What Texas and Florida can teach big spending states

Several weeks ago we saw a parade of governors and mayors on Capitol Hill asking for a bailout of state and local government. On that occasion, South Carolina Gov. Mark Sanford was the voice of fiscal sanity, offering a cautionary warning that “[t]his $150 billion may in fact further infect our economy with unnecessary government influence and unintended fiscal consequences.”

Most recently, the mayors of three big cities—Philadelphia, Atlanta, and Phoenix—sent a letter to Treasury Secretary Hank Paulson asking the feds to use a portion of the $700 billion bailout to assist struggling cities.

States are looking to the feds for help because the two usual go-to sources of funding for state and local governments—taxes and bonds—are going to be severely constrained in the coming years. The political will to raise state and local taxes is almost non-existent. And the tough credit market means states—especially those with big deficits—are going to have a hard time borrowing, prompting some analysts to believe we’ve seen the end of an era of relatively cheap money and easy borrowing for governments.

So what’s a state to do to climb out of the fiscal hole they’ve dug themselves into? It’s simple: Spend within your means and partner with the private sector more often to deliver more services.

Texas is currently the envy of the nation with an $11 billion budget surplus. How did the state do it? For starters, the Texas Constitution gives the state Comptroller of Public Accounts (a chief fiscal officer, of sorts) the responsibility to certify the state’s budget and send back any spending bills that the state can’t afford. It’s an elected position and the current comptroller, Susan Combs, launched a “Where the Money Goes” website to boost transparency and show taxpayers where their money is going. Having a third-party enforce prudent fiscal forecasting and spending helps to avoid the situation so many states now face—governors and legislators gravitate to the rosiest of revenue projections to help justify new spending, and then when the mythical money doesn’t materialize, the state faces a budget “crisis.”

Texas also engages in performance-based budgeting—tying a given programs’ funding to its effectiveness at meeting clear performance targets. A Sunset Advisory Commission conducts mandatory periodic reviews of all state agencies to find duplicative or unnecessary programs that must be cut. Since the Sunset Commission was created in 1977, over 47 governmental agencies have been eliminated and another 11 have been consolidated.

Similarly, Washington state and South Carolina apply a performance budgeting model in which state activities are ranked in order of priority and effectiveness. The administration then “purchases” (funds) the activities from the top of the list down until all available revenues have been used up, ditching the lowest priority activities and eliminating poor-performing, unnecessary, or wasteful ones.

Policymakers also seem to be increasingly recognizing that privatization and competitive service delivery are proven tools for doing more with less. Competitive sourcing allows the private sector to compete for jobs and contracts that are currently performed by the government. Federal employees actually won 83 percent of the job competitions from fiscal year 2003 through fiscal year 2007. But the competition still helps save a lot of money. Taxpayers saved $25,000 for every job that was put up for competition because even when the government kept the job it significantly improved efficiency and reduced costs.