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Budgeting For Results: A Fiscal Roadmap For Montana MPI Policy Note 03-10

Based on an MPI Study by Dr. Barry Poulson, Ph. D.

BOTTOM LINE UP FRONT:

Montana has experienced unconstrained state government spending growth, resulting in a structural deficit where future expected revenues will not match future spending obligations. The major source of this problem is a broken budgeting process where spending increases are baselined into future year budgets regardless of whether or not they are sustainable or even needed. MPI proposes that Montana convert to a priorities-based budgeting system that will monitor how tax dollars are spent and provide elected officials with much greater spending oversight and taxpayer accountability. There is a structural deficit in the state budget. o Structural deficits, unlike current account deficits, are not linked to the business cycle but rather to the fiscal rules that determine expenditure growth in the long run. These rules often encourage deferring difficult choices to future lawmakers. o A state is said to have a structural deficit if under current law state revenues are projected to fall below state expenditures in the long run. This is not sustainable and requires fundamental changes to the fiscal rules of the game. o Future costs mandated by current law will result in significantly more spending than revenues in the coming years. This is especially true in out-year state Medicaid and pension liabilities, which significantly outpace projected revenues. o While temporary federal injections have allowed state Medicaid spending to grow at a reasonable rate or even decline, the states share will skyrocket beginning in 2011 and beyond as federal subsidies are reduced. o Unfunded or underfunded pension liabilities for state workers are over $2 billion and very likely worse given unrealistically high assumptions for returns on pension fund investment portfolios. Taxpayers are left to pick up the difference. Montanas budget process is seriously flawed, resulting in a bias towards spending growth. o Montanas Present Law system begins with existing agency budgets, adjusts them for inflation and other factors, and uses the outcome as a baseline for future budgets. Spending increases are automatically carried into future years. o The system implicitly assumes that all current spending is both efficient and effective, and that the justifications behind all existing state programs and expenditures remain valid. Actual performance and need are not measured. o The result is a baseline budget that will almost always be larger than its predecessor. Any reduction to this budget is treated as a cut, even though it may still increase spending levels from previous years. o The burden is on our citizen legislators to find, propose, and defend cuts to the proposed budget, something they are ill-equipped to do during a biennial 90 day

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session as they are log rolled by special interests and government officials lobbying for their programs. MPI recommends the state convert to a Priority-Based Budget System. o Priority-Based Budgeting has been implemented successfully in a number of states. It is not experimental and the benefits are real and measurable. o The process begins by asking four basic questions: 1) What are the essential services the state must perform? 2) How can the state deliver essential services efficiently and effectively? 3) How should the state budget be allocated for the delivery of essential services? 4) How can the state assure that essential services are delivered efficiently and effectively in the long run? o Programs, rather than agencies, are evaluated based on their effectiveness and efficiency in addressing these four questions. Since each program is evaluated against objective criteria and against other programs with similar goals, results will be measurable and redundancy will be minimized. o This process forces lawmakers to acknowledge the fact that resources are limited, and then prioritize spending to achieve the greatest impact for the least amount of spending during each budget cycle. Other reforms are also necessary to resolve Montanas structural deficit. o Off Budget, or statutory spending makes up nearly 30% of state expenditures. This spending is automatic and outside the purview of normal budget processes. These earmarks, which stood at about $1.2 billion in 2009, should be forced to compete with other programs for taxpayer dollars. o Unfunded federal health care mandates greatly increase Montanas Medicaid and pension liabilities. Federal subsidies will end at about the time costs will begin to significantly increase, resulting in unsustainable state obligations. o Underfunded state pension programs will increasingly draw on budget resources and siphon funding from essential programs. Montanas defined benefit system should be stabilized and then converted to a defined contribution system for new hires.
The Montana Policy Institute is a 501(c) (3) policy research organization that equips Montana citizens and decision makers to better evaluate state public policy options from the perspective that policies based upon limited government, individual rights, and individual responsibility will result in the greatest common good. To find out more or for copies of the complete study, visit us at www.montanapolicy.org. NOTHING WRITTEN here is to be construed as an attempt to influence any election or legislative action. PERMISSION TO REPRINT this paper in whole or in part is hereby granted provided full credit is given to the author and the Montana Policy Institute. Copyright 2010 The Montana Policy Institute 67 West Kagy Blvd., STE. B Bozeman, MT 59715 406-219-0508 www.montanapolicy.org

MPI Policy Note 03-10

Budgeting for Results: A Fiscal Roadmap for Montana