WA State Government Spending

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Tue, Dec 15, 2009, 3:00 pm  //  Craig Mayberry

It is always fascinating to watch the government budgeting process. With the recent reduction in revenue forecast, the Governor and other state politicians announced a severe cut in funding to the following key programs to meet a $760 million shortfall in this budget and $2.6 billion budget shortfall in 2011-2013 budget.

• Some correctional institutions to be closed
• School district's levy lid lift to be increased to 30%
• Basic Health Plan to be ended
• General Assistance for the unemployable to be ended
• Prescription drug assistance for 85,00 seniors to be suspended
• Maternity support for 50,000 pregnant mothers to be suspended
• Hospice assistance to be cut
• Financial aid to over 12,000 low income students to be ended
• Levy equalization to be suspended

I was heavily involved in the budgeting process at Intel Corporation for a number of years and I learned a lot about the games that get played in the budgeting process. At Intel we would start with the existing budget and then add spending depending on how much was available. A zero increase in the budget was generally considered a maintenance budget with maybe a slight increase for wages and benefits. Department managers were expected to fight for higher budgets and make strong cases about why they needed more money. As would be expected, they wanted to cut the critical programs Intel could not do without, it was part of the game. My role as a finance manager was to be the check and balance on the system, to test the legitimacy of the requests and balance all of the various departments to see who really needed the money. Budgeting was a very painful process, but generally the process worked.

In watching the state budgeting process there are some critical differences. As can be seen from the Governor's list above, politicians trot out all the key programs they know people will not want cut to make their case for more money. That is to be expected and is what the department managers should do. However, there are two inherent flaws in the system. First, the spending base is not based on the last budgeted number, but a “maintenance budget” which is much higher than the current budget. (I would love to see a politician claim with a straight face they need to increase spending by 17% just to provide the same level of service.) The $2.6 billion shortfall is because the revenue is not living up to a desired 17.2% increase in spending from the 2009-11 budget ($30.1 billion) to the 2011-13 budget ($35.3 billion). The other flaw is the lack of any real checks and balances in the system. My role as financial manager was to play the role of shareholder and push back on spending. In principle, legislators should probably play that check and balance role, but they do not. Voters are too far removed from the process to have enough information to adequately play that role. The budgeting process will never lead to appropriate results for the citizens of this state as long as these two flaws exist.

One way to put some checks and balances into the system, and correct the fatal flaws that currently exist, is to move to a low, medium and high priority budget system. Each department would be categorized as low, medium, or high, and then depending on expected revenue, a budget would be established based on a percentage increase (or decrease) from the prior budget. At current revenue levels spending can increase by 3.7% over the 2007-09 budget even with the December revenue level. This allows a 4% increase for high priority departments, 0% growth for medium priority, and a 15% budget cut for low priority programs. The outlook for 2011-13 is much improved with high priority programs getting a 8.5% increase, medium a 4% increase and low priority a 2% increase. Adjustments can then be made; the money can be taken from one part of the budget and given to another part of the budget. For example, deeper cuts in higher education can be moved to K-12 education, or the cuts in low priority programs can be deeper and the money moved to health care. I have put together an Excel spreadsheet with all of the operating budget departments. You can easily create your own budget by changing the percentages for high, medium, and low programs, change the priority category of the department, or make other specific adjustments. I was hoping to be able to make it available though this blog, but it only allows pictures, so if you want a copy of the spreadsheet email me at ckmayberry@clearwire.net and I would be happy to send it to you.

This approach at least ensures that money is going to critical programs and decisions are more transparent and easier to follow. It also allows the formulas to act as some measure of checks and balances on the system when politicians are not willing to play that role. It is hard to take politicians seriously when they make exorbitant claims of the deep budget cuts to be made to key programs, when in fact no such cuts need to happen. Despite the apparent hype, Washington State revenue and spending has gone up each year, and the trend will likely continue. It would be great for politicians to hand out 10% budget increases every year and never have to make a hard decision, but those days are over. The new reality is that the economy is not going to grow much over the next 3-5 years. Every level of government wants more money, but whenever one level takes more it comes at the expense of another level. For instance, an increase in taxes at the federal level means citizens in Washington have less to spend and therefore will buy fewer goods, leading to a further decline in sales tax revenue. The problem is not the amount of money, but flaws in the process that do not allow the appropriate checks and balances. Fix the flaws and then we can have a more realistic budget conversation.

The picture of the front table of Craig's multi-table spreadsheet. You can email him and he will send you the Excell spreadsheet. See article for what he suggests you might accomplish with it.