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Battling the Permanent Fiscal Crisis

An innovative approach to budgeting can ease the pain.

June 13, 2004|David Osborne | David Osborne, coauthor of "Reinventing Government," is also coauthor, with Peter Hutchinson, of "The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis," published this month by Basic Books.

It is budget time in America. And once again, governors, mayors, state legislators and city council members are cutting. This year, they are beyond fat, beyond muscle, heading deep into bone.

Despite the threat of terrorism, we have laid off police officers and firefighters. School districts have dismissed teachers. States have released felons. Millions of poor people have lost their health insurance. Yet the economy is growing rapidly and tax revenues have bounced back in predictable fashion. Why the continued budget carnage?

Welcome to the permanent fiscal crisis. In much of America, the exploding cost of healthcare has converged with the aging of the population to create a perfect fiscal storm.

Healthcare costs have risen by 10% a year, on average, since at least 1970. They will continue to do so for as far as the eye can see, because every breakthrough that keeps people alive longer drives up costs. Life expectancy is now pushing 80, and once people live that long they consume an enormous amount of healthcare.

Second to healthcare costs are public pensions, driven ever higher as retired civil servants live longer. Then there are rising interest payments on all the debt accumulated by "leaders" who chose to postpone the hard decisions.

Since the fiscal storm broke, many leaders have grabbed for any solution that could keep them afloat for another year. The tidal wave of red ink has triggered accounting gimmicks worthy of Enron: shifting next year's revenue into this fiscal year; pushing this year's spending onto next year's books; borrowing against future revenue to pay current costs. At least 20 states have sold their huge, 30-year tobacco settlement revenues at deep discounts to plug current deficits.

California has been king of the deadly deceptions, with its $25.7 billion in borrowing. Citizens will be paying interest on those bonds for decades. New York, which did something similar to bail out New York City in the 1970s, has never been able pay off its bonds; it recently refinanced them.

This kind of clap-if-you-believe-in-Tinkerbell budgeting delays the fiscal pain, but it does not eliminate it. Too many of our leaders bring to mind the man who jumped off a 40-story building and said as he sailed by the 20th floor, "So far so good."

When sleight of hand is no longer enough, leaders have turned to across-the-board cuts, which weaken every program equally, regardless of the effect.

When these are exhausted and real choices must be made, legislatures typically cut in an ad hoc, highly political fashion, based largely on which interest groups have the most muscle and scream loudest. This process inevitably victimizes the weakest members of society, those with the least political clout.

The biggest flaw in our conventional approach, however, is that we tend to focus entirely on what we cut (or hide), while ignoring what we keep. We do little to improve the effectiveness of the 85% or 90% of public dollars that continue to be spent.

A few public leaders, including Gov. Gary Locke of Washington and Mayor James K. Hahn of Los Angeles, have pioneered a different way. It begins with a decision about how much citizens are willing to spend -- and thus whether taxes or fees will be increased.

Once the "price" has been set, leaders define the measurable results most important to citizens -- making the city safe, for instance, or creating quality jobs or building affordable housing.

They then decide how much to spend on each of these outcomes and assign teams to research the strategies that are most effective at achieving them. Only then do they turn to the previous year's spending programs, where most budget processes begin. Each team ranks that year's programs -- and any new initiatives -- according to the effect they are likely to have on the desired outcome. It then goes down the list until the money runs out and draws a line. Programs above the line go in the budget; those below do not.

The key question is always the same: Will program X or program Y contribute more to safer streets, better schools, increased mobility or healthier neighborhoods?

To most of us, this seems like plain common sense. And that is exactly what it is.

It does not eliminate the necessity of painful cuts; it simply assures that those cuts will have the least negative effects on programs that most citizens value. More important, it focuses decision-makers' energy away from cuts and onto "keeps." It forces them to ask how they can best purchase the results citizens want at the price they are willing to pay. It has begun to work in cities and counties around the state.

Could it work in Sacramento? Can Californians afford not to find out?

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