Policy Documents

Research & Commentary: A Different Way to Budget

July 15, 2010

States are beginning to turn away from baseline budgeting, a method that has proven ineffective in keeping the size of government to a responsible level. They are moving toward zero-based and performance-based budgeting, which has proven effective in cutting deficits.

Baseline budgeting merely builds on the government’s preceding spending base, thus providing no natural constraints on spending. Zero-based budgeting, by contrast, involves a start-from-scratch process in which each agency must prove the value of its services instead of automatically having them funded under an assumption of necessity.

Talmadge Heflin, former head of the Texas House Appropriations Committee, says with zero-based budgeting the “Legislature not only eliminated the state’s $10 billion shortfall in 2003 without raising taxes, but also cut general revenue spending for the first time since World War II and helped create an environment of low taxes and spending that spurred the Texas economy for the rest of the decade.”

Performance-based budgeting, or “budgeting for outcomes,” goes even further by measuring effectiveness. It involves identifying the core functions of government, requiring agencies to rank their activities based on priority, setting up effectiveness measurements, and then ranking programs according to their measured effectiveness. These budgeting techniques require more time and resources, so states typically analyze only a few agencies per year instead of all of them.

Bob Williams, founder of the Evergreen Freedom Foundation, says, “by following this budget process, a government ‘buy list’ is created, directing the discussion away from ‘cuts’ to instead what outcomes are being purchased.” Recently there has been a renewal of interest in such policies in Georgia and Nevada and at the local level. The Georgia House and Senate approved a bill to enact zero-based budgeting, but Republican Gov. Sonny Perdue vetoed it.

Although neither approach is a silver bullet for ending a budget deficit, zero-based and performance-based budgeting can be effective in helping governments prioritize services and identify inefficiencies and waste.

The documents cited below provide additional information on these alternative budgeting mechanisms.

 

Performance-Based (Priority-Based) Budgeting: How to address budget shortfalls in the states
http://www.budgetandtax-news.org/article/28000
Bob Williams, founder of the Evergreen Freedom Foundation, explains how performance-based budgeting helped Washington balance its state budget in 2003 without raising taxes. He writes, “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.”

A How-to Guide for Budget Reform: Part 1
http://www.npri.org/publications/a-howto-guide-for-budget-reform-part-1
In part one of his how-to budgeting series, Nevada Policy Research Institute fiscal policy analyst Geoffrey Lawrence demonstrates how fixing the state’s budgeting process could help Nevada out of its financial problems. The current “baseline budgeting is essentially a cost-plus budgeting process that fails to evaluate existing programs for performance,” he writes.

What Is Zero-Base Budgeting?
http://www.ncsl.org/default.aspx?tabid=12578
The National Conference of State Legislatures provides a primer on zero-based budgeting.

The One-Way Bet
http://www.npri.org/publications/the-oneway-bet
Nevada Policy Research Institute fiscal policy analyst Geoffrey Lawrence says budgeting reform is needed in order to control spending in Nevada. He recommends zero-based budgeting, noting it could mean significant cost savings for Nevada taxpayers.

Budgeting for Outcomes Can Help California
http://budgetandtax-news.org/article/28004
This study by the Reason Foundation shows how “budgeting for outcomes” would create more responsible fiscal policy in California. “Budgeting for Outcomes has already proven its value in Washington State, Iowa and more than a dozen other states, cities, counties and school districts. It combines strategic planning, zero-based budgeting, and performance budgeting in a workable, common-sense package,” the report notes.

Starting from Scratch
http://www.texaspolicy.com/commentaries_single.php?report_id=2963
Talmadge Heflin, former head of the Texas House Appropriations Committee and current director of the Center for Fiscal Policy at the Texas Public Policy Institute, explains how Texas dealt with a $10 billion budget deficit. “The objective of zero-based budgeting was simple: Start from scratch,” he writes.

Zero-Base Budgeting in the States
http://www.ncsl.org/?tabid=19204
This article from the National Conference of State Legislatures looks at the experiences of states that have enacted zero-based budgeting. “It forces an end to thinking that current activities and funding will continue with minor (or incremental) changes, and requires a reconsideration of every activity and demand for resources,” the report notes.

The Pros and Cons of Zero-Based Budgeting
http://www.mackinac.org/article.aspx?ID=5928
This testimony from Michael LaFaive, director of fiscal policy at the Mackinac Center for Public Policy, before the Michigan House Appropriations Subcommittee on General Government, outlines the pros and cons of zero-based budgeting. “Case studies about businesses and governments that have adopted zero-based budgeting, or some hybrid of it, generally report some improvement quantitatively or qualitatively. That is, the process has either saved money, improved services, or both,” LaFaive notes.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For additional information on this and other topics, visit the Budget & Tax News Web site at www.budgetandtax-news.org and The Heartland Institute’s Web site at www.heartland.org.

If you have any questions about this issue or the Heartland Web site, please contact Legislative Specialist John Nothdurft at 312/377-4000 or jnothdurft@heartland.org.