The Wrong Formula for Pension Reform
May 19, 2016
UPDATED: Liquor Modernization: It’s Better Than Nothing
June 7, 2016

Legislators Propose Revolutionary Changes to State Budget Process

And, by revolutionary we mean something the private sector has been doing for decades.

On Tuesday, the “Taxpayers Caucus” released a report highlighting over $3 billion dollars in potential savings this year. Many of the items have been discussed separately in the past, but this is the first time anyone has compiled them in one place. In reviewing the report, there were items related to the budget process that stood out in terms the scope of the changes proposed.

The most interesting thing was the proposal to modify the budget process completely. Although this change did not have a dollar amount attached to it, following the report’s recommendations could save taxpayers billions over the medium term. Specifically, the report called for Pennsylvania to shift from “baseline budgeting” to a hybrid budget process comprised of performance-based budgeting and priority-based budgeting. Discussions about budgeting processes are usually enough to make one’s eyes glaze over, but switching to a hybrid budgeting process would represent a radical shift in how the Commonwealth spends your money.

Baseline budgeting is a simple (and terrible) way to allocate resources. What it means is that an agency or department looks at what their budget was this year and assumes that they will get a certain percentage more next year. Baseline budgeting means that spending will essentially never decrease. Furthermore, it is how agencies can claim that their funding got cut even though they got more money year over year.

Let’s say Agency X received $1 million last year. Their assumption is that they will get 5 percent more this year, or $1.05 million. Instead, the legislature increases Agency X’s budget by “only” 3 percent, to $1.03 million. Under baseline budgeting Agency X would now state that their funding was “cut”, but in reality, they just got a smaller increase.

In contrast, performance- and priority-based hybrid system eliminates the assumption that Agency X will automatically get more money, and more importantly it raises the possibility that the funding might go away entirely if the programs it administers aren’t performing as well as alternatives or if the priorities of the Commonwealth change. Most programs run by the state and federal government do not have a clear objective, or if they do there is very little information available on what progress is being made to achieve that goal. Economic Development, i.e. corporate welfare, and social welfare programs are notoriously bad at setting objectives and measuring performance. A real world example would be for a business to invest in all new servers to reduce downtime, but never measuring the downtime to see if it worked.

Priority-based budgeting is what CAP called for during the last few budget cycles. It is similar to how families budget. They know their income and make financial decisions based on the amount of money they have, which is a stark contrast to how government typically operates. The government generally decides how much to spend and then tries to figure out where to get the necessary money.

The changes proposed by the Taxpayer Caucus would drastically alter the culture of government from one of entitlement to one of results. The budgeting process is not particularly exciting and does not make good headlines. However, the basic assumptions underlying the allocation of resources affects Pennsylvanians in a profound way, and it is worth examining carefully.