Attacking the Fiscal Crisis - What the States Have Taught Us About the Way Forward

8/3/2019 Attacking the Fiscal Crisis - What the States Have Taught Us About the Way Forward

1/720 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT SUMMER 20120 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT SUMMER 201

The nation is slowly emergingrom its worst recession sincethe Great Depression. Theseare dicult times or manyAmericans, and all levels

o government ace stark realities ounsustainable scal policies. Statesace dicult choices in grappling withlarge budget gaps and long-term struc-

tural decits. They also ace the end oederal Recovery Act1 unding, whichhas helped ll current budget gaps.

A lot can be learned rom statesresponses to scal challenges. Moststates are statutorily required to bal-ance their operating budgets, andnone have the luxury o the ederalgovernments vast borrowing poweror ability to print money. As a result,states have had to explore dicult andpotentially unpopular choices to com-bat their budget shortalls.

This article examines the scalstressors acing state governments andexplores actions being taken by Cali-ornia, Florida, Illinois, New York andTexas. It then oers perspectives ondrivers o successul decit reduction.

Taking the Temperature:

The Fiscal Survey oStates

Ater two o the most challenging years or state budgets, fscal 2011will present a slight improvementover fscal 2010. However, even animprovement over one o the worsttime periods in state fscal condi-tions since the Great Depression,states still orecast considerable fs-cal stress. Additionally, in 2012, a

signifcant amount o state undingmade available by the AmericanRecovery and Reinvestment Act o2009 will no longer be available. Thesignifcant wind down o this sup-port will result in a continuation oextremely tight fscal conditions orstates and could lead to urther statespending cuts.

These are the words o the NationalAssociation o State Budget Ocers(NASBO) and the National GovernorsAssociation (NGA), summarizing thendings o their survey o states scalconditions.2 Published semi-annually,The Fiscal Survey o States, Fall 2010: AnUpdate o State Fiscal Conditions3 sur-veyed all 50 state budget ocers.

The survey showed that the econ-omy in general has improved as itimpacts the states, states have acted

By: Nancy A. Valley, CGFM, CPA,

and Jerey C. Steinho, CGFM, CPA, CFE

Attacking theFiscal Crisis:What the States

Have Taught Us

About the Way Forward


2/7SUMMER 2011 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 2SUMMER 2011 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 2

to reduce spending and increase rev-enue, and states ace the prospect oa dicult 2012, when Recovery Actunding ends.

Here are some survey highlights.

The Magnitude of the Gaps

Statesreportedbillionsofdollarsin budget shortalls, with 11 stateseach reporting nearly $10 billionor more in budget gaps or 2011.

Rainydayfunds,whichreacheda peak o $69 billion in 2006 (11.5percent o general und revenues),are expected to all to $36.2 bil-lion (5.6 percent o general undrevenues) by 2012. Taking Alaskaand Texas out o the equation, theremaining 48 states rainy day

unds in 2012 drop to 2.8 percento general und revenues rom10.6 percent in 2006.

The Underlying Causes

Taxrevenueshavebeendrasti-cally reduced rom every source,declining in 2010 by 10.4 percent

rom 2008. While an increase isprojected or 2011, revenues willstill lag by 6.5 percent compared to2008 and are unlikely to return to2008 levels until 2013 or 2014.

Demandforserviceshasincreased. For example, Medicaidenrollment grew 8.5 percent in2010 and is expected to growanother 6.1 percent in 2011.Health care is the primarylong-term cost driver or states.

How the States Have Responded Statesclosed$230billionin

budget gaps between scal2009 and 2011.

39statesmade$18.3billioninmid-year budget cuts or 2010,and 14 states cut $4 billion romtheir 2011 enacted budgets.

These are in addition to mid-year budget cuts o $41.6 billionmade by 42 states in 2009.

Generalfundspendingdeclined in each o the pasttwo years, and 36 statesorecast lower general undspending in 2011.

Statesenacted$30.1billioninincreased taxes and ees or 2010and 2011, and $10.4 billion inother revenue measures.


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Statesreceived$151billioninfexible emergency unds throughthe Recovery Act that helpedstates avoid draconian cuts to stateservices.

Looking Forward

2012and2013revenuesarepro-jected to continue to lag those o2008.

23statesforecasted$40.5billioninbudget gaps or 2012, and 17 statesorecasted $40.9 billion in budgetgaps or 2013.

Statesforecastedusing$43.2bil-lion in Recovery Act unds in 2011,the nal year or these unds.

Thecombinedeffectoftheendo Recovery Act unding, anextremely slow recovery in state

revenues and rising health carecosts could result in severe cuts tostate programs and services.

State Governments HaveTaken Up the Gauntlet toAddress Fiscal ChallengesGovernors do not have the luxury obeing ideological particularly when theyhave huge budget gaps to close.4

Susan K. Urahn, managing director othe Pew Center on the States

This is a critical time, where the statesare acing $175 billion shortall in thenext two years.5

Washington Gov. Chris Gregoire, NGA Chair

Today, state governments29headed by newly elected governorsare taking strong actions to reduce de-icits, in many cases changing the waygovernment does business, including:

Reducingservicesandspending.

ReformingMedicaid.

Revisitingpensionplansandpost-retirement benets.

Increasingtaxesandfees.

Consolidatingagenciesandoperations.

Eliminatingprograms.

Promotingprivatizationandpublic-private partnerships.

It is instructive to look atapproaches being taken by ve statesin dierent regions o the country:Caliornia, Florida, Illinois, NewYork and Texas, which reported acombined $49.2 billion shortall atthe time their scal 2011 budgetswere enacted.6 (See Figure 1.)

These states ound no silver bul-let. Tough choices and sacrice wereneeded. They also ound that struc-tural decit problems require unda-mental reorm, such as with Medicaid

and work orce benets.Figure 2 includes some commonareas o spending cuts or these states.

Lets look at the ve states.7

n California: Despite ghting largebudget decits since 2002,8 Caliorniaprojects a $25.4 billion operating decitor the remainder o scal 2011 and s-cal 2012. In announcing his 20112012budget, Gov. Jerry Brown stated:9

Caliornia aces a crisis that isreal and unprecedentedAlthough

our states economy has started torecover, we will not create jobs weneed unless we get our fnancialhouse in order These cuts willbe painul, requiring sacrifce romevery sector o the state, but wehave no choice. For 10 years, wevehad budget gimmicks and tricksthat pushed us deeper into debt. Wemust now return Caliornia to fs-cal responsibility.

The proposed budget calls or $12.5 billion in spending reductions, $12

billion in temporary tax extensions$1.9 billion in other solutions, andit provides $1 billion or the totallydepleted rainy day und.10 Proposedcuts include:11

$1.7billioninMedicaid,suchas limiting service utilization,reducing provider payments by 10percent and requiring beneciary

co-payments. $1.5billioninwelfare-to-work.

$750millionindevelopmentalservices.

$1billioncombinedtotheUniver-sity o Caliornia and CaliorniaState University.

$580millioninstateoperationsand employee compensation,including a 10 percent cut in take-home pay o many state employeesand pension reorm.

$200millionthroughavarietyofactions, including reorganizationsand consolidations and additionalreductions in corrections and thejudiciary.

The proposed ve-year temporarytax extension includes the 1 percentstatewide sales and use tax, vehiclelicense ee and the .25 percent increasein the personal income tax rate. Thegoal is to place the tax extensions ona special election ballot. I they arenot enacted, the governor will call or

additional budget cuts.The governor also proposed toeliminate state benets or enterprisezones and to phase out unding orredevelopment agencies, intended toreturn billions to local governmentsto help pay or education and otherprograms.

n Florida: Florida was hard hit bythe housing crisis and aces large budget shortalls. In his 2012 budgenamed the Jobs Budget, with a goalo creating 700,000 jobs in seven years,

Figure 1

State Fiscal 2011EnactedBudgetShortall$ (Billions)

Total BudgetShortall as aPercentage o

the Budget

California 17.9 20.7

Florida 4.7 19.5

Illinois 13.5 40.4

New York 8.5 15.9

Texas 4.6 10.2

Figure 2: Spending Cuts

State Public Health/Medicaid

Elderly/Disabled

K-12 andEarlyEducation

HigherEducation

State WorkForce

California X X X X X

Florida X X X X X

Illinois X X X X X

New York X X X X

Texas X X X X



Gov. Rick Scott called or $5 billion inspending reductions and $2 billion intax cuts. In releasing the budget, thegovernor stated:12

Reviewing a governmental budgetis much like going through the attic inan old home. You come across somepriceless things you need to protect.But there are a lot o odd things some-

one once thought we needed. Much oit weve outgrown. And it just doesntft anymore. Over the last month, Ivespent a lot o time in that attic. AndIm cleaning it out.

The governors 2012 budget13 callsor:

A5percentpensioncontributionby state employees, expected tosave $2.8 billion over two years;a $5,000 cap on employee healthcare costs; continuation o payreezes in eect since 2006; and

urther work orce reductions. Apatient-directedMedicaidsys-

tem, expected to reduce utilizationand save $4 billion over two years.

Innovationsinthemanagemento juvenile oenders and stateprisons, including prison closingsand privatization, estimated tosave $500 million annually.

$800millioninnewspendingovertwo years or economic develop-ment projects and incentives tocreate private-sector jobs, and

regulatory reorms to ease bur-dens on business and encourageeconomic development.

Taxreductionsof$4billionovertwo years by cutting the corporateincome tax rate rom 5.5 percent to3 percent ($2.6 billion) to supporteconomic development and jobsand by reducing property taxes($1.4 billion).

Saving$660millionovertwoyears through actions to reducewaste and abuse, such as procure-

ment reorms, including renegotia-tion o contracts and leases.

$120millioninsavingsovertwo years by streamliningstate agencies, consolidatingoverlapping unctions, reorganiz-ing, privatizing and moving toshared service centers.

Saving$150millionovertwoyears by eliminating programsnot deemed core governmentunctions.

Measurablegoalsforeverybudgetline item to track and assesswhether spending is cost-eectiveand achieving its mission and tohold public ocials accountable.

n Illinois: Struggling with a large budget shortall, Illinois accumulated$8.7 billion o unpaid bills. Its bondrating was downgraded to the lowesto any state (along with Caliornia),and it aces an $80 billion shortall instate pension unding. To quote Gov.Pat Quinn in his address on the 2012budget:14

We stood on the brink o economicdisaster... ater three decades o fscalmismanagement, our states fnan-cial house was on fre.

Following are some o the actionstaken by Illinois.

ThegovernorwasgivenEmer-gency Budget Act powers.15 Hecut $1.4 billion rom the scal2011 enacted budget in areas suchas K-12 and higher education,public health, children and amilyservices, and the elderly, andauthorized borrowing rom otherstate unds to improve generalund liquidity.16

Enactment17

o a our-year increasein the personal income tax raterom 3 to 5 percent and thecorporate rate rom 4.8 to 7 percentis expected to raise $6.8 billionannually. Spending limits werealso enacted, which, i breached,would trigger tax rates revertingto previous levels.

Medicaidreformlegislation18 wasenacted, with projected savingso $624 million to $774 millionover ve years, and $550 millionin additional Medicaid cuts toreimbursement rates or hospitalsand nursing homes are proposedor 2012.

Majorstateemployeepensionreorm was enacted, which isexpected to reduce pension costsby $200 billion over 35 years.19

Acommissionhasbeenproposedto consolidate school districts,with a goal o saving $168 millionannually.20

Thegovernorintroduceddebtrestructuring legislation to elimi-nate the payment backlog andlower interest costs.21

TheIllinoisInnovationCouncil

was ormed to make investmentsto build the states economicbase and oster innovation andeconomic growth, and the stateocused on public/private partner-ships. (In 2010, Illinois was ourthnationally in job growth and saw a20 percent rise in exports.)22

n New York: Facing a large budgetshortall, and a our-year projecteddecit o $64.6 billion, Gov. AndrewCuomos proposed scal 20112012 budget would end a 15-year cycle

o increased state spending. Inunveiling his budget, the governorsummed up well the situation acedby many states:23

New York is at a crossroads, and wemust seize this opportunity, makehard choices and set our state on anew course toward prosperity. Wesimply cannot aord to keep spend-ing at our current rate New Yorkmust ace economic reality

Without actions, spending wasprojected to grow by 12 percent This has become an unsustainableprocess.

The governor proposed no new bor-rowing and no extension o the incometax surcharge on higher-income tax-payers levied in 2009. Instead, hisocus is on structural reductions inspending intended to lead to long-term scal sustainability. Included inthe governors decit reduction initia-tives are:24

TheestablishmentofaMedicaid

Redesign Team. On February24, 2011, the governor acceptedthe teams 79 recommendations,estimated to save $2.3 billion thisyear and cap uture increases.25


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Pensionreformtargetedatrais-ing both the retirement age andemployee contribution, placinga cap on benets by eliminatingpaid overtime rom the computa-tion and by reassessing retireehealth care costs.

Establishmentbyexecutiveorder26o the Spending and Government

Eciency Commission to compre-hensively assess state governmentstructures, operations and pro-cesses. The commission is chargedwith streamlining, consolidatingor eliminating redundant orunnecessary government organi-zations, identiying activities thatare not central core missions, andidentiying operational improve-ments that reduce cost andincrease service.

A10percentreductioningeneralund state operations spending,including work orce savings. Ithese savings cannot be achieved,the governor indicated that up to9,800 layos would be necessary.

AMandateTaskForcetolookor ways to reduce costs or localgovernments, which would helposet the impact o reduced stateunding to localities.

$1.5billionincutstoK-12andhigher education spending, whileproviding incentives throughgrants or administrative e-ciencies and enhanced studentperormance.

$80millioninincentivestolocalgovernments to reduce coststhrough grants or consolidationsand streamlining.

Issuanceofanexecutiveorderrequiring a 10 percent reduction inthe cost o service contracts.27

Anexaminationofbudgetformu-las that drive increases in the basebudget above the rate o infation.

n Texas: Texas scal picture hasbeen comparatively better than moststates. It reports having the lowest percapita spending o any state,28 RainyDay unds represent 18.3 percent ogeneral und revenues,29 and unem-ployment is lowest o the 10 largeststates.30 However, Medicaid spendingis rising 8 to 10 percent annually, andthere have been declines in sales taxand energy production tax receipts,drops in single amily and multi-

amily building permits, and adversescal impacts rom the Gul oil spill.

In releasing his 20122013 budget,Gov. Rick Perry said:31

We must respond to the states bud-get challenges by tightening ourbelts, discerning between needs andwants, We must increase govern-ment efciency by consolidating ser-

vices and suspending or eliminatingservices that are not necessary unc-tions o government.

Here are some ways Texas isaddressing its budget shortall.32

InMay2010,thegovernorannounced $1.2 billion in spendingcuts, stating: Every penny we savenow in the 201011 biennium is onepenny closer to balancing the bud-get in the next legislative session.

InSeptember2010,agencies,universities and appeals courts

were ordered to submit plans orcutting another 5 percent romspending, expected to save $1.2billion or 20102011.

Inpresentinghis20122013budget,the governor mapped out his visionor urther reductions throughbudget restraint, streamlining andincreased eciencies, and tempo-rary suspensions o non-critical ser-vices. He urged keeping taxes lowand protecting rainy day unds.33

Observations: 10 Driverso Government DefcitReduction Initiatives

In looking at states experiencesand considering earlier initiatives toaddress scal challenges, we haveidentied 10 drivers that acilitatemeaningul decit reduction.

Strongleadershavethepoliticalwill to make dicult and poten-tially unpopular choices.

Decision-makershaveasharedand ull understanding o themagnitude o the problems, wherethings stand, the range o optionsavailable, realistic trade-os, timehorizons, and likely impact on s-cal stability and program delivery,both short- and long-term. This isacilitated through reliable, useuland timely nancial and programinormation.

Politicalconsiderationstakeaback seat to making decisionsin the best interest o the stateand its citizens.

Partnershipsformacrosslineso political and public interests,between government and itsemployees, and between govern-ment and the business community

to ormulate meaningul solutionsand gain consensus or what maybe bold or disruptive change.

Thepublicisfullyandopenlyinormed o the nature and sever-ity o the problems, the risks onot taking or delaying action, andthe need or shared sacrice. Inthe end, government will have tomake a case to the public or anysubstantial change.

Everythingisonthetable,espe-cially given the nature o long-

term structural decits and theopportunity that crisis providesto make broad-based changes thatotherwise may be more dicult toachieve.

Leadersarewillingtolookatnewsolutions. Slight tweaking o thestatus quo is unlikely to createthe most successul outcomes. AsAlbert Einstein said: We cantsolve problems by using the samekind o thinking we used when wecreated them.

Gimmicksareavoided,suchasshiting payment dates rom oneyear to the next or acceleratingrevenues. In place o smoke andmirrors, leaders acknowledge themagnitude o the problem and areopen to taking actions that get toroot causes.

Fiscalperformanceiscontinuallymonitored, and mid-course correc-tions are taken as needed.

Technologyisfullyleveragedtonot only reduce costs and improve

service, but also to inorm thepublic on results and to encourageeedback and participation.



Final ThoughtsThe adversity being aced by most

states today provides an opportunityto rethink the role o governmentand take needed actions not onlyto win the short-term ght againstbudget gaps, but also to help ensureour nations long-term nancial well- being. Getting state governments

nancial houses in order shouldcontinue to be a top priority. Statesshould continue to ask the toughquestions: Are programs and opera-tions really needed and do theyperorm as expected, attain desiredresults eectively and eciently,and meet the test o public trust?

The states have learned much in thepast two years. All levels o govern-ment should take advantage o theselessons learned as they use crisis as apositive orce to orge the way to scal

sustainability.

This article represents the views o theauthors only, and does not necessarily rep-resent the views or proessional advice oKPMG LLP.

End Notes

1. Public Law 115-5, Feb. 17, 2009.2. Preliminary Summary NGA/NASBO Fall

2010 Fiscal Survey o States, Nov. 19, 2010.3. The Fiscal Survey o States series, started in

1979, presents aggregate and individual dataon states general unds receipts, expendituresand balances. The all 2010 survey was con-

ducted between August and October 2010.4. Susan K. Urahn, managing director o

the Pew Center on the States, as quoted inGovernors rom Both Parties Face PainulCuts Amid Budget Crisis in U.S., by MichaelA. Fletcher, sta writer, Washington Post, Feb.8, 2011.

5. Washington Gov. Chris Gregoire, chair,National Governors Association, as quotedin Governors Fear U.S. Budget Cuts WouldCrush States, by Dan Balz, sta writer,Washington Post, Feb. 27, 2011.

6. States Continue to Feel Recessions Impact,December 2010, Center on Budget and PolicyPriorities, National Governors Association.

7.An Update on State Budget Cuts, Center

or Budget and Policy Priorities, NationalGovernors Association, Nov. 5, 2010.8. Department o Finance, State o Calior-

nia, do.ca.gov/budgeting/budget_aqs/.9. Caliornia Gov. Edmund G. Brown Jr.,

State o the State Address, Jan. 31, 2011.10. 20112012 Caliornia Budget, Edmund

G. Brown Jr., governor, State o Caliornia,Jan. 10, 2011.

11. 20112012 Caliornia Budget, EdmundG. Brown Jr., governor, State o Caliornia,Jan. 10, 2011.

12. Florida Gov. Rick Scott, Feb. 7, 2011.13. Florida Gov. Rick Scott, Feb. 7, 2011.14. Illinois Gov. Pat Quinn, Illinois Work-

ing: Budget Stability, Creating Jobs or Today andTomorrow, Feb. 16, 2011.

15. Emergency Budget ImplementationAct (Senate Bill 3662), July 1, 2010.

16. Illinois Gov. Pat Quinn, Illinois Work-ing: Budget Stability, Creating Jobs or Today andTomorrow, Feb. 16, 2011.

17. Economic Recovery and BudgetReorm (Senate Bill 2505), Jan. 13, 2011.

18. Medicaid Reorm Legislation (HouseBill 5420), Jan. 25, 2011.

19. Public Pension Reorm Bill (Senate Bill1946), April 14, 2010.

20. Illinois Gov. Pat Quinn, Illinois Work-

ing: Budget Stability, Creating Jobs or Today andTomorrow, Feb. 16, 2011.



23. New York Gov. Andrew M. Cuomo,Governor Cuomos 201112 Executive BudgetProvides Transormation Plan or a New NewYork, Feb. 1, 2011.

24. New York Gov. Andrew M. Cuomo,Governor Cuomos 201112 Executive BudgetProvides Transormation Plan or a New NewYork, Feb. 1, 2011.

25. New York Gov. Andrew M. Cuomo,www.governor.ny.gov/press, Feb. 24, 2011.

26. New York Gov. Andrew M. Cuomo,Executive Order No. 4, Establishing the Spend-ing and Government Efciency (SAGE) Com-mission, Jan. 5, 2011.

27. New York Gov. Andrew M. Cuomo,Executive Order No. 10, Reducing Costs orPersonal Service Contracts, March 2, 2011.

28. www.texasbudgetsource.com.29. Fiscal Survey o the States, NASBO and

NGA, Fall 2010.30. U.S. Bureau o Labor Statistics as

reported by the state o Texas.31. Texas Gov. Rick Perry, 2012-2013 Gov-

ernors Budget, Feb. 8, 201132. www.texasbudgetsource.com and Texas

Gov. Rick Perry, 2012-2013 Governors Budgetand State o the State address, Feb. 8, 2011.

Nancy A. Valley,CGFM, CPA,a member ofAGAs New YorkCapital Chapter,is a partner withKPMG LLP.

Jeffrey C. Steinhoff,CGFM, CPA, CFE,an AGA PastNational Presidentand member of theNorthern Virginiaand Washington,D.C. Chapters, isthe executive direc-

tor of the KPMG Government Institute.


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Attacking the Fiscal Crisis - What the States Have Taught Us About the Way Forward