Policy Documents

Performance-Based (Priority-Based) Budgeting: How to Address Budget Shortfalls in The States

Bob Williams –
April 1, 2009

At least 42 states have major budget shortfalls. How can legislators advance Jeffersonian principles of free markets, limited government, federalism, and individual liberty when there is a budget crisis?

The temptation will be to try to take the usual approach—across the board cuts, raid accounts from non-general fund accounts, delay funding of some legislation, avoid full funding of pensions, and use the federal stimulus funds to postpone meaningful budget reforms. "Those actions may give states a temporary “patch” in their budget shortfall, but when the federal funds run out in a year or two, the states that did not take action to permanently solve their budgetary shortfalls will face an even greater one.

When budgets are built in this traditional manner, without deliberate efforts to develop core governing principles first, legislators become “enablers” for agencies and programs that likely have fundamental design flaws or that may be providing services in direct conflict with lawmakers’ policy views. Building budgets the conventional way virtually assures overspending since there is little, if any, focus on efficiency or effectiveness. Debating, writing, and approving a state budget are the primary task legislators must accomplish because the budget drives all policy.

Governors and state agencies cannot spend even one dollar without legislative approval. Conventional thinking in most states has legislators adjusting the current budget for inflation, adding caseload increase, splicing in a few new initiatives, and calling this the baseline budget. This type of approach is almost entirely focused on inputs (more money). Legislators then often find that the baseline budget is higher than the estimated revenue forecast. They then focus on cutting programs, raising taxes, or a combination of both until the total of the general fund matches the forecasted revenue. However, today most state economies are too weak to withstand a tax hike. An increase in tax rates at this time may very well produce less revenue (after the tax rates are raised) due to the negative economic impact.

The conventional budgeting approach ignores the efficiency and effectiveness of existing state programs. Rarely is the question asked about how existing programs can be improved or how can we maximize the return on the tax dollars that are collected.