Opinion: States Can Teach Feds Something About Budgeting

Richard F. Keevey | October 18, 2019 | Opinion
A good place to start: approve the budget on time, start reducing budgetary deficits and review the entire budget rather than just 30% of it
Credit: Amanda Brown
Richard F. Keevey

The Feds did it again: They began the fiscal year on Oct. 1, 2019 without annual appropriations. Instead a continuing resolution (CR) was approved to authorize spending until Nov. 21, 2019. This temporarily prevents another government shutdown but does not guarantee the country will have a budget by then. In fact, the Feds have done this on average five times per year since 1977. What a way to run the world’s largest business.

New Jersey and most states execute appropriation bills on time. Occasionally, some miss the date and are forced to close the government — or make other adjustments — until appropriations are made. But in general these are very rare occurrences.

A normal state budget process

The budget is the principal document for decision-making in government. Good decisions are made after sound policy analysis by executive branch and legislative members and after careful consideration of spending and tax-policy options.

There are some basic rules and procedures for good budget-making that are standard, especially in the world of state government. The process should:

  • Be disciplined, predictable and institutionalized.
  • Facilitate negotiation and compromise.
  • Review all spending elements,
  • Estimate revenues in a consensus manner.
  • Focus not only be on the current year but also project future-year spending and revenues.
  • Borrow only for capital purposes.
  • Record transactions on an accrual basis — not a cash basis.
  • Maintain a reasonable surplus and a rainy-day fund.
  • Consider options in a neutral and careful manner.

In February 2019 Gov. Phil Murphy, for example, proposed the budget for fiscal year 2020.  After being reviewed, amended and approved by the Legislature, the governor signed a balanced appropriations act authorizing agencies to spend. Importantly, the appropriations act included a responsible estimate of revenues, was balanced and provided for a reasonable surplus.

In general, all states follow a very similar process. Numerous spending and revenue issues are addressed in the process, such as funding for K-12 school districts, Medicaid, criminal justice, transportation, aid to local governments and the level of taxation. There is not always a consensus on all policy issues but compromises are usually made and an agreement is reached in a timely manner.

The federal budget process

The federal government has a different process. The president simply transmits a budget to Congress in February for the year beginning Oct. 1. Then, the budget committee of each house develops its own overall budget framework, which provides overall guidance to each of 12 appropriations committees who are then charged with formulating the appropriations acts to fund federal agencies.

In most instances these appropriations bills will have little relationship to the guidance provided by the Budget Committees or for that matter to the budget submitted by the president. In fact, each budget submitted by President Donald Trump has been totally disregarded by both political parties and the committees.

Each appropriations act must ultimately be approved by the full Congress and the president. The president has no line-item veto authority; he can only approve or veto.

Interestingly, the Congress approves only a small potion of spending —the “discretionary” portion of the budget (approximately $1.4 trillion) —which includes the defense department and spending for all other departments. The “mandatory” portion of the budget ($2.8 trillion) — principally Social Security and Medicare and interest on the debt ($400 billion) — is not reviewed annually, and is basically on auto-pilot. A questionable process at best.

Unlike New Jersey and most states, the federal budget is not required to balance. Usually, the budget is crafted assuming a deficit — currently about $1 trillion — which on a cumulative basis now aggregates to a gross debt of almost $22 trillion.

I would be remiss not to mention that current projections by the Congressional Budget Office (CBO) indicate that annual deficits will soon reach over $1.3 trillion and the debt will swell to almost $ 30 trillion.

Major budgetary differences

It is not the purpose of this article to discuss federal long- term deficits, debt, taxes and spending but rather to highlight differences in budget-making procedures between the feds and state governments. For example:

Unlike corporations and state and local governments, the feds have no separate capital budget; instead, they have one budget, make no distinction between capital and operating costs, and borrow for any item.

The feds routinely submit budgets with deficits and fund the difference by selling bonds. If revenues falter during the year, they simply issue more debt.

The feds rarely approve a budget on time; states routinely do.

Most spending is not annually reviewed: Only 30 percent of the total budget goes through the normal budget process; the vast majority of spending is automatically approved.

The appropriations committees routinely ignore the guidance of the budget committees (the law says they should), and both generally ignore the president’s budget, especially if both branches do not belong to the same party.

Sounds unbelievable, right?

Final observations

State governments — and most local governments — have a rational budget process. The executive proposes; the Legislature reviews and make revisions; options are discussed; debate ensues; and compromises are achieved.

This process happens throughout the United States at all levels of government 96 percent of the time — never in the federal government.

I have only hinted at some of the changes that need to be made at the federal level. For example:

  • The entire budget must be annually reviewed not just 30 percent. The major spending areas (Social Security, Medicare) should not be ignored.
  • The numerous committees doing basically the same reviews should be combined.
  • The numerous exemptions in the tax code (over $1.5 trillion) must be periodically reviewed — many are very questionable and should not be continued.
  • The debt limit needs to be eliminated since it functions now only as a political threat. The proper way to address deficits is in the budget process by reducing spending or raising taxes.
  • Targets need to be established about how and when deficits and debt can be reduced.
  • The budget process must have more discipline and be approved on time. If not done in a timely manner, pay to Congress should be withheld.
  • The president must make an annual budget address to the people and Congress explaining his goals, objectives and spending needs. Currently, he simply sends a budget document to Congress with no explanation. Every governor views the budget as the ultimate spending and policy document and deliver a formal presentation and explanation to the people. Shouldn’t the president have to do the same?

A good process, of course, does not guarantee good outcomes or good public policy. Meaningful results require good management and lots of hard work by a whole host of government staff, communities and people of good will and dedication. But a sound budgetary process definitely lays the groundwork for intelligent discussion, review, approval and implementation.