Stateline Story

Budget Crisis Spurs Innovation, Reform

When Virginia Gov. Mark Warner (D), an ex-telecommunications executive, took office two years ago, he asked his staff how much the state spent on information technology each year.

No one knew. Their best guess was between $500 million and $1 billion.

Nine months later, after an intensive review of computer operations in dozens of state agencies, Warner learned Virginia spends $902 million on IT every year. That pays for 2,580 workers, 3,000 computer servers and dozens of e-mail systems.

The finding troubled him.

"Having been in the high-tech field in the private sector, I knew there were areas for great savings," Warner said in an interview with Stateline.org.

Some analysts say Warner's experience is common, that unaccounted-for technology funds and loosely run information systems are among the many inefficiencies plaguing states. They say more business sense could put states on firmer fiscal ground.

"States mostly have very decentralized information technology structures, all sorts of duplication and redundancy. . . .The legislators don't know enough about it, so no one wants to go there. They become slush funds," said William Eggers, director of public sector analysis for Deloitte Research and an expert on government efficiency.

But that may be changing. That's because the budget crisis is forcing lawmakers to look anew at the money they spend, with each dollar given new weight.

As a result, the state budget crisis, for all its pain, could have a silver lining. Where once lawmakers could spend, spend, spend, they are now having to squeeze more out of less by streamlining management and technology systems and even, in some cases, changing their healthcare and tax systems. States could emerge from the crisis leaner, stronger and better able to deliver the services taxpayers demand, experts say.

The process, however, may not be all that fun to watch.

"One of my messages to the states is: A lot of the reforms you need to do, a lot of the ways to save money, are not terribly sexy, they are hard things to do, but that's where a lot of the money is," Eggers said.

In Virginia, focusing on the "boring" stuff could save the state hundreds of millions of dollars a year.

Warner plans to merge all information technology workers into a single agency, the Virginia Information Technologies Agency, which would buy and maintain the state's high-tech infrastructure. This would eliminate three existing agencies and consolidate scores of technology divisions.

Expected savings: $100 million a year. Together with other economizing measures, including centralization of the state's purchasing system, Virginia is looking at savings of more than half a billion dollars a year.

Warner's effort to make every Virginia dollar go further is being watched closely. Fellow governors call him looking for advice.

"What I've spent a lot of time on, particularly with a lot of the new governors, is saying: 'You're going to have to make the cuts anyway; you're going to have to make the hard choices anyway. Use this as an opportunity not just to balance your budget, but use this as an opportunity to take on some of these issues that you know in the good times there won't be the political will to do,'" Warner said.

IT reform alone won't balance Virginia's budget, which has been running deficits in the low billions, but Warner still thinks it's worthwhile because it allows the state to do more with less while reassuring taxpayers that the state is managing its money well.

Mistrust of state government apparently manifested itself in 2002 when voters in Northern Virginia and the Hampton Roads region rejected proposals that would have raised local sales taxes to pay for transportation improvements.

"I think the reason [the initiatives] went down is a lack of confidence on the part of a lot of citizens that their money is being spent efficiently. That's why Mark Warner's procurement reform and IT reform is very important. Citizens at least have to have the confidence the money is being spent well," said Scott Pattison, an ex-Virginia budget chief who now heads the National Association of State Budget Officers (NASBO).

Raymond Scheppach, executive director of the National Governors' Association, said in a series of editorials for Stateline.org that the budget crisis could bring change beyond government streamlining and shrunken programs.

"There may be a silver lining in the dark clouds that have been hovering over state budgets. A growing awareness of the significance of . . . structural problems in both Washington, D.C. and state capitals is increasing interest on the part of our elected officials in reforming both state tax systems and the federal-state Medicaid program," Scheppach wrote in July 2002.

"Fixing ... these structural problems takes the kind of bold and progressive public policy action that is often so difficult for elected officials. But the desperate fiscal situation in states has perhaps provided the impetus in both Congress and statehouses to take on the challenge."

Just what Medicaid reform might look like is unclear at this point. Many governors want the federal government to pick up a larger share of the cost of the program that provides health coverage to 44 million low-income Americans. Congress has so far refused to back this.

The Bush administration recently proposed a much more radical reform package that would give states more flexibility in how they administer the program in exchange for a cap on the amount of money the federal government sends to states. The governors have convened a task force to study the proposal, which remains a draft, in an effort to help shape its final form.

All parties agree that Medicaid's status quo, with its rapidly escalating costs for both states and the federal government, is untenable.

The nature of tax reform is a bit more obvious expand the sales tax to include services and lower the overall rate. As Scheppach puts the problem:

"[S]tate tax systems were developed for the manufacturing economy of the 1950s not for the service-oriented, high technology, international economy of the 21st century. Sales tax revenues are being eroded by the change in the 'mix' of products purchased by consumers and the growth in electronic commerce, which is largely tax exempt. Most states do not tax services which have grown from 41 percent of household consumption in 1960 to 58 percent in 2002."

Scheppach says states could bring their tax systems up-to-date by expanding the sales tax to include services while lowering the overall rate in order to keep the total tax burden roughly the same.

The sum total of all these changes, from Medicaid reform to tax reform to increased government efficiency, would give state government a different look. A business mantra of the 1990s innovate or die may apply. The choice facing states might not be that stark, but neither is it much less, analysts say.