Stateline Story

The Arkansas Approach: How One State Has Avoided Fiscal Disaster

  • September 20, 2011
  • By Christine Vestal
                                                                      Office of the Governor 

Arkansas Governor Mike Beebe presides over a fiscal process that has functioned well since it was created in the aftermath of the state's debt default in the 1930s

LITTLE ROCK, Arkansas — A few states have escaped the worst of the recession, and for the most part that is for one reason: They derive massive amounts of revenue from oil and gas or other mineral extraction. It's not easy to find states without major wealth in the ground that have managed to avoid fiscal crisis.

But there is at least one: Arkansas. With money in the bank at the end of every budget year since 2007 and only minor spending cuts, it has averted employee layoffs, short-term borrowing and protracted budget debates. At 8.2 percent, the state's unemployment rate is considerably lower than the national average — although it is the highest in state history.

Some have attributed Arkansas' relative good fortune to the fact that it never experienced a housing market boom, so it didn't suffer the kind of collapse that plagued Arizona, Florida, Nevada and other states. But the state did lose thousands of manufacturing jobs and saw a steep increase in the number of people who qualified for Medicaid. Its poverty rate — the second highest in the nation — grew even higher.

So it's not that Arkansas is a rich state — it's just that it has been able to operate pretty normally in years when most other states are suffering severe fiscal pain. And that turns largely on the way it manages its government finances. Dubiously distinguished as the only state that defaulted on its debt during the Great Depression, Arkansas has since become a model of precision budgeting.

The state's popular Democratic governor, Mike Beebe, gets some of the credit for recent successes. Beebe started his tenure in 2007 with a $1 billion surplus left over from Republican Governor Mike Huckabee's administration. About half of it went for improvements to public schools under a federal court order, leaving a sizeable cushion for a state that spends about $4.5 billion annually.

Since Beebe took office, he's lowered the grocery tax from 6 percent to 1.5 percent — the biggest tax cut in state history. And despite declining revenues, he has pumped large amounts of money into long-term projects, including an expanded pre-school program and a community corrections project aimed at lowering prison populations. Without giving away huge tax breaks, the state has brought in some 26,000 new jobs, partially replacing 39,000 jobs, mostly in manufacturing, that disappeared. "We couldn't have done it without good management," Beebe says.

Beebe's popularity and 20 years experience in the state legislature have a lot to do with the state's sound fiscal health. In the 2010 elections, when GOP candidates swept into state offices around the country in history-making numbers, Beebe was the only incumbent Democratic governor to get re-elected by a landslide. With a margin of more than 62 percent statewide, he carried every county. Now, as public confidence in Washington sinks to new lows, Beebe's approval rating still tops 60 percent. He says he has a plan for working with the legislature after the 2012 election when every seat is up for re-election and the legislature could lose its Democratic majority. "But it's not necessarily a political plan," he insists.

The state's conservative budget process has worked for many governors. But it seems particularly suited to Beebe's overall management style. He's widely known for taking his time, getting everyone in a room and hammering out a consensus — but ultimately obtaining what he wants. "The dysfunction in Washington hasn't happened here," he says. "We get the best minds in the room so we're not making policy in a vacuum. And we don't do it in a hurry." Once a course of action is clear, Beebe says he lets everyone know he's moving forward with or without them.

Evidence of that is his success in enacting the state's first-ever severance tax, despite a required three-quarters super majority vote of the legislature. Previous governors had tried for 40 years to pass the grocery tax reduction; they tried for even longer to enact a severance tax. With natural gas production increasing in the state, the new tax is expected to add significant new revenues in the years ahead.

Remembering the worst

By all accounts, though, Arkansas owes much of its fiscal success to a unique budgeting process that dates back to the 1940s, once the default period had ended. Since enacting what is known as the fiscal stabilization act, the system has worked smoothly — even in difficult economic times.

It helps that Arkansas governors and lawmakers over the years have been able to depend on managers of exceptional longevity. The current team — Director of Finance Richard Weiss and Revenue Commissioner Tim Leathers — has been on the job in Little Rock for nearly 40 years. Budget Director Mike Stormes just retired this summer after an even longer stint in state government.

According to Scott Pattison, director of the National Association of State Budget Officers, two-thirds of states ended the fiscal year in July with a surplus. But many, if not most, did it by postponing certain payments, short-changing pension systems, and making radical cuts to core programs. Arkansas has resorted to none of those tactics."There are a lot of things other states should look at in the way Arkansas does its budgeting," he says.

Part tradition and part law, Arkansas's budget system has been the envy of other states for years. Former California Governor Arnold Schwarzenegger, for example, commissioned a study of the Arkansas method in the hope he could find some solutions to his own state's crippling budget woes.

Here's how it works:

Every two years lawmakers pass a list of appropriations, and agencies project what they will need to run their programs. Then those funding requests are divided into three categories: A, B and C.

--Category A is essential programs, including education, corrections, public assistance, transportation and Medicaid.

--Category B is cost-of-living increases for all agencies, necessary expansions of programs like Medicaid, and new programs that fill a critical need. The state's $10 million community corrections project, for example, went into this category.

--Category C is a wish list of new programs lawmakers and agency heads would like to start. According to retired state Senator Wayne Dowd, a Democrat, "category C is basically File 13 — the trash bin."

When Dowd served in the legislature from 1979 to 2001, he said freshman lawmakers would propose new programs and senior members would politely vote for them. "But everybody would be winking at everybody else, saying 'this is going in C, so it's not going to hurt.' "

Once the categories are created — in closed meetings among about a dozen senior lawmakers and the executive branch fiscal team — they are matched up with the state's conservative revenue projections. Funding goes first to A, second to B, and if anything is left over, some C projects may get funded.

After that, "the budget bill mysteriously gets filed simultaneously in both houses a few days before the legislature adjourns," Dowd says. Approval of the bill is more or less a given. "There are no political dogfights," he says. "If you don't have the money, you don't have the money."

Incremental moves

As the budget year proceeds, the finance department assesses revenue projections on a monthly basis. Beebe checks deposits every day. If revenues fall short of initial projections, the chief fiscal officer can make across-the-board cuts — first from C, then from B, and, only when the fiscal situation is dire, from A.

"In a lot of states, when you talk about cuts there's an ongoing political battle about who's going to take those cuts," says the state's new budget director, Brandon Sharpe. "Once we've gotten to that point, there's no more arguing about it."

During the recession, Arkansas reduced spending on category A programs only once — in fiscal year 2010. Even then, the cuts were smaller as a percentage of total revenues than in most other states, according to data from the Center for Budget and Policy Priorities.

When necessary over the years, Arkansas has made budget cuts early and often. "The worst situation is to make big cuts late in the year," Sharpe says. "Agencies are spending the money as we dole it out, so if you make a cut near the end of the year, there's not much they can do."

As well as it works, no budgeting system can cure poverty. Still, Arkansas has gone from 49th to 44th in the nation in per capita personal income over the last five years, and Beebe says careful fiscal management may have something to do with it.