Tag Archives: Sacramento Bee

As the Economy Recovers, State Budgets Continue to Worsen

Present state budget crises will likely seem mild compared to what they will face in F Y2011. In order to comply with  their constitutionally mandated balanced budgets, many states relied on one-time gimmicks to pass their FY 2010 budgets and must now turn to even more drastic measures.

In California, Governor Schwarzenneger’s proposed solution to close a $19 billion dollar funding gap is to rely on $8 billion of hoped-for federal aid. This prediction was deemed overly optimistic by the state’s Legislative Analyst’s Office. However, that Gover Schwarzenneger is relying on federal funding at all should signal that the states’ “one-time” federal bailout last year has created a culture in which state legislators look to higher levels of government to fix their fiscal irresponsibility.

The current state budget problems exemplify the danger of fiscal gimmickry: one-time solutions allow states to pass their budgets when the crunch hits, but they create long run problems as the structural gaps between spending and revenue grow over time. Continue reading

Serving Customers without a Metric for Success

California managed to pass a budget for fiscal year 2010 at the eleventh hour, but now the Center on Budget and Policy Priorities reports that the state faces a midyear projected shortfall of $1.1 billion.

Budget strife has recently led to cut backs in services and hours at state parks, after Governor Arnold Schwarzenegger cut over $14 million from the parks budget.

The parks department chose to cut hours rather than raising rates as it did last year in an effort to reduce budget shortfalls then.  In the Sacramento Bee, department spokesman Roy Stearns explains:

Parks leaders increased entrance and camping fees last year, and decided not to do it again, for fear of losing revenue if too many visitors stayed away.

State employees are attempting to choose the method to close their budget shortfalls that will bring the least pain to residents, but in truth, they do not know how to best serve their “customers.” Unlike firms who rely on profit and loss calculation to let them know if they are successfully serving consumers, government agencies can only make educated guesses about providing the optimal level of services to constituents at the right price.

Across the country, the Washington (DC) Metropolitan Area Transit Authority is facing a similar problem. The Metro and bus services are paid for by a combination of subsidies and rider fares, but setting the “optimal” ticket price and determining the agency’s budget are largely a matter of guesswork.

A WMATA report details the need for $11 billion in funding for fiscal years 2011-2020, ignoring that some of the budget could be covered by cost savings or changes in fare price.

If a private firm provided a transit or park system, it would have a profit incentive to determine the most efficient fare price and to pay for its services, but government agencies have no equivalent. Some services with public goods characteristics may simply not be provided by private firms, which is why many people advocate a government role in providing these services. However, as long as the public sector is offering such goods, we should acknowledge that there is not a good way of determining the appropriate level of provision, despite what lobbyists and politicians may tell us.