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S T A T E B U D G E T R E F O R M T O O L K I T I
STATE BUDGET REFORM TOOLKIT
2011 American Legislave Exchange Council
All rights reserved. Except as permied under the United States
Copyright Act of 1976, no part of this publicaon may be reproduced
or distributed in any form or by any means, or stored in a database
or retrieval system without the prior permission of the publisher.
Managing Editors:
Leonard GilroyDirector of Government Reform, Reason Foundaon
Jonathan Williams
Director, Tax and Fiscal Policy Task Force,American Legislave Exchange CouncilContribung Authors:
Josh CullingState Government Aairs Manager, Americans for Tax Reform
Leonard GilroyDirector of Government Reform, Reason Foundaon
Amber GunnDirector of the Economic Policy Center, Evergreen FreedomFoundaon
Jason MercierDirector of the Center for Government Reform, WashingtonPolicy Center
Mahew Mitchell, Ph.D.Research Fellow, The Mercatus Center
Barry Poulson, Ph.D.Professor Emeritus, University of Colorado
Bob WilliamsPresident, State Budget SoluonsFounder and Senior Fellow, Evergreen Freedom Foundaon
Jonathan WilliamsDirector, Tax and Fiscal Policy Task Force,American Legislave Exchange Council
About the American LegislaveExchange Council
The State Budget Reform Toolkit has been published by
the American Legislave Exchange Council (ALEC) as part
of its mission to discuss, develop, and disseminate public
policies, which expand free markets, promote economic
growth, limit the size of government, and preserve indi-vidual liberty. ALEC is the naons largest non-parsan,
voluntary membership organizaon of state legislators,
with 2,000 members across the naon. ALEC is governed
by a Board of Directors of state legislators, which is ad -
vised by a Private Enterprise Board, represenng major
corporate and foundaon sponsors. ALEC is classied by
the Internal Revenue Service as a 501(c)(3) nonprot,
public policy and educaonal organizaon. Individuals,
philanthropic foundaons, corporaons, companies, or
associaons are eligible to support ALECs work through
tax-deducble gis.
About ALECs Tax and Fiscal PolicyTask Force
The mission of ALECs Tax and Fiscal Policy Task Force is
to explore policy soluons that reduce excessive govern-
ment spending, lower the overall tax burden, enhance
transparency of government operaons, and promote
free-market scal policies.
Public Sector Chairman: Indiana Sen. Jim Buck
Private Sector Chairman: Bob Williams
Task Force Director: Jonathan Williams
Published by
American Legislave Exchange Council1101 Vermont Ave., NW, 11th Floor
Washington, D.C. 20005
Phone: (202) 466-3800
Fax: (202) 466-3801
www.alec.org
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Leonard GilroyGilroy is the Director of Government
Reform at Reason Foundaon, a non-
prot think tank advancing free minds
and free markets. Gilroy, a cered
urban planner (AICP), researches priva-
zaon, government reform, transpor-
taon, infrastructure, and urban policy
issues. Gilroy has a diversied background in policy re-
search and implementaon, with parcular emphases
on public-private partnerships, compeon, govern-
ment eciency, transparency, accountability, and gov-
ernment performance.
Gilroy is the editor of the worlds most respected news-
leer on privazaon, Privazaon Watch, and is the
editor of the widely-read Annual Privazaon Report,
which examines trends and chronicles the experiences
of local, state, and federal governments in bringing com-
peon to public services. Gilroy also edits Reasons an-
nual Innovators in Acon report.
Prior to joining Reason, Gilroy was a senior planner at a
Louisiana-based urban planning consulng rm. He also
worked as a research assistant at the Virginia Center for
Coal and Energy Research at Virginia Tech. Gilroy earned
a B.A. and M.A. in urban and regional planning from Vir-
ginia Tech.
Jonathan WilliamsJonathan Williams is the director of the
Tax and Fiscal Policy Task Force for the
American Legislave Exchange Council
(ALEC), where he works with state legis-
lators and the private sector to develop
free-market scal policy soluons in the
states. Prior to joining ALEC, Jonathan
served as sta economist at the non-parsan Tax Foun-
daon, authoring numerous tax policy studies.
His work has been featured in many publicaons in-
cluding The Wall Street Journal, The Los Angeles Times,
Forbes and Investors Business Daily. With Dr. Arthur Laf-
fer and Steve Moore, Williams co-authored Rich States,
Poor States: ALEC-Laer Economic Compeveness In-
dex. Jonathan has been a contribung author to the Rea-
son Foundaons Annual Privazaon Report and has
wrien for the Ash Instute at the Kennedy School of
Government at Harvard. In addion, Williams is a con-
tribung author to In Defense of Capitalism (North-
wood University Press, 2010). He is also a contributor
to The Examiner (Washington, D.C.) and serves as an
adjunct scal policy fellow at the Kansas Policy Instute.
In addion to tesfying before numerous legislave bod-
ies and speaking to audiences across America, Williamsis a popular guest on talk radio shows and has appeared
on numerous television outlets, including The Glenn
Beck Program and Fox Business News.
A Mid-Michigan nave, Williams graduated magna cum
laude from Northwood University in Midland, Mich.,
majoring in economics, banking/nance, and business
management. While at Northwood, he was the recipient
of the presgious Ludwig von Mises Award in Economics.
About the Managing Editors
Acknowledgements
We wish to thank
the following pares
for making this
publicaon possible:
First, our sincere thanks go to The Lynde and Harry Bradley Foundaon for their
generous support to make this research possible. Next, we would like to thank
Ron Scheberle, Michael Bowman, Chaz Cirame, Ka Siconol, Ben Iwen, Jusne
Fink, Laura Ellio, Harris Kenny, and the professional sta members at ALEC and
the Reason Foundaon for their valuable assistance with this project.
W W W . A L E C . O R G
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vi.vii.
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S T A T E B U D G E T R E F O R M T O O L K I T I
Table of ContentsI. Introducon
A. Problem: The Current Budget System
B. Soluon: Priority-Based Budgeng
II. Tools to Modernize State Budgeng
A. Dene Core Governing Principles
B. Require Non-Parsan Revenue Forecasts and Independent Cercaon of Budgets
C. Pass a Strong, Balanced Budget Requirement
D. Adopt an Eecve State Spending Limit
E. Require Preparaon of Agency Mission Statements
F. Adopt Performance Assessment and Management
G. Budgeng for Outcomes
H. The Item-Reducon Veto
III. Tools to Improve Budget Transparency
A. Create a Transparent Budget Web site
B. Adopt a 72-Hour Budget Timeout
C. Require Fiscal Notes Before Acon on Spending Bills
IV. Tools to Control Costs and Improve Government Eciency
A. Adopt a State Hiring Freeze
B. Reform State Pensions
C. Restructure State Reree Health Care Plans
D. Eliminate Posions Vacant More Than Six MonthsE. Delay Automac Pay Increases
F. Adopt Acvity-Based Cosng
G. Adopt a Sunset Review Process for State Agencies, Boards, and Commissions
H. Allow the State Auditor to Conduct Performance Audits
I. Establish a System of Independent Recovery Audits for Improper Payments of Taxpayer Funds
J. Embrace the Expanded Use of Privazaon and Compeve Contracng
K. Establish a State Privazaon and Eciency Council
L. Create a Statewide Real Property Inventory and Search the
Balance Sheet for Asset Sale and Lease Opportunies
M. Achieve Savings Through Employee Incenve Programs
V. Conclusion
VI. Appendix
Index of Recommendaons
Index of ALEC Model Legislaon
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A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .vi
LECs State Budget Reform Toolkit will advance a
set of budget and procurement best pracces to
guide state policymakers as they work to solve the cur-
rent budget shoralls. The toolkit will assist legislators in
priorizing and more eciently delivering core govern-
ment services through advancing Jeersonian principlesof free markets, limited government, federalism, and in-
dividual liberty.
Today, states face structural decits created by over-
spending. Most of the legislave xes over the past
few years for state budget gaps have merely postponed
or obscured the problems rather than addressing them
directly.
A contribung factor to state budget gaps is the ex-
piraon of the federal smulus funds provided by theAmerican Recovery and Reinvestment Act (ARRA). Al-
though these federal funds temporarily supported state
budgets, the money will not last forever. When it is gone,
states will be faced with gaping holes in their budgets, as
policymakers in many states have imprudently opted to
rely on these temporary federal funds in order to avoid
making dicult, but necessary, budget reforms to align
expenses with revenues.
To solve this problem, the temptaon will be to use a
business-as-usual approach: raise taxes, raid non-gen-eral fund accounts, delay funding of some legislaon,
avoid fully funding pensions, and use federal smulus
funds to postpone meaningful budget reforms. Some
of these acons may give states a temporary patch
in their budget shorall, but when the federal funds
expire, when pension tabs for delayed contribuons
come due, and when there are few o-budget accounts
le to raid, states that did not take real acon to solve
their budgetary shoralls will face even greater budget
defecits. Addionally, as ALECs Rich States, Poor States
publicaon so aptly points out, tax increases come at a
very high cost: the erosion of state economic compe -
veness. In the words of President John F. Kennedy: Aneconomy constrained by high tax rates will never pro-
duce enough revenue to balance the budget, just as it
will never create enough jobs.
Problem: The Current BudgetSystem
A budget drives all policy within a state. For this reason,
debang, wring, and approving a state budget are the
primary tasks legislators must accomplish. However, when
budgets are built in the tradional manner of adjusngthe current budget for inaon and caseload increases,
legislators become enablers for agencies and programs
that likely have fundamental design aws or that may be
providing services that are ineecve at meeng legisla-
ve goals. This type of approach focuses almost enrely on
inputs (more money). Building budgets the convenonal
way virtually assures overspending since there is lile, if
any, focus on eciency, eecveness, or outcomes.
Legislators oen nd that the baseline budget is higher
than the esmated revenue forecast. They then focus ona combinaon of cung programs, raising taxes, or us-
ing accounng gimmicks to make general fund resources
match forecasted revenue. This approach ignores the
queson of whether exisng state programs are ecient
or eecve. Rarely are the quesons asked, How can
exisng programs be improved? or How can we maxi-
mize the outcome of the tax dollars that are collected?
Introduction
A
I.
A.
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S T A T E B U D G E T R E F O R M T O O L K I T I
from government. This includes removing barriers stand-
ing in the way of delivering results to cizens.
Without this approach, state budgets resemble an iceberg,
with decades worth of spending unseen and unexamined
under the water, while the debate rages year aer year
over the small part that scks up out of the water. The lon-
ger state lawmakers connue to use the cost-plus model,
the more hardwired their decit problems will become.
In 2003, Washington state actually implemented priority-
based budgeng to close a budget decit of $2.4 billion
without raising taxes. Had the tradional cost-plus budget-
ing system been used, legislators would have started with
the baseline budget and focused on cung programs or
raising taxes unl the general fund matched the forecasted
revenue. The states economy was recognized by both par-
es as too weak to withstand a tax hike. Instead, the state
priorized services and determined what the most impor-
tant things to buy or deliver were for the dollars invested.
In order to face the upcoming budget crisis, states should
change their convenonal budget system to a priority-
based budget system. Using this tool, legislators can fo-
cus on delivering eecve services to taxpayers instead
of funding costly, ineecve programs. The rst tool set
below describes steps for states to follow to modernizetheir budgeng system fully.
Convenonal Budget
System: Input-Focused
B.
Priority-Based Budget
System: Output-Focused
Table 1.
v
Baseline Budget+
Inaon+
Caseloads+
Iniave Requirements+
Addional Policy Changes=
Business-as-Usual Budget
Soluon: Priority-BasedBudgeng
This State Budget Reform Toolkit is designed to help legis-
lators address the serious nancial crises in the states by
changing their budgetary system from the convenonal
input system, which is clearly a failed policy model, to
one focused on outcomes.
This new budgetary system is called priority-based bud-
geng. Priority-based budgeng means state ocials
and cizens must rst determine the core funcons of
government. While this may seem like an elementary
step, it is seldom taken before legislave appropriaons
are made. Gaining control of a state budget means the
following quesons must be answered:
What is the role of government?
What are the essenal services government
must provide to fulll its purpose?
How will we know if government is doing a
good job?
What should all of this cost?
When cuts must be made, how will they be
properlypriorized?
Only by carefully considering the proper role of govern-ment can legislators and governors do an eecve job
protecng individual rights, while providing essenal
services to taxpayers in an ecient, cost-eecve man-
ner. This is not an an-government philosophy; rather
it is ensuring that what government is supposed to do, it
will do well. Furthermore, great savings can be obtained
if legislators and agencies do not spend me determining
how a parcular funcon can be performed beer, faster,
and cheaper if it is not a core funcon of government.
Priority-based budgeng views all of state governmentall of its agencies and funconsas a single enterprise.
It evaluates new proposals in the context of all that state
government does, and develops strategies for achieving
priority results with an eye on all available state resources.
Priority-based budgeng helps to keep a cizen-focused
perspecve on the budget. It assumes we can change
the rules, if necessary, to maximize the results we can get
Core Funcons of Governme+
Performance Measuremen+
Priorized Spending Adjustme=
Priority-Based Budget
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8 A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .
Tools to Modernize
State BudgetingII.
tates need innovave strategies to modernize their
budgeng system. The rst secon of our State
Budget Reform Toolkit gives state policymakers a step-
by-step process to implement priority-based budgeng.
Tools in this secon include: dening core governing
principles, requiring independent cercaon of thebudget, and passing a strong balanced budget require-
ment. Addional tools in this secon also include: adopt-
ing an eecve state spending limit, requiring agencies
to prepare mission statements, adopng performance
management, and budgeng for outcomes.
Dene Core GoverningPrinciples
A rst step in reforming state budgets is to determine
the core funcons of state government. Every state con-stuon, which lawmakers swear to uphold, contains
language that cannot be ignored when building a frame-
work for eshing out core government funcons.
When deciding the core funcons of government, the
following quesons should be asked:
Is this a proper funcon of government, or is it best
le to the individual (family) or charitable organi-
zaon?
If intervenon is necessary, is it best le to local
government which is closer to the people? Does it further increase taxes, regulaons, or the
size of government? If so, is this jused?
Many lawmakers are unwilling to determine the core
funcons of government because:
It is hard work and may take years to get right.
Fierce philosophical bales must be waged with the
end result being a compromise that may please no
one.
Sll, the ulmate responsibility of lawmakers is to looktaxpayers in the eye and honestly report to them that
government is funconing excellently within its bound-
aries and its means. Starng the governing process with
sound core principles is a necessity. However, developing
a meaningful set of core governing principles requires
me and courage. Many ocials will publicly embrace
the noon of developing budgets around a model of
more carefully priorized spending, but most will also
vigorously oppose or undermine that model in day-to-
day operaons.
Some legislators may disagree with the already-dened
core funcons, or may disagree with the newly draed
core funcons. While absolute consensus is not likely,
legislators should use the core funcons as a starng
place to develop the legislave agenda. This would result
in healthy debates about the states core responsibilies.
In some states, the legislature may not wish to wait for
its governor to develop a list of core funcons. In other
states, it will be a joint endeavor between polical pares
and the branches of government. A biparsan racaonof agreed-upon core funcons should be sought within
the rst few weeks of budget-wring sessions. This would
dramacally increase the producvity of standing com-
miee hearings because everyone would know the terms
and the budget limitaons. Once the core funcons for
S
A.
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S T A T E B U D G E T R E F O R M T O O L K I T I
the state have been developed, they will serve as a lit-
mus test for the hundreds of currently funded agencies,
boards, commissions, and programs. Agencies should be
asked to submit their budgets based on delivering one or
more of the states idened core funcons.
Washingtons core funcons are detailed at:
www.ofm.wa.gov/budget/pog/default.asp
In Washington state, this approach considered revenue
for all sources (not just the general fund) and assumed no
spending commitments were sacrosanct. The legislature
chose which spending to add to the budget in order to
deliver the core funcons and priorized acvies within
those funcons.
Recommendaon: All exisng programs shouldt within one of the core funcons or they should be
abolished. Measurable outcomes for each core funcon
should be idened and agency acvies priorized.
Addional Resources: The Evergreen Freedom Foundaon, The Steward-
ship Project, Olympia, WA, June 2003. www.ewa.
org/pdfs/stewardship2003.pdf
Require Non-Parsan Rev-enue Forecasts and Indepen-dent Cercaon of Budgets
The current budgeng process allows far too much room
for discreon in revenue projecons, creang the oppor-
tunity for unrealisc projecons to serve as the founda-
on for state spending. Two interrelated reforms can help
to address this problem: (1) have a non-parsan revenue
forecast council that meets quarterly and publishes an
ocial state revenue forecast, and (2) have an indepen-
dent, third-party cercaon of the budget.
Using non-parsan revenue forecastswhich should
account for all taxes, fees, and charges by state govern-
mentcan help eliminate the bureaucrac tendency to
rely on higher-end revenue esmates just to balance the
budget. However, states should go further by undertak-
ing the second reform. Requiring the state treasurer (or a
similar comptroller or state auditor) to cerfy the budget
would help to ensure that the budget relies on realisc
revenue forecasts. Further, this approach creates a poli-
cal incenve for accurate budgeng since the treasurers
professional credibility (and potenal polical future) is
on the line.
The Texas Constuon gives the comptroller in that state
the authority to cerfy the states budget. In advance of
each regular legislave session, the comptroller prepares
and submits to the governor and legislature a statement,
under oath, showing the nancial condion of the state
treasury at the close of the last scal period and an es-
mate of the probable receipts and disbursements for
the current scal year. The statement also contains an
itemized esmate of the ancipated revenue based on
the laws then in eect from all sources, showing the fund
accounts to be credited during the succeeding biennium.
Except in the case of emergency or imperave necessity
and with a four-hs vote in each house, no appropria-
on is considered valid if it exceeds the cash and anci-
pated revenue of the funds from which such appropria-
on is to be made. No bill containing an appropriaon
can be considered as passed or be sent to the governor
for consideraon unl and unless the comptroller cer-
es that the amount appropriated is within the amountesmated to be available in the aected funds.
Recommendaon: State policymakers should closethe current gap in their budgeng process by adopng
provisions similar to Texas. Giving the states chief nan-
cial ocer the ability to prevent unrealisc budgets from
being adopted unl the budgets match expected reve-
B.
Using non-parsan revenue
forecasts can help eliminate the
bureaucrac tendency to rely on
higher-end revenue esmates just
to balance the budget.
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10 A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .
W W W . A L E C . O R G
nues would be an important step towards ghtening and
strengthening scal control systems to keep the price of
government in check.
Addional Resources: State of Texas, Senate Research Center, Budget
101: A Guide to the State Budget Process in Texas,
Ausn, TX, January 2005. www.senate.state.tx.us/
SRC/pdf/Budget101_2005.pdf
Texas State Constuon, Arcle 3, Sec. 49a, Finan-
cial Statement and Esmate by Comptroller of Pub-
lic Accounts; Limitaon of Appropriaons.www.
statutes.legis.state.tx.us/Docs/CN/htm/CN.3.htm
ALEC Model Legislaon: Balanced Budget Cercaon Act
Independent Revenue Forecasng Act
Pass a Strong, BalancedBudget Requirement
One major aw in state spending is that the legislature,
which is responsible for draing state spending, rarely
produces a balanced budget. While most states do have
balanced budget requirements, all too oen state leg-
islators also take advantage of accounng maneuvers
that push expenses into future budgets, for exampleissuing specious and unsustainable bond programs.
The balanced budget requirement needs to be carefully
structured to include all funds so legislators dont use
accounng gimmicks to push the operang decit into
future budgets. Ideally, legislators should adopt the 98-
2-60 approach. This means the state should spend no
more than 98 percent of forecasted revenue on previ-
ously idened priories of government, put 2 percent
away in reserves and require a 60 percent supermajority
to change the 98 percent-2 percent rule.
The primary benet of this policy recommendaon is
that it would allow states to stop the bleeding. There
are many budgetary repercussions that will take me to
solve. First and foremost, incumbent ocials must be
able to guarantee to voters that reckless spending is a
thing of the past.
Recommendaon: Pass a balanced budget require-ment, mandang that the expenditures included in the bud-
get for the next scal year shall not exceed esmated rev-
enues, and create a protected emergency reserve account.
Addional Resources:
Washington Policy Center, Cizens Guide to SJR
8206, Budget Stabilizaon Account, Olympia, WA,
September 2007. www.washingtonpolicy.org/
publicaons/notes/cizens-guide-sjr-8206-budget-
stabilizaon-account
Adopt an Eecve StateSpending Limit
Many states have aempted to curtail spending (or,more accurately, spending growth) with mixed success.
In fact, a majority of states maintain some sort of spend-
ing limit or rainy day fund, but their eecveness varies
greatly.
The importance of using both a spending limit and a
rainy day fund is to help smooth out expenditures over
the business cycle and avoid the dangerous boom-and-
bust cycle of budgeng. The purpose of the spending
limit is to provide the scal discipline necessary during
strong periods of revenue growth, to not overextend thebudget, and to avoid creang a structural decit caused
by overspending. This two-pronged policy would make
state budgets more resilient in the face of unancipated
expenses. The inaccessibility of the emergency funds
would mandate biparsan eort to solve problems in-
stead of relying on tenuous party-line votes.
C.
D.
First and foremost, incumbent
ocials must be able to guarantee
to voters that reckless spending is athing of the past.
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S T A T E B U D G E T R E F O R M T O O L K I T I
When properly designed and implemented, Tax and Ex-
penditure Limits (TELs) have proven to be eecve in
constraining the growth of government spending, and
stabilizing government budgets over the business cycle.
ALECs model legislaon incorporates features that make
TELs eecve and successful:
Incorporate TELs into state constuons, rather than
in easily evaded or ignored statutes.
Use TELs to limit the rate of growth of revenue and/or
expenditures to the sum of inaon plus populaon
growth.
Do not link TELs to some measure of aggregate eco-
nomic acvity, such as personal income. This type of
limit is less eecve in constraining the growth of
spending and stabilizing the budget.
Apply TELs to a broad measure of revenue and/or
expenditure, exempng only federally funded expen-
ditures.
Use TELs to provide for the disposion of surplus rev-
enue above the TEL limit.
A poron of surplus revenue should be placed inan emergency reserve fund. Use of this emergency
reserve fund should be limited to natural disasters,
as opposed to revenue shoralls.
With an emergency reserve fund in place, a poron
of surplus revenue should be allocated to a budget
stabilizaon fund. The budget stabilizaon fund
should only be used to oset revenue shoralls in
periods of recession.
A poron of the surplus revenue should be allocatedto tax cuts or tax rebates to constrain the growth of
spending. Tax cuts and tax rebates reveal to taxpay-
ers the opportunity cost of allowing government to
spend the surplus revenue.
The most eecve TELs require voter approval to
increase taxes, issue debt, or spend surplus revenue.
When taxpayer approval is required on ballot mea-
sures, taxpayersnot elected ocialswill deter-
mine how much government spending they want and
are willing to pay for.
Recommendaons: States should adopt a cons-
tuonal revenue or spending limit. Such a limit would
impose much needed discipline on proigate spending
paerns.
Addional Resources:
Poulson, Barry W., Colorados Taxpayer Bill of
Rights (TABOR) Amendment: An Experiment in
Direct Democracy, Americans for Prosperity Foun-
daon, Washington, DC, 2009. www.voteontaxes.
com/images/Colorado_s_taxpayer_bill_of_rights_
tabor_an_experiement_in_direct_democracy.doc
Poulson, Barry W., What is at Stake in the Cur-
rent Bale over Colorados Tax and Spending
Limits?, The Independence Instute, Lakewood,
CO., March 2009. www.old.i2i.org/main/author.
php?author_id=90&cycle=2012-3
Segal, Georey F. and Adam B. Summers, The
Sky Isnt Falling: Proven Strategies for Budget
Reconciliaon, Americans for Prosperity Founda-
on and Reason Foundaon, Washington, D.C.,
October 2005. www.reason.org/les/d54cd-b9ddc42fd6dd894005e25c.pdf
Laer, Arthur, Stephen Moore, and Jonathan Wil-
liams, Rich States, Poor States: ALEC-Laer State
Economic Compeveness Index, American Legis-
lave Exchange Council, Washington, D.C., 2010.
www.alec.org/AM/PDF/tax/10RSPS/RSPS2010-
Final.pdf
ALEC Model Legislaon: Tax and Expenditure Limitaon Act
Require Preparaon ofAgency Mission Statements
Unbelievably, only half of the states require their agen-
cies to develop mission statements. Many problems
arise when agencies do not have clear goals and ob-
jecves. Requiring agencies to prepare mission state-
E.
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12 A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .
mentswith goals and objecves that link back direct-
ly to core funcons of governmentswould help solve
the business-as-usual budgeng problem. Agency mis-
sion statements describe the agencys reason for exist-
ing in general terms that capture its unique purpose and
funcons.
Agency goals should be broad, high-level, issue-oriented
statements of an organizaons desired future direcon
or the outcomes that they strive to achieve. Goals elabo-
rate on the organizaons mission statement, arculang
the overall expectaons and intenons for the agency.
They should t well with the mission statement and an-
swer the queson: What do we need to achieve to carry
out our mission? Objecves break down the goals into
smaller, more specic outcome-oriented pieces. They
describe the measurable results an agency is expected
to accomplish within a given me period.
The benets of this recommendaon are clear: with
well-dened roles, local and state government can work
in concert to provide services. Red tape and burden-
some, overlapping of roles can be eliminated. Taxpayers
benet in understanding exactly which agencies to go to
for services. The agencies themselves benet because
they avoid being forced to assume addional respon-
sibilies when other agencies face budget cuts, or are
eliminated enrely. Lastly, policymakers benet becauseit will be clear to see exactly which agencies require an
increase (or decrease) in funding.
Recommendaon: The legislature should requireeach agency to have a mission statement with goals and
objecves linked to the states core funcons of govern-
ment.
Adopt Performance Assess-ment and Management
Once the budget is built, policymakers and administra-
tors should compare those expenditures against the
expected performance outcomes, using the lessons
learned to make necessary adjustments to build the next
budget. All agencies should have clear performance indi-
cators so that policymakers and voters can easily moni-
tor their eciency. If there is no performance monitor-
ing, several problems may arise.
Legislators face a Samaritans dilemma in that failing
agencies receive increases in funding despite being
poorly run, when properly run agencies that are under
duress should receive addional funding. Conversely,agencies may be facing a decreased workload, but re-
ceive the same amount (or even addional) funding
when a reducon of funding is pernent.
Agencies should have at least one performance outcome
measure for each major acvity in their acvity inven-
toryif not, the acvity should be eliminated. An eec-
ve acvity performance measure:
Indicates whether the acvity is achieving its pur-
pose or is contribung to statewide results. Imme-diate and intermediate outcomes are preferable,
although in some cases, output and eciency mea-
sures help tell the story.
Is reliable, accurate, and veriable.
Is understandable and relevant to cizens and
stakeholders who may have lile or no knowledge
of agency operaons.
Is stated in posive terms (or in terms of the
desired outcomes).
Is connected to challenging, yet achievable, targets.
Can be obtained at reasonable cost and for reason-able eort.
To help improve budget accountability, high-level perfor-
mance outcome measures should be placed directly in
the budget. By doing so, state ocials and cizens can
quickly determine whether performance goals have been
met, evaluate the eecveness of acvies purchased
F.
The benets of this recommendaon
are clear: with well-dened roles,
local and state government can work
in concert to provide services.
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S T A T E B U D G E T R E F O R M T O O L K I T I
in the budget, and gauge whether the investment has
proven its worth versus the cost (see discussion under
Secon II.G: Budgeng for Outcomes).
Many governments have taken steps to require agencies
to start monitoring their performance, but this concept
can be taken much further by instung a process to reg-
ularly review all state programs for performance, rele-
vance, and eciency. While the benets of performance
measurement may seem obvious, merely measuring
agency and program performance is insucient by itself.
Without a corresponding mechanism for oversighta
process designed to ensure performance on an ongoing
basis across all agenciesnothing will change.
In this process, each agency should be required to regu-
larly demonstrate how each acvity it performs directly
relates to achieving its core mission. This process can
idenfy immediate opportunies for streamlining, con-
solidaon, and alternave delivery. Ulmately, the pro-
cess should integrate into the larger budgeng process,
fully funding performing and eecve programs, while
reducing or eliminang funding to ineecve, redun-
dant, or poorly performing programs. The review should
include, but not be limited to, making recommendaons
for eliminaon or alternave delivery systems.
The Bush administraon developed a robust process
model at the federal level that can serve as a template.
The Oce of Management and Budget (OMB) developed
the Program Assessment Rang Tool (PART) in 2002 to
evaluate programs based on their purpose, strategic
design, management, and results. OMB takes these as-
sessments into account while reviewing agency budget
requests, and the results are reported in the Presidents
budget submission to Congress. Between 2002 and
2008, the administraon evaluated the performance of
over 1,000 programs constung 96 percent of all feder-al programs. During that me, program rangs increased
across the board, and programs whose results could not
be demonstrated due to a lack of relevant informaon
declined from a whopping 50 percent to 19 percent.
Congress has been slow to use PART informaon to make
budget allocaon decisions, and the administraon has
enjoyed only limited success in convincing the legislature
to eliminate or reduce funding for poorly performing
programs. However, over the life of PART, high perform-
ing programs have generally received larger funding in-
creases than those that did not perform well.
Indiana Governor Mitch Daniels has adopted a similar
process in Indiana, launching an aggressive review of
the size, scope, funcons, and budget of each agency,
dubbed PROBE (Program Results: an Outcome Based
Evaluaon). PROBE reviews each state program to jus-
fy its work and demonstrate results, and is concep-
tually similar to the federal PART analysis established
under Daniels leadership as federal OMB director. The
ndings of the rst PROBE reports revealed that over
half of the 420 state programs examined did not havemeasures that suciently reported on the performance
of the program. Following the publicaon of the PROBE
report, agencies were requested to develop appropriate
program measures, which will feed into a larger perfor-
mance-based budgeng process within Governor Dan-
iels Oce of Management and Budget.
Recommendaon: Aer requiring that all agenciescreate a traceable monitor of their performance, a sepa-
rate process should be instuted at the enterprise level
to regularly assess their performance.
Addional Resources:
Pew Center on the States, Policy Framework to
Strengthen Government Planning, Budgeng, and
Accountability, Government Performance Project,
Washington, D.C., March 2010. www.pewcen-
teronthestates.org/report_detail.aspx?id=57708
Tradionally, state budgeng
focuses only on the increase to a base
budget, and rarely are the big picture
quesons askedin essence, the
budget is on autopilot.
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14 A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .
Osborne, David and Peter Hutchinson, The Price
of Government: Geng the Results We Need in an
Age of Permanent Fiscal Crisis, Basic Books, New
York, NY, 2004. www.psg.us/reinvenon/pogbfore-
invent.html
Segal, Georey F. and Adam B. Summers, The
Sky Isnt Falling: Proven Strategies for Budget
Reconciliaon, Americans for Prosperity Founda-
on and Reason Foundaon, Washington, D.C.,
October 2005. www.reason.org/les/d54cd-
b9ddc42fd6dd894005e25c.pdf
The Evergreen Freedom Foundaon, The Steward-
ship Project, Olympia, WA, June 2003. www.ewa.
org/pdfs/stewardship2003.pdf
Government Management Accountability and Per-
formance, Publicly Measuring Performance, State
of Washington, November 2010. www.account-
ability.wa.gov/default.asp
ALEC Model Legislaon:
Council on Ecient Government Act
An Act Relang to Performance Audits of Govern-
mental Enes
Budgeng for Outcomes
The adopon of a priority or outcome-based budgeng
system would help state policymakers to more easily
idenfy the governmental acvies most important to
cizens, as well as to make dicult trade-o and cost-
benet decisions more easily. It would also result in the
provision of beer, more ecient state government ser-
vices, while protecng taxpayers and maintaining scal
responsibility.
Surely, state governments can stop providing some func-
ons, but unfortunately, the tradional budgeng pro-cess fails to facilitate this sort of downsizing. Tradion -
ally, state budgeng focuses only on the increase to a
base budget, and rarely are the big picture quesons
askedin essence, the budget is on autopilot. The
logic of autopilot budgeng is simplein order to main-
tain current service levels, agencies need to spend what
they did last year plus an increase to account for ina-
on and populaon increases. Put simply, this moves
the discussion to the margins of spendingthe annual
spending increase requests from agencies. Unfortunate-
ly, the other 90 to 95 percent of spending is le out of
the debate and is seldom analyzed for relave merits.
In fact, it is generally assumed that the acvies should
connue to receive funding. The tradional budgeng
process eecvely establishes a default posion that
state government will just connue to expand over me,
represenng an unsustainable approach to state scal
management.
Several states (and also cies and counes) are chang-
ing their views about government budgeng. Priority
or outcome-based spending treats spending as an in-
vestmentthe type and amount of investment should
change yearly as revenue, results, performance, and
needs change. Budgeng this way shis the focus on
the investments and what can be accomplished with
available resourceswhen resources run out, spendingstops. Using this model, decits are nearly impossible.
States need to follow the lead of Washington state, Iowa,
and others (see Table 2 on the following page) and begin
shiing to an outcome-based budgeng systemalso
known as Budgeng for Outcomes (BFO)in which poli-
cymakers and the public collaboravely rank programs.
It helps leaders rank programs according to how cost-
eecve they are at achieving the results cizens want.
The state government then goes down the list, funding
the most important programs rst, buying down withavailable revenues unl it runs out of money. This en -
sures that vital services are being funded before less-
crical ones, and services not deemed of the highest im-
port are reduced or eliminated. Kitchen table budgeng
works this way, and theres no reason the state shouldnt
do the same.
G.
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S T A T E B U D G E T R E F O R M T O O L K I T I
Jurisdicons That Have Used Budgeng for Outcomes
States Counes
Washington
Iowa
South Carolina
Michigan
Louisiana Dept. of Culture, Recreaon, and
Tourism
Snohomish, WA
Multnomah, OR
Mesa County, CO
Polk County, FL
Larimer County, CO
Coconino County, AZ
Cies School Districts
Azusa, CA
Spokane, WADallas, TX
Ft. Collins, CO
Northglenn, CO
Redmond, WA
Eugene, OR
Savannah, GA
Balmore, MD
Tacoma Metro Parks, WA
Jeerson County, CO
Billings, MT
Washington StatePrioriesof Government BudgengModel
Budgeng for Outcomes was rst employed by Gover-
nor Gary Locke in Washington state in 2002 and was
called the Priories of Government (POG) model. At the
me, Washington faced a potenal $2.4 billion budget
shorall (approximately 10-15 percent of the size ofthe general fund operang budget). Signicant changes
were needed to plug the hole in the budget. In an eort
to make the most of limited resources and ensure that
the most important governmental funcons were prop-
erly funded, the Locke administraon called for a top-
to-boom evaluaon of what services the government
provides and how.
The Public Strategies Group, led by reform expert David
Osborne, developed the POG approach with the Locke
administraon as a central means of closing the budget
decit. The administraon idened a set of ten key re-
sults that cizens expect from government:
Improve student achievement in elementary, mid-
dle, and high schools.
Improve the quality and producvity of our work-force.
Improve the value of postsecondary learning.
Improve the health of Washington cizens.
Improve the security of Washingtons vulnerable
children and adults.
Improve the economic vitality of business and indi-
viduals.
1.
Table 2.
Source: David Osborne, The Next California Budget: Buying
Results Cizens Want at a Price They Are Willing to Pay,
Policy Study 380, Reason Foundaon, April 2010, p.2.
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16 A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .
Washington State POG Example
Reducons: $2.4 Billion
Source: Washington State Oceof Financial Management
Figure 1.
$24Billion
FUNDEDP
RIORITIE
S
Purchased: $24 Billion
$109m
$221m$112m
$187m
$389m$277m
$774m
$112m
K-12 educaon for
1,000,000 students
Higher educaon for
215,000 students
Health care for 979,000
children & needy people
Protecng vulnerable children,
adults and families
Public safety, including
prison for 15,500
Economic development
Natural resources and parks
Legislature
Judicial
Government operaons
Dept service on capital projects
Pension contribuons
Reserves
(General Fund = $214m,
Health Services = $78m, Emergency
Reserve Fund = $67m)
$10.2b
$2.7b
$3.7b
$3.8b
$1.4b
$125m
$310m
$133m
$82m
$369m
$1.3b
$55m
$344m
$2.4Billion
Lower costs in higher educaon
Future class size reducon
K-12 programs beyond basiceducaon
Lower-priority programs for
vulnerable children and adults
Future expansion of Basic Health Plan
Health coverage for 68,000 adultsnow on Basic Health Plan
Pay increases/benets for state-funded employees, pensions savings
Consolidaon and sta reducons of2,600 FTE
Improve statewide mobility of people, goods, infor-
maon, and energy.
Improve the safety of people and property.
Improve the quality of Washingtons natural
resources.
Improve cultural and recreaonal opportunies
throughout the state.
Result teams were formed to analyze government ac-
vies in each of the ten result areas. In Washington,
result teams were comprised of six to eight subject-
maer experts from state agencies, and were led by the
Oce of Financial Management. These teams analyzed
and ranked government acvies according to how well
they achieved the desired outcomes as outlined in the
ten governmental goals. The result teams were aided by
a 10-member guidance team comprised of leaders of
the public, private, and nonprot sectors. The guidance
team was tasked with overseeing the priorizaon pro-
cess and reviewing the work of the result teams.
In order to aid in the decision-making process, result
teams were each given a dollar allocaon to serve as an
upper spending limit for their purchase plans. Washing-
ton reached several key conclusions regarding the alloca-
on limit:
The priorizaon process is oen more meaningful
when the allocaon is less than the amount cur-
rently spent in that area.
A dollar constraint encourages creavity, keeps
proposals grounded in nancial reality, and forces
people to arculate priories and choices.
The priority rankings established by the result teams
were then used to develop the 2003-05 biennial execu -
ve budget proposal. Acvies were funded from the
top of the list down unl the spending limit was reached.Figure 1 oers an illustrave example of some of the
spending priories that were established.
Washington state sll uses the POG model under the
current administraon, demonstrang the longevity of
the approach and its resilience to changes in leadership.
UN
FUNDEDP
RIORITIES
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S T A T E B U D G E T R E F O R M T O O L K I T I
Why Budgeng forOutcomes Works
Across-the-board cuts are generally ill-advisedthey
treat and aect the highest performing and most im-
portant services equally with the lowest performing and
least important services. By focusing on performance
and priories, policymakers can target their cutsrid-
ding taxpayers of poor performing, non-essenal, and
non-core services.
Since policians, special interests, and bureaucrats oen
focus on narrow interests and spending priories, ignor-
ing the larger picture and the sacrices necessary to ac-
commodate those desiresperhaps the greatest ben-
et of the Budgeng for Outcomes (BFO) approachis
simply making budgetary priority and trade-o decisions
clear to all. As a 2005 U.S. Government Accountabil-
ity Oce (GAO) report of innovave state performance
budgeng eorts noted:
One Washington legislator said that [BFO] provided
decision makers with proposed priories in a clear
and easily understood format that encouraged con-
strucve debate. . . Legislave ocials said that the
greatest contribuon of [BFO] was that it provides a
strong, clear means of communicang budgetarytrade-os to both decision makers and the public.
The BFO approach to budgeng has several other ad-
vantages over the tradional incremental line-item
approach:
Focuses on achieving results and developing state-
wide strategies for realizing goals, instead of focus-
ing narrowly on agency silos.
Illustrates not only which programs are cut, but
which programs are funded.
Presents trade-os and cost-benet decisions in away that is clear and easy for decision makers and
cizens alike to understand.
Makes performance informaon more relevant
and useful to budget decisions.
Allows decision makers to reward programs and
acvies that best serve state goals and helps
reduce waste by idenfying ineecve and dupli-
cave programs and services.
Helps idenfy statutory limitaons that obstruct
more eecve service delivery.
Recommendaon: States should adopt a BFO ap-proach to bring sanity and scal sustainability to the
state budget process. BFO integrates strategic planning,
zero-based budgeng, and performance-based budget-
ing into a workable, common-sense system that has
been replicated in numerous state and local govern-
ments. State policymakers would be well-advised to be-
gin implemenng a similar transformaon in their bud-
geng process to ensure that taxpayer dollars are spent
with maximum eecveness and that the trade-os
among dierent categories of spendingespecially in a
budget crisisare made clear and explicit.
Addional Resources:
Osborne, David, The Next California Budget: Buy-
ing Results Cizens Want at a Price They Are Will-
ing to Pay, Reason Foundaon, Los Angeles, CA,
April 2010. www.reason.org/les/california_bud-
get_david_osborne.pdf
Osborne, David and Peter Hutchinson, The Price
of Government: Geng the Results We Need in an
Age of Permanent Fiscal Crisis, Basic Books, NewYork, NY, 2004. www.psg.us/reinvenon/pogbfore-
invent.html
Oce of Financial Management, Priories of Gov-
ernment homepage, Washington State, Olympia,
WA, November 2010. www.ofm.wa.gov/budget/
pog/
U.S. Government Accountability Oce, Perfor-
mance Budgeng: States Experiences Can Inform
Federal Eorts, Report No. GAO-05-215, p. 14,
Washington, D.C., February 2005. www.gao.gov/
new.items/d05215.pdf Evergreen Freedom Foundaon, Next step in prior-
ity-based budgeng, Olympia, WA, November 18,
2003. www.ewa.org/main/arcle.php?arcle_
id=240&number=51
2.
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18 A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .
There is a widespread belief in the public sectorand
among many policymakersthat as the state populaon
increases and incomes rise, government spending should
increase at a roughly equivalent rate. This assumpon
reveals a key dierence between private sector manag-
ers and government managers. While it is true that the
burden on state government grows as the populaon in-
creases and the economy uctuates, it is also vital that
policymakers learn from the private sector, and connu-
ally work to reduce taxes and regulaons through inno-
vave and entrepreneurial government reform.
In the private sector, the cost of producing a product
connually reduces over me because compeon en-
courages companies to increase eciency in their deliv-
ery of services. As a result, costs go down and consumers
get beer value for their tax dollars. The following tools
will give legislators valuable ideas to control costs and
improve government eciency.
The Item-Reducon Veto
From 1950 to 2009, U.S. state and local government
spending grew 33 percent faster than the private sector.
More recently, from 2000 to 2009 state and local spend-
ing growth outpaced the private sector by nearly 90 per-cent. This is not sustainable. State and local governments
depend enrely on the private sector for their resources
and cannot connually outpace the wealth-creang sec-
tor of the economy. State policymakers looking for ways
to limit government spending have a number of opons.
One potent and lile-discussed means of liming spend-
ing is the item-reducon veto.
Like the president, every governor in the naon pos-
sesses the power to veto pieces of legislaon. Unlike
the president, however, governors in all but four statespossess a line-item veto, allowing them to reject cer-
tain secons of bills without striking the enre piece of
legislaon. In just twelve states, however, the governor
possesses an even more-potent veto power: the item-
reducon veto.
The item-reducon veto is similar to the line-item veto
but it permits the governor a further power: It allows
him or her to reduce the amount budgeted for a par-
cular item without striking the item altogether (it does
not, however, allow a governor to increase the amount).
The power gives governors superior agenda-seng au-
thority. More importantly, it has been an eecve tool
to combat excessive spending.
Using observaons from 47 states over a period of nearly
30 years, economist Mark Crain compared the potency
of various instuons that can aect state spending.
Aer controlling for various demographic factors, Crain
examined the impact of the item-reducon veto. Among
all instuonal controls on spending, the item-reduconveto stood out. Its ability to limit per capita spending is
nearly ve mes as great as that of the other instuons.
State and local spending has been growing at an unsus-
tainable pace for decades. According to the GAO, state
and local governments long-term scal posion will
steadily decline through 2060 absent policy changes.
One policy change that might help states avert scal cri-
sis is a line-item reducon veto.
Recommendaon: Adopt an item-reducon vetopolicy.
Addional Resources: Crain, Mark, Volale States: Instuons, Policy,
and the Performance of American State Econo-
mies, Ann Arbor, MI: University of Michigan Press,
H.
More recently, from 2000 to 2009,
state and local spending growth
outpaced the private sector by
nearly 90 percent. This is notsustainable.
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S T A T E B U D G E T R E F O R M T O O L K I T I
2003. www.press.umich.edu/pdf/0472113038-fm.
Crain, Mark and James C. Miller III., Budget Pro-
cess and Spending Growth., William and Mary Law
Review 31, no. 4, pages 1021-46, Williamsburg,
VA, 1990. hp://scholarship.law.wm.edu/cgi/
viewcontent.cgi?arcle=1983&context=wmlr
Government Accountability Oce, State and Local
Governments: Fiscal Pressures Could Have Implica-
ons for Future Delivery of Intergovernmental Pro-
grams,Washington, D.C., 2010, www.gao.gov/
new.items/d10899.pdf
Mitchell, Mahew, State Spending Restraint: An
Analysis of the Path Not Taken, Mercatus Center at
George Mason University Working Paper, no. 48,
Arlington, VA., August 2010. www.mercatus.org/
publicaon/state-spending-restraint
New, Michae, Proposion 13 and State Budget
Limitaons: Past Successes and Future Opons,
Cato Instute, Washington, D.C., 2003. www.cato.
org/pubs/briefs/bp83.pdf
ALEC Model Legislaon Item-Reducon Veto Constuonal Amendment
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W W W . A L E C . O R G
20 A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .
Create a TransparentBudget Web site
At some point most cizens wonder, Just how, when,
and where does government spend our tax dollars?
What do our elected representaves want to accomplish
when they spend public money, and what results are ac-
tually achieved?
Considering state lawmakers will spend billions eachbudget cycle, these are basic quesons to which any tax-
payer should be able to get answers quickly and conve -
niently. This is especially true since modern technology
makes accessing large amounts of informaon easier
than ever.
Since adopng model language to promote budget trans-
parency in 2007, ALEC has witnessed dozens of states
pass comprehensive legislaon to improve transpar-
ency and accountability by establishing central, search-
able databases of government expenditures. These Websites have streamlined the process of budget research,
reduced the burden of paperwork on state agencies, and
generated millions of hits, demonstrang real public in-
terest in such an eort.
The purpose of ALECs model Taxpayer Transparency
Act is to provide a searchable budget Web site to show
Tools to Improve
Budget TransparencyIII.
We might hope to see the nances of the Union as clear and intelligible as a merchants books,
so that every member of Congress and every man of any mind inthe Union should be able tocomprehend them, to investigate abuses, and consequently, to control them.
- Thomas Jefferson
cizens where their tax dollars are spent and for what
purpose. Among the types of informaon typically in-
cluded on such sites are:
State expenditures by fund or account.
Expenditures by agency, program, and subprogram.
State revenues by source.
State expenditures by budget object and sub-object.
State agency workloads, caseloads, and perfor-
mance measurements. Historical informaon on state spending as well as
access to state service contracts.
States can easily implement transparent budget Web sites
at minimal cost. The state of Nebraska placed its expendi-
tures online for $37,000, down from a previous $1.3 mil-
lion price tag. Oklahoma implemented budget transparen-
cy at minimal cost to taxpayers. According to the sponsor
of the legislaon, the soware to build the Web site only
cost $8,000. The cost of such Web sites is minimal, and al-
most always overstated. Inated cost esmates occur for afew reasons, most commonly, a lack of informaon and a
desire to kill the project as it threatens business-as-usual.
Transparent budget Web sites are also an asset to poli-
cymakers and agencies because they idenfy and elimi-
nate waste and ineciencies in their expenditures. For
example, Texas Comptroller Susan Combs idened $8.6
A.
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S T A T E B U D G E T R E F O R M T O O L K I T I
million in savings as a direct result of the implementa-
on of Open Book Texas, a database similar to the one
called for in ALECs Taxpayer Transparency Act. Stream-
lining government and eliminang wasteful spending is
much easier when nancial data is provided in a conve-
nient and useable format.
It is important for taxpayers to have detailed informaon
about how their money is spent. ALECs model Taxpayer
Transparency Act codies this fundamental right, making
the data searchable and easily available to any taxpayer
with an Internet connecon. This means that the site al-
lows users to download data from the site, and sort the
gures as they see t, free of cost. It is imperave to al -
low taxpayers to quickly and easily navigate a massive
amount of complex expenditure and revenue data. The
move towards transparency in governance is inevitable,
and the sooner states decide to embrace it, the beer
o they will be.
Public School DistrictTransparency
Not only do educaon budgets constute a massive
annual expenditure for all states, but they also play an
important role in shaping the next generaon of Ameri-
cans. Parents, voters, and taxpayers have a vested in-terest in specic informaon about how public dollars
are spent educang the states children. ALECs model
Public School Financial Transparency Act mandates that
all school districts put their expenditures and revenues
online in a searchable database available free of charge,
increasing accountability in the states educaon fund-
ing system. This represents a massive jump forward for
transparency and accountability, as sorng electronic
data is innitely more user-friendly than sorng through
thousands of pages of budget documents.
The bill also contains specic privacy protecons with re-
spect to what data is allowed to be displayed on the site.
The site is to contain data that is already publicly avail-
able under the states freedom of informaon laws. It
simply makes that informaon easier to obtain, stream-
lining the process for parents and taxpayers without any
violaons of privacy. By empowering ocials to idenfy
cost eciencies, students can get more bang for their
parents buck, ushering in a new era of accountability in
educaon budgets.
Recommendation: States should develop search-able online budget transparency tools for state and
local budgets.
Addional Resources: The Sutherland Instute, Transparency in Govern-
ment, Salt Lake City, UT, 2008. www.sutherlandins-
tute.org/uploads/transparencyingovernment.pdf
www.kansasopengov.org
www.scalaccountability.org
www.SunshineReview.com
www.buckeyeinstute.org
ALEC Model Legislaon: Taxpayer Transparency Act
Public School Financial Transparency Act
Transparency and Government Accountability Act
Adopt a 72-Hour BudgetTimeout
A detailed review of budget priories, by pares other
than just the budget-writers, improves the transparencyand accountability of state government, and may also
improve the quality of proposed legislaon.
To help facilitate public involvement, legislators should
adopt a 72-hour meout period once a tax or spending
bill is introduced or amended, and before hearings or
legislave votes occur.
Consider the fact that a states combined budget (oper-
ang, capital, and transportaon) can be hundreds of
pages long. Despite the length and complexity of thesedocuments, hearings are usually held the same day the
budget is introduced, and the bill is amended and en-
acted with inadequate me for meaningful public input.
Allowing an opportunity for a detailed review by the
public prior to hearings or votes on budget bills would
help increase public trust in government and enhance
accountability for the spending decisions being made.
B.1.
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22 A M E R I C A N L E G I S L A T I V E E X C H A N G E C O U N C I L I .
Timeout, January 2009. www.ewa.org/main/
arcle.php?arcle_id=2644
ALEC Model Legislaon: The 72-Hour Budget Review Act
Require Fiscal Notes BeforeAcon on Spending Bills
Fiscal notes provide value for legislators and the public
by forecasng revenue changes in proposed legislaon
However, many mes bills are introduced and voted on
before the data on scal repercussions are made avail-
able to those vong on the bills. State ocials can eas-
ily feign surprise at the state of the budget when it is
obvious that the long-term budget forecasts have either
been unseen or uerly disregarded.
State ocials and the public should know the full impact
of a spending proposal before any acon is taken. Bills
proposing increased spending should not receive hear-
ings or votes unl a completed scal note is available.
The purpose of this recommendaon is clearproi-
gate spending bills cannot be pushed through legislave
bodies without the full scal consequences being made
known to legislators. This is in line with several other rec-ommendaons that in totality demand more account-
ability from ocials on both sides of the aisle.
Washington state is moving toward required scal notes.
For the me being, scal notes only have to be created
when requested and they are not always prepared by
the me a hearing or vote is held. This gradually evolving
access to the scal impact of legislave acon is unprec-
edented and commendable.
Recommendaon: Require completed scal notesbefore bills can be acted on.ALEC Model Legislaon:
Fiscal Note Act
C.
Far too oen, state government has
approved wasteful spending as big spenders
exploit its opaqueness.
This would allow lawmakers and the public at least a
three-day period to review and calmly consider the pro-
posed budget, new taxes, or new spending before hear-
ings or nal vong occurs.
Too oen, state government has approved wasteful
spending as big spenders exploit its opaqueness. By en-
suring proper consideraon of legislaon before passage,
it helps to increase the public trust in government and
enhances the respect for the legislature by ensuring that
its operaon is conducted with the openness, order, and
dignity beng the state. This good government bill
nudges the state in the right direcon by fostering pub-
lic parcipaon in the legislave process and allows the
opportunity for detailed review by interested pares. Ci-
zens deserve legislators who have the me for a detailed
review prior to hearings or votes on legislaon.
The bills should be made publicly available, meaning
that the bills will be posted on the legislatures Web site
and published in a bill report, commiee report, and/or conference report. The 72-hour me period excludes
Saturdays, Sundays, and holidays, except when the leg-
islature is in session on such a day. Amendments oered
to the bills will not be considered unless they are made
publicly available 24 hours prior to any vote (excluding
Saturdays, Sundays, and holidays). Because of a built-in
exempon for emergency legislaon, there is no cred-
ible argument against the 72-Hour Budget Timeout.
If a lawmaker wants to appropriate public funds, those
foong the cost have every right to a detailed, delibera-
ve review by their elected ocials.
Recommendaon: Legislators should adopt a 72-hour meout period for all future budget and tax bills.
Addional Resources: Gunn, Amber, Evergreen Freedom Foundaon,
Olympia, WA, Lawmakers Need a 72 Hour Budget
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2
Tools to Control Cost and
Improve Government EfciencyIV.
Adopt a State Hiring Freeze
During a budget crisis, all state agencies will argue
their services are essenal. These cries will become
even louder if layos are discussed. Unions and other
special interests will line up against layos and cry loudlyagainst disrupng the status quo. This can be avoided by
implemenng a hiring freeze and analyzing which needs
are the most pressing.
Adopng a exible freeze on state hiring would reduce
state employment growth while allowing agency
managers to maintain exisng stang levelspriorizing
new hiring where it is most needed, while ensuring
the overall size of state government doesnt grow. This
approach maintains the exibility necessary for agency
managers to focus on the most important programs andmaintain adequate service levels.
During a temporary freeze, the state should conduct an
audit assessing the need for the budgeted posions.
States should consider freezing all posions, not just
those unlled today. These are vacancy savings, in
other words, jobs have gone unlled. There have been
no layos. An excepon to this could be if a department
oers to layo exisng employees to be replaced by new
hires that are less costly. Substung higher cost labor
for lower cost labor could save agencies money and haveminimal impact on their ability to provide services.
In 2008, the Thomas Jeerson Instute and Reason
Foundaon found that simply not lling more than 7,600
non-crical posions (i.e., not public-safety, university
faculty, and management-related posions) budgeted,
but unlled, at the beginning of 2008 would save the
Commonwealth of Virginia over $500 million a year
or more than $1 billion during the two-year budget.
Former Arizona Governor Janet Napolitano took a similar
acon in February 2008, freezing all state posions except
those directly involved in public health and safety orcollecng and invesng state revenues. At that me, the
workforce aected by the freeze numbered 38,954 full-
me employees. By that September, Gov. Napolitanos
oce reported that the hiring freeze had resulted in a
5.3 percent reducon in the number of jobs covered by
the freeze, and a reducon of the overall state workforce
of 2.8 percent.
Recommendaon: Adopt a state hiring freeze
encompassing all departments.
ALEC Model Legislaon Commission on Economy and Producvity in State
Government Act
Reform State Pensions
In recent years, state governments have encountered
a funding crisis in their pension plans for public
employees. This crisis in the states has resulted from
many factors, including:
Escalaon in health care costs
Signicant losses in the stock market
Costly pension and health benets provided in
dened-benet plans
Public employees rering earlier and living longer
A.
B.
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Reducon and postponement of employer contri-
buons to the pension plans
Many state pension plans are fundamentally awed.
Using more realisc assumpons regarding the rate of
return on assets, as well as assumpons regarding the
actuarial value of liabilies, it is highly unlikely that these
plans will achieve actuarial balance over the amorza-
on period. In scal year 2008, the states had a 1 trillion
dollar gap in funding their pension plans. Furthermore,
pension systems are likely to experience signicant fund-
ing shoralls in future years, even if the economy recov-
ers and nancial markets stabilize. These funding short-
falls will impose a heavy burden on future generaons.
Recommendaons to reform state pensions includecapping o the exisng pension system and forming a
dened-contribuon system for all new employees.
State policymakers can also consider capping o pension
ballooning in state employees nal years of service. Ad-
dionally, policymakers can also require increased em-
ployee contribuons, limit reree and rehire costs, and
raise the rerement age for new employees. Utah also
provides an excellent case study in successful state pen-
sion reform.
Recommendaon:Everything should be on the ta-ble, including changes in benets and increased employ-ee contribuon rates, as well as employer contribuon
rates. Most importantly, states should consider replacing
their dened-benet plans with dened-contribuon
(401(k) style) plans for new employees.
Addional Resources: Poulson, Barry and Arthur Hall, State Pen-
sion Funds Fall O a Cli, American Legislave
Exchange Council, Washington D.C., January, 2010.
www.alec.org/AM/Template.cfm?Secon=State_Pension_Funds_Fall_O_a_Cli&Template=/CM/
ContentDisplay.cfm&ContentID=12363
Unfunded Teacher Pension Plans: Its Worse Than
You Think, The Foundaon for Educaonal Choice,
Indianapolis, IN, April 13, 2010. www.edchoice.
org/Research/Reports/Underfunded-Teacher-Pen-
sion-Plans--It-s-Worse-Than-You-Think.aspx
California Pensions Underfunded by 500 Billion,
Stanford University, Stanford, CA, April 11, 2010.
www.sierrasun.com/arcle/20100411/NEWS/100
419995/1066&ParentProle=1051
ALEC Model Legislaon: ALECs Statement of Principles on State and Local
Government Pension and Other Post Employment
Benet (OPEB) Plans
Restructure State RereeHealth Care Plans
Current state reree health care plans are also scally
unsustainable. Recent esmates suggest that the states
have $558 billion in unfunded reree health care liabili-
es for current and future benets, according to the
Center for State and Local Government Excellence. As of
scal year 2008, the Pew Center on the States reports
that states had only funded $32 billion, or 5 percent, of
the total cost funded for reree health care liabilies.
State and local government Other Post Employment
Benet (OPEB) plans for public employees are generally
in worse shape than their pension plans. Most govern-
ments connue to fund these OPEB plans on a pay-as-
you-go basis. To meet Governmental Accounng Stan-
dards Board (GASB) accounng standards, governments
must now show the unfunded pension plan liabilies as
debt in their nancial statements. For OPEB plans, liabili-
es only need to be recognized in a footnote. Govern-ments must also meet the 30-year me frame for elimi-
nang unfunded liabilies in pension plans, though not
in OPEB plans. Few state and local jurisdicons are meet-
ing the 30-year amorzaon standard for either pension
or OPEB plans. Many of these state governments would
have to double their actual contribuon rates to well
over 20 percent of salaries to meet this standard.
C.
Current state reree health
care plans are also scally
unsustainable.
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It is likely that unfunded liabilies in state and local gov-
ernment pension and OPEB plans are over $2 trillion. Tax-
payers are no longer willing to bear the increasing cost of
these plans in the form of higher employer contribuon
rates or decreased government services. They are de-
manding reforms that will bring these plans into line with
pension and OPEB benets oered in the private sector.
States may no longer be able fulll their health care prom-
ises to rerees unless the system is restructured. Typically,
states fund state employee reree health care plans by
paying current rerees medical expenses as they occur.
States that oer generous health care benets may strug-
gle to aord the massive price tag in the near future.
Unlike pension reform, state lawmakers have a greater
opportunity to successfully restructure reree health
care benets. Recommendaons to reform state reree
health care plans include examining what percentage of
the states public employees are eligible to rere within
the next ve years. Other recommendaons for reform
include increasing employee contribuons to health care
plans, improving governance and oversight, lowering
health care benets, and increasing the rerement age.
State lawmakers can also follow the reforms that Idaho
and Indiana recently made, using these successes as their
guide to a more sustainable reree health care model.
Recommendaon: Freeze dened-benet OPEBplans, and replace them with dened-contribuon plans
for new employees. One approach is to oer oponal par-
cipaon in Health Savings Accounts (HSA) for state work-
ers. Indianas experience has been highly successful, with
70 percent of state workers choosing the HSA planswith
Indianas taxpayers saving millions in the process.
Addional Resources:
Promises With A Price, Pew Center on the States,Washington, D.C., April 30, 2008. www.pewcen-
teronthestates.org/uploadedles/Promises%20
with%20a%20Price.pdf
At a Crossroads: The Financing and Future of
Health Benets for State and Local Govern-
ment Rerees, Center for State and Local
Government Excellence, Washington, D.C.,
July 2009. www.slge.org/index.asp?Type=B_
BASIC&SEC={3A23B0F5-96FC-40AE-91D1-
0DE488D5F17E}&DE={9CED9932-83D5-4183-
B5F3-16C59BA66A12}
State and Local Government Reree Health Ben-
etsLiabilies Are Largely Unfunded, but Some
Governments Are Taking Acon, GAO, Washing-
ton, D.C., November 2009. www.gao.gov/new.
items/d1061.pdf
Poulson, Barry and Arthur Hall, Public Employee
Other Post Employment Benet Plans, The
American Legislave Exchange Council, Washing-
ton, D.C., January 2011. www.alec.org
ALEC Model Legislaon
ALECs Statement of Principles on State and Local
Government Pension and Other Post Employment
Benet (OPEB) Plans
Eliminate Posions VacantMore Than Six Months
State public employment levels are measured using a
number of dierent methods. One measure, typically used
by agency managers when requesng budget increases, is
the number of posions for an agency to meet its desired
stang level. In many cases, this measurement includesposions that have been vacant for a long me. Typically,
hundreds of unlled posions in state government exist on
paper.
If a posion remains open for more than six months, it is
reasonable to assume the agency can do its work without
an employee in that posion. By eliminang all posions
that have gone unlled for six months, the state can cut
budgeted payroll in areas not crical to public safety or
the basic operaon of state government.
This recommendaon will bring more accurate budget
informaon and lower personnel costs for providing
services for the taxpayers.
Recommendaon: Create a tracking system where-by any posion that is vacant for more than six months
is eliminated.
D.
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ALEC Model Legislaon Commission on Economy and Producvity in State
Government Act
Delay Automac PayIncreases
During an economic downturn, many people in the pri-
vate sector face a reducon in pay or the loss of their jobs,
while government workers are assured employment with
regular raises and generous vacaon, health, and rere-
ment benets. This is an unsustainable personnel policy
that virtually ensures steady, annual spending increases.
In mes of decit, policymakers should delay automac
pay increases for state employees unl the state achievesscal sustainability. This decision will certainly be un-
popular with the public ocials that are having their pay
increases delayed. However, during a me of nancial in-
solvency, private sector employees dont get the benet
of automac pay increases either. If the legislature wants
to avoid this problem, it must carefully monitor the bud-
get to prevent this emergency step from occurring.
The budgetary benets of this decision are clear. Howev-
er, aenve voters will noce other benets. By opng
to delay the automac pay increases, policymakers showthat both the public sector and the private sector take
the budget crisis seriously. It also shows that public sec-
tor employees are held accountable and dont brazenly
plunder the public purse.
Recommendaon: Policymakers should delay auto-mac pay increases for state employees unl the rising
costs of government are brought under control.
ALEC Model Legislaon: Commission on Economy and Producvity in State
Government Act
Adopt Acvity-Based Cosng
Agency managers consistently face dicult decisions
about the best way to administer state services. Of-
ten managers simply do not have access to the infor-
maon they need to make important decisionssuch
as whether to provide a service in-house or through a
contractor, or whether the cost of a service outweighs
the benets. Put simply, the queson, How many state
employees does it take to change a light bulb, and at
what cost? oen cannot be accurately answered in
government bureaucracies because they are not set up
to answer it.
The true cost of any acvity in government is dicult,
if not impossible, to accurately measure because agency
budgets typically do not capture the full costs of con -
ducng that acvity. For example, some of an agencys
overhead costs may be covered by a separate general
services agency (e.g., prinng, energy, informaon tech-
nology, payroll, human resources, etc.).
Acvity-based cosng is a method of cost analysis de-
signed to describe all the cost elements of a certain ac-
vity, not just the major factors like labor, fringe benets,
supplies, and depreciaon. In the private sector, acvity-
based cosng accounts for every hour of work and each
piece of equipment involved in a project, including capi-
tal, facility, and overhead costs for an organizaon, al-
lowing managers to make informed decisions about the
use of scarce resources.
Acvity-based cosng is not a novel, untested concept.
It has proven eecve in cies and states across the na-
on, saving money me and me again without forcing
legislators to compromise on the quality of service they
provide for their constuents.
In 1992, Indianapolis Mayor Steven Goldsmith imple-
mented acvity-based cosng in agencies throughout the
city. Using the new analysis tool, city workers reduced the
cost of plowing snow from $117 per mile to $38 per mileand cut the cost of sealing cracks along the highway from
$1,200 per lane-mile to $737 per lane-mile.
In another example, acvity-based cosng helped the
Iowa Department of Transportaon generate $200,000
in new revenue in 1996 and reduced the me needed to
paint stripes on state highways. By developing a compre-
E.
F.
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S T A T E B U D G E T R E F O R M T O O L K I T I
hensive cost analysis of three major acviescenter
line and no-passing marks; edge-line markings; and curb,
island, and miscellaneous markingsthe Department
reduced unproducve down-me and began performing
work for other governments during the me they saved.
Recommendaon: Lawmakers can improve theperformance of state agencies by implemenng acvity-
based cosng.
Adopt a Sunset ReviewProcess for State Agencies,Boards, and Commissions
Once created, government agencies or programs are
rarely reevaluated to see if circumstancesor agency
performance itselfjusfy their connued existence.
Naturally, this promotes government sprawl and spiral-
ing public sector costs. In the absence of any mechanism
to connually prune away at government, it is typically
far more dicult to shut down an agency or program
than it is to create it in the rst place.
Luckily such mechanisms exist, one of the more power-
ful being the use of a sunset review commission. Texasoers a powerful example of what a funconal, eecve
sunset commission can achieve. The Texas Legislature
established a 12-member Sunset Advisory Commission
in 1977 to conduct regular assessments of more than
150 state agencies to determine: (a) if each agency is sll
needed, and (b) idenfy and eliminate waste, duplica-
on, and ineciency in state government.
The scal impact of Commissions recommendaons
over me has increased government eciency. Since
the sunset process began in 1978, 58 state agencies have
been abolished and another 12 agencies have been con-
solidated. Based on reviews conducted between 1982
and 2009, the Commission esmates a potenal 27-year
revenue savings of approximately $783.7 million through
the sunset process, compared with expenditures of
$28.6 million for the Commission. Hence, for every dol-
lar spent on the sunset process, Texas taxpayers have re-
ceived $27 in return.
Each sunset review must include a recommendaon to
either abolish or connue the agency, and it may in-
clude addional recommendaons for policy changes,
eciency improvements, and the like. Notably, the TexasLegislature has approved a large majority of the recom-
mendaons of the Sunset Commission over me. If the
Commission recommends connu