This is another commentary in Civic Way’s series on reconstructing American government, in this case, state government. The author, Bob Melville, is the founder of Civic Way, a nonprofit dedicated to good government, and a management consultant with over 45 years of experience improving public agencies throughout the US. Our earlier commentary on the need to revamp Federalism provides a great framework for understanding our thinking about state government. We also encourage a quick look at our commentary on restructuring state government.

Highlights

• State governments must be restructured, but we must also pursue nonstructural reforms, such as revamping resource planning, allocation and management systems
• State governments suffer from burdensome legacy structures, but also several nonstructural or bureaucratic maladies, including myopic decision-making, rigid budgeting, fallow revenues and assets, intermittent risk management tools and disjointed, inaccessible public data
• Using best corporate practices, states should expand their planning capabilities, revamp their budget management processes, improve their revenue and asset management systems, bolster their risk management mechanisms and manage data more efficiently

Introduction

State governments face unprecedented fiscal challenges. While they have thus far ably navigated the pandemic-triggered downturn (due in part to its timing), the worst is yet to come. The fiscal years ending June 30, 2022 and June 30, 2023 promise more revenue losses, operating cuts and fiscal instability. By FY24, many states could face the daunting prospects of insolvency.

We should view the occasional rosy headlines with skepticism. Virginia’s optimistic two-year budget proposal. Georgia, Massachusetts and New Mexico outpacing last year’s receipts. California’s projected tax windfalls. Most states face deteriorating revenues and rising costs. Reserves, which took over ten years to build, are being exhausted. Pension funds, many of which are already underfunded, could pose serious threats to state finances.

State government’s archaic structure contributes mightily to its high costs and less-than-stellar performance. However, it also suffers from many non-structural ills like outmoded, slipshod management practices. Since structural reforms will be extremely hard to achieve, non-structural opportunities for improving state government should be simultaneously and vigorously pursued.

Fortunately, many nonstructural improvements can be achieved with resolute political will, flexible enabling legislation, prudent policies and strategic investments. This commentary outlines one such nonstructural opportunity—state resource management—that could irrevocably transform the way in which state government makes policy and budget decisions.

State Government and Resource Mismanagement

State government resembles big business in many ways. Many state governments rival the size of our largest corporations. States spend billions of dollars—our tax dollars—every year. They employ tens of thousands of workers. They serve millions of customers. They comprise a major segment of our national economy. However, the similarities end there.

Unlike most modern businesses, state governments take a disjointed approach to managing their vast, tax-funded resources. The problem is largely structural—different agencies, some run by independently elected officials, supervise functions that could otherwise be integrated. But, state governments also suffer from several nonstructural maladies, as summarized below:

• Myopic decision-making – Most state governments lack adequate planning capabilities and expend resources with little regard for long-term consequences. Obsessed with immediate issues, they tend to ignore long-term threats, defer tough decisions and, ultimately, mortgage the future.
• Archaic budgeting – While virtually every state balances its annual budget, they employ outmoded, costly budgeting practices. Isolated fund and organizational budgets. Short-term budget cycles. Vague performance metrics. Weak capital project links.
• Squandered resources – Unbalanced tax systems and untapped taxes (e.g., online sales). Inadequate audits. Slow cash receipts. Assets treated like found objects, routinely inventoried and sporadically maintained, but rarely valued. Government accounting—fund and modified accrual accounting—further impedes the full accounting of public assets and liabilities.

States, unlike most large corporations, tend to overlook financial and economic risks. This is best illustrated by three glaring examples—reserves, stress testing and policy impact analysis. First, while many states increased their reserves after 2009, some continue to underfund reserves, base budgets on revenue windfalls and spend one-time funds on tax cuts or program costs. Second, most states lack rigorous fiscal stress testing systems. Third, state officials often succumb to ideological impulses, enacting laws with incalculable fiscal and economic costs, but without the benefit of objective forecasts (the inane bathroom laws and Covid-19 preemptions are just two examples.)

One more thing, and it is a big thing. The inability of states to effectively manage data  contributes to all of the problems summarized above, and undermines their ability to manage resources and anticipate risks. During the pandemic, for example, Covid-19 testing results have varied widely by state. This lack of uniformity contributed to our tragically inept pandemic response and underscores the need for more coordinated state and local data management.

Taking the Long View

State governments must make substantial investments in planning capabilities, tools and systems. They should create dynamic, professional executive and legislative planning units or form an independent nonprofit like Envision Utah. The planning entity should be charged with leading long-term visioning, planning, restructuring and innovation initiatives. Further, it should seek ways to unleash business, academic and nonprofit resources and facilitate public-private partnerships.

Every state should design and launch a permanent statewide planning process. That process should be independent, nonpartisan, evidence-based and transparent. It should take note of short- and mid-term needs, but in the context of long-term issues. It should respect short-term fiscal constraints, but focus primarily on framing tough decisions for future generations. It should have a strong citizen outreach and engagement element. And it should identify the most promising policy and investment opportunities for strengthening the state’s long-term resiliency and cost-effectiveness.

Budgeting for Results that Matter

States must migrate from conventional, incremental line-item budgeting to more strategic, enterprise budgeting. Modernize the budget management process. Integrate fund and departmental budgets and minimize the presentation of pointless items like fund transfers. Adopt a six-year budget cycle and integrate the operating and capital budgets. Link annual budgets to long-range plans and meaningful performance metrics (e.g., outcome measures). Reduce unnecessary line items and simplify formats. Exclude nonrecurring revenues. Ensure extensive citizen involvement.

Every budget should link costs to outcomes. Every agency should base its budget on verifiable performance metrics and thoroughly justify requests for new or expanded programs (e.g., Colorado and Tennessee). Every program should receive a sunset review no less than once every five years. Every sunset review should entail an analysis of mission, structure, costs, performance, outcomes, peer benchmarks and accountability mechanisms. Every review should generate recommendations for eliminating ineffective programs, improving productivity and reallocating funds to effective evidence-based programs (e.g., Iowa and Kansas).

States should make it easier to manage approved budgets. Where possible, long-term budget commitments like tax incentives and multi-year contracts should be restructured or eliminated. Administrators should be granted more latitude to approve budgetary adjustments during a fiscal year, within clear parameters. In addition, approved budgets should include contingency plans and designated officials should be authorized to implement those contingency plans under prescribed conditions.

Harnessing Revenues and Assets

States should maximize resources by getting more value of out of the revenues and assets they already have. They should recalibrate their tax structure to workings of the modern economy. They should rebalance their tax structure as necessary to improve its fairness, diversity, elasticity and efficiency—and reduce its vulnerability to economic fluctuations. They should champion a nation-wide initiative to tax new economic activities (e.g., online retail sales, advertising and gambling).

State agencies should do a better job of collecting, managing and investing the revenues to which they are legally entitled—taxes and fees. States should collect, manage and invest all revenues through a single agency. They should upgrade their tax assessment and auditing capabilities. They should standardize and integrate revenue management rules and systems for all non-tax revenues. They should improve cash management practices (e.g., consolidate banking arrangements).

States should manage assets more holistically. They should develop a central asset database for inventorying, assessing and managing assets (e.g., Wyoming). They should assess the feasibility of reducing workspace needs or moving employees from high-cost urban centers to lower-cost areas. They should identify and sell or lease under-utilized assets (e.g., land, office property or equipment). And they should exploit prudent opportunities for monetizing other untapped assets (e.g., concession leases and cooperative intergovernmental agreements for under-utilized assets).

Finally, state officials should launch a long-term campaign to adopt commercial accounting. States, in partnership with local governments, should lead efforts to eliminate traditional—and confusing—fund and modified accrual accounting and adopt the full accrual accounting methods used by businesses. This would require states to fully recognize the value of its assets as well as the magnitude of its obligations.

Anticipating and Mitigating Risk

States must stop enacting laws and adopting policies with significant long-term economic and fiscal implications without understanding their potential impact. Instead, the legislatures should require multi-year economic and fiscal forecasts for any proposed, relevant legislation. In turn, executive agencies should conduct similar forecasts of any policies with such implications. Any legislation lacking the requisite forecasts should be subject to an automatic veto and a super-majority override.

States should design and implement objective, rigorous fiscal stress testing protocols. These stress tests should address statewide financial condition, individual funds (e.g., pension funds), investments, debts, other obligations and local governments. States should have to conduct stress tests to identify potential risks, maintain spending priorities and increase reserves as merited. States also should have early warning systems to identify fiscally-distressed localities and trigger remedial action (Virginia).

Finally, state legislatures should enact legal standards governing the funding and control of fiscal reserves, including measurable allocation targets for reserve funds. Legislators also should consider linking future state aid to local government reserve targets (e.g., 60- 90 days of operating revenues or expenditures). Every Governor’s Office should adopt a prudent reserve policy to guide agencies. This policy should prohibit fiscal practices that increase economic risks (e.g., budgeting for revenue windfalls or spending one-time, nonrecurring or unsustainable revenues).

Managing Statewide Data

Governors—with legislative leaders—should launch initiatives within their respective states to improve the coordination of public data across state agencies and localities. This effort should begin with the appointment of a statewide chief data officer within the Governor’s Office (preferably the planning unit), creation of a state-local board of directors, enabling legislation clarifying roles and duties for the initiative and formation of a powerful interagency team (e.g., Virginia’s Data Governance Council).

What should such data management initiatives entail? A coherent, collaborative approach to collecting, standardizing, managing and sharing public data among state and local governments. A single state-local data warehouse with real-time data-sharing for all members. A central data retrieval and reporting system with easy-to-use report templates and dashboards (e.g., Covid-19 and unemployment insurance dashboards). Integrated online customer service platforms and self-service tools. Access to qualified database management and security vendors through cooperative procurement arrangements.

Ultimately, the US will need a national data management initiative to overcome the limits of American federalism. Singapore has invested in a national digital infrastructure to improve citizen access to public services. While the US has not mounted a credible national effort, many state governments have recognized the potential benefits of managing data more efficiently and tested smaller initiatives (e.g., Colorado, Ohio and Virginia). It is time for state leaders and their alliances (e.g., the National Governors Association) to mount a multi-state effort to harness public data for the public good.

The Resource Management Imperative

Running government like a business has become a popular refrain. However, it is frequently misused or misunderstood. Partly because government is harder to manage than most businesses—success is harder to attain and measure. Partly because most businesses are too different in structure, size and purpose to serve as fitting prototypes for governments. Partly because some businesses are demonstrably unsuitable models for public enterprises.

Resource management, however, is one area where many large corporations offer a worthy model for state governments to emulate. If state governments embrace best corporate practices in resource management, they could realize many enduring benefits. Evidence-based policy and budget decisions. Greater fiscal and economic resilience. More productive citizen engagement. Unleashed public assets. Better service quality and responsiveness. More stable government. Enhanced societal outcomes.

State government resources are public resources. We should demand that our state officials manage them in ways that honor this unconvertible fact. We should ensure that every public resource is fully used to protect our citizens and prepare our children and grandchildren to meet an uncertain future.