New Democrat Update - October 2003
GETTING THE BUDGET RIGHT
As government revenues plummet, state and local elected officials across Colorado are facing some very difficult choices as they try to balance their budgets. The Bush administration has made it even tougher by forcing state and local governments to pick up more and more of the tab for essential public services.
Too often, as has been the case with Colorado state government, policymakers make matters worse by focusing on costs, operating from last year’s budget. Quickly, they see that next year’s revenue will simply not be enough.
Despite being on the job for only a little more than two months, Denver Mayor John Hickenlooper is well on his way to getting Denver’s budget back into fiscal shape. His successful formula includes defining a clear set of priorities, an effective partnership with city employees and a strong willingness to implement important reforms. His first proposed budget is Denver’s smallest since 1999.
Importantly, Hickenlooper’s plan focuses on maintaining essential services, reforming ineffective employee compensation practices and strengthening economic development efforts, all without shortchanging the city’s future fiscal prospects. It also implements initiatives that will improve service quality and hold managers accountable for performance, while empowering them to more precisely define goals and assess their staff's progress toward them.
To the administration’s credit, the budget conservatively estimates a mere 1.1 percent in sales tax revenue growth while implementing $70 million in painful but necessary spending cuts. That same sense of fiscal conservatism is reflected in a reserve fund of $71 million - 10 percent of expenditures. Such prudence helps preserve Denver’s bond rating - key to borrowing funds at reasonable interest rates.
Hickenlooper’s focus on maintaining critical services and minimizing layoffs (a layoff-only budget strategy would have resulted in 1,100 job losses, about 11 percent of the total city workforce) is developing into a close, mutually beneficial partnership with city employees. Further employee goodwill was generated when the mayor cut his own staff’s salaries and advocated using a $5.4 million one-time tax amnesty windfall to fund merit raises through the end of 2003.
Renegotiating the current contracts with the firefighter and sheriff’s unions has saved $6 million (only the police union selfishly decided not to help - despite being asked to give less than the firefighters). Other sacrifices from city employees include five days leave without pay, contributing 2 percent of the pension cost, and paying a larger share of their health insurance premium. Additionally, any market survey adjustment will be deferred until 2005, and merit increases will be frozen in 2004.
Hickenlooper’s thoughtful and meaningful approach sharply contrasts with the recent budgetary shenanigans of Washington and Colorado state government. Both have been guilty of using overly optimistic revenue projections and underestimating expenses to mask budget shortfalls - only deferring the day of reckoning.
The numbers from Washington are staggering. The Congressional Budget Office says that the federal budget deficit will grow to a new world-record $480 billion next year, with cumulative deficits over the next 10 years totaling $1.4 trillion! That is quite a turnaround from the 10-year budget surpluses of more than five-and-a-half trillion dollars that were being projected right before George W. Bush took office.
While the state’s constitution mandates balanced budgets on a yearly basis, Gov. Owens and state Republican legislators have also demonstrated little fiscal discipline. Twenty-five percent of the GOP’s total “cuts” last year were mere creative accounting changes.
For example, shifting last June 30's state employee payday to July 1 eliminated one month’s payroll from last year (the state’s fiscal year is from July 1 to June 30) but that trick can only be played once. Another $116 million came from changing how Medicaid revenues are reported and raiding the state’s education fund.
No actual savings were realized - only a shell game of shifting existing funds. The other usual ineffective band-aids were also used - hiring freezes, pay freezes, across-the-board cuts, travel bans and purchasing delays.
Instead, officials should estimate how much revenue is expected, involve citizens in the priority-setting process, determine what results people most want and need, examine the tasks government performs and then “purchase” those services and programs that contribute most to the desired results. That way, the more important services will go into the shopping cart first and those with lower priorities will be left on the shelf - keeping the cost of government within its means.
To further discipline the process, policymakers should direct agencies to rate each activity as high, medium or low priority (at least a third of an agency’s budget should be required to be listed as low priority). Another idea is to create a "negative" expense line item, which would require generating a targeted amount of savings from reinvention and innovation (say 5 percent of current expenditures). That, coupled with the right financial and non-financial incentives, will motivate managers and employees.
Citizens should be enlisted to identify 10 broad goals against which all spending recommendations would be measured. Once those priorities are defined, a top-to-bottom review of every service can be conducted, ranking each government function and suggesting which should be kept and which should be cut. The services and programs should be prioritized by function, not by agency, empowering teams to focus on the government as a single enterprise, achieve results at less cost through creative solutions, reprioritize spending, eliminate programs and consolidate similar activities in different agencies.
These strategies will produce budgets that reflect citizens’ priorities, make the necessary tough choices, stay within our means, and redefine the truly important roles of government. Colorado’s state and local governments must get started now.
OPENING UP THE FRIENDLY SKIES
While airline deregulation has generally led to lower fares and increased traffic in metro areas, carriers continue to dramatically reduce services to smaller communities, resulting in higher prices and fewer flights. That has led to communities competing to get service rather than airlines vying to provide it.
The lack of adequately available and competitively-priced airline service can be devastating to rural areas. Service is particularly important for attracting management jobs, as well as for the high-tech sector, business service companies and tourist-related industries.
Airlines often cite that the demand is simply not there. While sometimes the case, introducing robust competition can often create an entirely different kind of dynamic - lower fares resulting in much higher levels of traffic (much of it from travelers abandoning their cars) that can make the economics work.
That’s why Attorney General Ken Salazar’s antitrust investigation into United Airlines may prove to be so important. Without adequate competition in the airline industry, overall state economic growth is jeopardized.
The issues include United’s exclusive arrangements with commuter carriers at Denver International Airport, potentially getting in the way of rural Colorado’s access to the skies. In addition, current lease negotiations between Denver and United could result in cost shifts to other carriers, making it even more difficult to compete with DIA’s overwhelmingly dominant airline (United has a 60 percent market share at DIA).
Salazar’s efforts reflect his belief that economic growth requires robust, open competition on a level playing field - in other words, equal opportunity for all and special privilege for none. Nothing could be fairer, or smarter, than that.