Friday, August 17, 2012

The Solution to Alaska's Fiscal Issues ...

In listening this morning to the podcast of Glen Biegel's show from a couple of days ago, I was struck by the response of a couple of legislative candidates to Glen's questions about the state budget.  Glen started by asking each if they thought the current state budget was "sustainable."  Each answered "no;" so far, so good.

Then Glen asked how they would "fix" the budget.  With varying degrees of speed, both ultimately suggested using "zero based budgeting" to address the problem.  Not as good (in my opinion).

Generally speaking, zero based budgeting is a "method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a 'zero base' and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one."

In other words, zero based budgeting is a way of more deeply examining costs; it is not a way of setting overall budget levels.

For those of you remember (or more likely, have studied it as a history lesson), zero based budgeting first gained significant notoriety for use in developing government budgets during the Presidency of Jimmy Carter.  I recall because I was at the Pentagon at the time, and somewhat involved in dealing with the implementation of the approach on a few programs.

While President Carter touted the approach as a way of reducing government spending, it did not.  It took a little longer to develop the bdugets, but spending levels continued to grow.  The reason is that the approach only looked at programs from the cost side, requiring that the proponents justify each element of cost as they rebuilt their budgets.  Good people always can come up with justifications for programs and their related costs; after some "log rolling" ("I'll agree to your costs if you agree to mine"), the budgets were built and the spending levels continued.

Alaska's needs are different.  The first, and most important, step that Alaska needs to take going forward is to establish a hard cap on General Fund spending at the fiscally "sustainable" level.  Without that as a starting point, overall spending levels will never be controlled.  As now, well intentioned people will simply build good stories for why their program needs to be approved, and approve others in order to have theirs approved.  That explains how Alaska General Fund spending has exploded over the last six years from $3.0 billion for FY 2006, to $6.7 billion for FY 2012, and now to $7.6 billion for FY 2013.  And it also explains why spending will continue to match cash flow, at the expense of future Alaskans, until something is done.

By putting a hard cap on overall spending at sustainable levels, Alaska will control the end result from the start.  Once that is done, the various Commissioners, state agencies and legislators can work on prioritizing programs and projects within the cap.  Zero based budgeting to facilitate that approach may or may not be helpful; it can and should be used where it is.

But relying on zero based budgeting as the primary approach to control state spending is -- as the University of Alaska Athletic Director recently told me I was on when I suggested that there was a need to bring accountability to that program -- a "fool's errand."  I disagree with that characterization in that instance and will have more to say about it soon.  But that characterization is true when thinking that zero based budgeting is the primary solution to Alaska's fiscal issues.

A hard cap on overall spending is the most -- and possibly, only -- effective solution to Alaska's fiscal issues.  I hope that, as this election cycle continues, those appearing on Glen's show earlier this week and other legislative candidates increasingly think of that solution as their first line response.