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An Important Tool to Improve the Budgetary Decision-Making Process

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Richard F. Keevey
January 22, 2024

Budgeting by units of government at all levels is an important, albeit perilous exercise. Important because it reflects the priorities of the jurisdiction. Risky because factors that influence spending and revenue collections in the months/years ahead are often uncertain and forever changing. For example, many state governments are currently in relatively good fiscal condition but these good times are not likely to last, especially if a state relied heavily on one-time federal funds (provided under the American Rescue Plan Act) or drew down significantly from surplus and/or ‘Rainy- Day Funds’ to balance its current budget. As such, states should be mindful of the short- and long-term implications of their fiscal actions as they develop their budgets for the next fiscal year. This caution applies to both spending and tax policy decisions and their related long-term implications.

However, there is an important and useful policy (analytical) tool for identifying any potential adverse long-term impacts of current tax and spending policies—namely, The Current Service Budget Baseline. Such a tool can be used to show the future budget implications—for example, over the next three to five years.

 A Current Service Budget Baseline (preferably prepared by the Executive branch, as they have most of the necessary details) provides policy makers with multi-year budget projections and information about likely future revenues and program costs, based on current statutes, contracts, commitments and economic and demographic trends. Ideally, the projections would have three major components:

  • Revenue forecasts, given current state tax and nontax revenue policies and structure;
  • Projections of baseline spending, specifically what will it cost to continue existing programs given demographic trends, interest rates and inflation;
  •  An articulation of revenue projections given three possible scenarios: Baseline; Pessimistic and Optimistic.

These projections reflect how much the upcoming budget will cost to provide the same level of services it is providing in the current year, but taking into account future demographic trends, inflation, changes in the number of people using certain services and the execution and phase-in of certain law or rule changes made in previous years.

Ther are two key points to consider here. First, the projections do not include any proposed policy changes, new programs or changes in tax/revenue policies. Second, the baseline does not commit the legislature to implement this plan. It is simply a three-to-five-year projection of the current budget spending and current tax policy implications under three different revenue projection scenarios.  

Another advantage of the Current Service Baseline Budget is that it allows the legislature and the state’s residents to understand the cost and impact of current policy and whether these existing trends and projections would permit new program spending in future years without new revenues or reductions to existing programs. 

What’s Needed

Sometimes policymakers are a bit skeptical when it comes to spending options and more so about revenue projections. So, multiple projections incorporating alternative economic assumptions are both useful and necessary to produce a realistic current service budget projection. An effective annual budgetary spending presentation (which would include the Current Services Baseline Budget plus the proposed new budget) would include four columns for each budgetary program, over a three-to-five-year period, including:

  • the current appropriation level;
  • the projected amount for base budget (assuming no spending or tax policy changes, but adjusting for changes in population/demographics, interest rates and inflation);
  • the future cost implications for any expanded and/or new pending initiatives proposed by the executive; and
  • the total current and long-term recommendation

This type of budget presentation would improve the budget process in four major ways:

  • It would provide an assessment of proposed state spending needs compared to the current year;
  • It would allow legislators and the public to understand the likely consequences for proposed new or changed programs and services;
  • It would provide a neutral (i.e. non-political or ideologically biased) and consistent way to evaluate on-going needs based on current policies versus any proposed policy changes;
  • Finally, it would Improve budgeting efficiency as it forces policymakers to examine long-range implications of proposed new programs, significant changes to existing programs and tax/revenue policy changes.

Some Final Observations

I know of no state that prepares a comprehensive Current Service Baseline Budget. A few states may do revenue projections, but I am not aware of any state that does the entire package, including projected revenue and spending for multiple years. From my experiences as a State Budget Director, I observed the following dynamic: the budget office would internally prepare a current services budget baseline projection and share these projections with the governor (whether republican or democrat); the governor would casually review the CSB projection, dismiss them and say: “I will worry about the upcoming budget now; and future years when the time comes” or something to that effect.

At the federal level, the Congressional Budget office (CBO), by law, prepares a very comprehensive ten-year revenue and spending projection twice a year—basically a Current Service Budget Baseline. However, aside from political comments and critiques, neither the President nor the Congress has historically addressed the obvious warnings embedded in the document—we know the results. We have a long way to go before this useful budget tool is used appropriately by our decision-makers, at either the federal or state levels. We ignore this powerful analytical tool at our own peril.

Author: Rich Keevey is the former Budget Director for the state of New Jersey—appointed by two governors from each political party. He was also appointed by the president as the Chief Financial Officer at HUD, and the deputy undersecretary of defense for finance. He is currently a Senior Policy Fellow at Rutgers University.

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