that empowered visitors to determine whether the state was efficiently doing its job and even to help decide what government should be or should not be doing. In Colorado, that tool would be especially useful as another way to educate citizens about how unwieldy constitutional measures passed in the last 25 years have made rational budgeting literally impossible.
Ritter and the legislature’s Joint Budget Committee should implement this thorough, comprehensive and thoughtful process, producing budgets that reflect citizens’ priorities, make the necessary tough choices, stay within our means, and redefine the truly important roles of government. They should take the opportunity this budget crisis presents, to remake government services to get the most bang for every taxpayer buck.
MODERNIZING ECONOMIC DEVELOPMENT
Like the rest of the country, Colorado’s economy is clearly in deep trouble. The middle class is feeling it and recent reports show poverty rates skyrocketing.
Restoring broadly-shared prosperity requires embracing the new economic realities of the 21st century - technology, globalization, and entrepreneurship. Now, what ultimately determines a state's economic success is the ability of all institutions (private, nonprofit, and government) to innovate and change.
Innovation is driving virtually the entire U.S. economy. For the first time ever, American businesses have invested less in new physical assets than in intangible things - mainly patents and copyrights, databases, brands, organization, training and so on. Roughly two-thirds of the value of large U.S. companies are in intangible assets.
Due to these new realities, policymakers and economic development officials should focus less on issues such as taxes and regulation or the number of firm-specific deals, and more on initiatives that can spur company learning and innovation. They should be concerned with how many entrepreneurs are taking risks to start new ventures, and whether workers are acquiring the right kind of skills and companies are organizing themselves in ways that utilize those skills.
Public leaders should care if companies are investing in technological breakthroughs, if research institutions and universities are transferring knowledge to companies and individuals and if government is doing its part by funding research, and training enough scientists and engineers. Individuals and firms must have the right incentives and tools to adequately invest in and commercialize new ideas.
Governments must also avoid imposing protections for companies against more innovative competitors and implement policies that support adoption of advanced information technologies and the broader digital transformation of society and the economy. Finally, state and local economic development efforts must be organized in new ways that fit these very different realities.
The days of relying on attracting out-of-state business operations through targeted tax incentives are over. Today’s challenge is “home-growing” more entrepreneurial and innovation-based firms.
Stay tuned to future New Democrat Updates on how to make that happen.