Fiscal Ills Could Bring State Government Reform

Unlike previous periods of state fiscal distress, the current one is less due to the recent economic downturn and more due to long-run structural problems, such as a deteriorating tax base and an explosion of health care costs. For this reason, the depth and breadth of the problem is historically unprecedented and it will take states three to five years to realign their expenditure-and-revenue paths.

For the 25 newly elected governors, a smooth recovery to fiscal stability will be an almost insurmountable task. Most have inherited budget shortfalls of five percent to 15 percent with almost no time to develop comprehensive long-run cost-effective strategies. This is because every state but one has balanced budget requirements and their legislative sessions begin within several weeks after inaugurations. Governorsnew and old will be forced to adopt emergency, short-run spending and tax decisions to meet their balanced budget requirements.

However, during the next two years many governors will be “stepping back” and reevaluating state government’s core services, efficiency, and organizational structure. Citizens and the business community should participate in this process, since both have a vital stake in the outcome.

Citizens must help identify government’s core functions and decide how much they are willing to pay for services the state provides. They also must help define measures to hold government accountable. In today’s Internet age, the efficiency and responsiveness of government is often measured against the ease of making an online transactionand generally government comes up short.

Likewise the business community will need to participate in redesigning government to help states realign their business regulation and tax systems with today’s changing economy. Moreover, because state government is the largest financial supporter of education and training in the nation, the private sector must collaborate with state government to develop a fair and efficient revenue system that supports these services.

Globalization, deregulation, and the explosion of technology have changed state economies dramatically during the last 20 years. These forces have created a “New Economy” characterized by different sources of wealth, corporate interdependence, dynamic markets, consumer choice, and investment needs. In this New Economy, governors will be reengineering state government and developing pro-growth strategies. Four broad strategies will likely emerge during the next several years:

• Governors will begin reevaluating core services that government provides to determine which are most critical to the state. Citizens will need to fully participate in this review and understand that difficult choices will need to be made and some services terminated.
• Governors will begin reengineering state government to make it more flexible, adaptable, consumer-oriented, and performance-driven. This will include focusing on results, increasing accountability, using technology wisely, and examining service delivery options such as privatization.
• Governors will begin reallocating strategic investments to focus on building the intellectual and physical infrastructure needed in the New Economy. This will include a more cost-effective allocation of funds for education and training as well as for infrastructure. For example states may move investment into early childhood given the higher long-run benefit relative to other education programs.
• Governors will begin reshaping the economic environment to facilitate business expansion and eliminate market distortions caused by outmoded taxes and regulations. This includes revising tax systems, simplifying regulations, refocusing research and development on economic outcomes and commercialization, and increasing access to venture capital. This should be done in full participation with the business community.

While these changes will be extremely difficult for state government, the result will be more streamlined and efficient delivery of services. It will also produce a state government that regulates and taxes businesses and individuals by fairer, more efficient means. Overall, a stronger public-private partnership could emerge in states as pro-economic growth strategies are developed and implemented, leading to increased public and private sector productivity. 

Ray Scheppach is executive director of the National Governors’ Association.