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Deficit reduction with fewer fears


North Carolina, like most American states, faces a very tough funding future. The state has a large budget shortfall, which it is legally required to close.  Hard choices are on the horizon – significant cuts in services and programs and possibly tax and fee hikes. Fortunately, there are some steps that state leaders can and ought to take that can make a difference.

Governor Perdue has made a start in identifying potential cuts in a variety of policy areas. Her plan is to "remake" state government by consolidating 14 state agencies into eight and privatizing several functions such as information technologies.

No figures for possible cost savings have been suggested yet, which is to be expected. The effort to enact a new balanced budget will take time and lots of politicking and number crunching.

Certainly some cost containment would ensue from some of the consolidating, name-changing, and box-moving involved in decreasing the number of state agencies by six.

However, these actions do not guarantee significant cost savings.  Moreover, there exists no "natural law" that programs are made more cost-efficient and effective by being housed somewhere else. 

Privatization is not even a sure strategy.  Sometimes it has worked and sometimes, not.

And there are many perils along the way. Big spending cuts could harm North Carolina's most economically vulnerable citizens. Disinvestment in education and infrastructure could undermine or market position in the global economy.  Moreover, the Administration and the General Assembly could miss an "opportunity" for transforming governance and public services.

There are, however, examples of states and cities that have made headway in navigating a way through this "trilemma." A few years ago, the state of Washington's Governor and its Office of Financial Management used a process that sought to "buy" the best results for their budget dollar and closed a $2 billion budget gap.  Iowa saved more than $200 million, while improving outcomes with programs as varied as abuse in foster care, permit processing times, internal services costs, etc.  Most recently, the city of Baltimore used "outcome budgeting" to close a $121 million budget gap (about 15 percent of projected discretionary general fund spending). 

It is not easy to make these sorts of reforms.  Liberals and conservatives will both raise objections. Here, however, are ten steps for remaking government that deserve consideration:

  1. Start by separating the governance ("steering") function from the service delivery ("rowing") function.  Do not contract out the former but find the best public, private, or nonprofit service provider for a particular job.
  2. Do not eschew any tool for leveraging change – the budget process, the personnel system, and the procurement system – all are needed to make things happen.
  3. Be ready to abandon programs, whose intentions are good, but are not working or are not working as well as other efforts.
  4. Stop worrying about agencies and think about strategic opportunities.  The key questions are not – "Where do we put this agency or division?", but (1) "How do we best tackle this policy area?" (2) "Given that a certain amount of public money is set aside for this strategy, how much funding is needed to not just do the right thing, but to make a difference?" and (3) "What types of strategic alliances are required as well?"
  5. Emphasize prevention, not treatment. 
  6. North Carolina's tax system is outdated.  Three commissions during the last 20-plus years have analyzed the issue and largely offered the same set of recommendations – broader tax base with lower rates aiming to advance tax equity, neutrality, and stability.
  7. Emphasize long-term returns on public investments.
  8. Change employee incentives in order to begin shifting the state governmental culture from a focus on rules, red tape, and inputs to one on innovation, individual initiative, and results.
  9. In an effort to accomplish more with less, do not be seduced by the notion that one need only slash payrolls across the board and then seek to raise efficiency by "flogging" the remaining public employees
  10. Focus, instead, like a laser beam on meeting the customer's needs, not the organization's desire for immortality. Much of the innovation has to be bottom-up, led by the employees.

This is an admittedly ambitious agenda and there is not much time to act. Worse still, the standard budget process is already underway. 

Fortunately, we do not need to start from scratch. North Carolina has experience with these activities and tools. With hard work, open minds and realistic expectations we can make a real difference in meeting the quality and cost concerns of our citizens.

Let's get to work.

William Schweke is a Senior Fellow at Durham, NC office of CFED [2].