Our Recommendations to Legislature on Improving Budget Process in January 2014

It was January 2014 when the APF briefed the legislature on future budget problems. We don't have a revenue problem. We have a CULTURAL problem in how the State government and legislature budget our limited resources. Fix the culture, and that will fix the root cause of the problem. Zero based budgeting or priority budgeting need to be implemented.

The Alaska Policy Forum was invited to present its recommendations on improving the capital and operating budgeting processes to the Budget Subcommittee of House Finance in January 2014.  Scott Goldsmith of ISER and Brad Keithley also presented their recommendations to this committee.  All of us were very concerned at that early point in time of the overspending by the State of Alaska.  Note that then the price of Alaska North Slope crude was more than $107/barrel.  Here is the APF presentation:



Chairwoman Costello, Committee members, we want to thank you for the opportunity to present our ideas for improving the budget process.  The Alaska Policy Forum is a free market think tank which focuses on fiscal responsibility, government transparency and education reform.  We are a non-profit organization which neither receives nor takes any form of government funding-federal, state or local.  You will not find us as a line item in the capital budget.  This allows us to maintain our non-partisanship and objectivity in public policy.  I might add that we do not stand to gain financially from our efforts.  We do this strictly as a public service.

Our staff is entirely made up of volunteers, part-time and full-time.  I am an Air Force retiree and I devote my efforts to improving education and government policy because I am deeply concerned about our state and our nation’s future.

Now that we have a target spending budget provided by the previous speakers, and I want to thank them for doing a great service to the state, we should look at the other side of the equation: What should the government spend and what is vital to the State?  We shouldn’t necessarily spend the money we have; we should identify and prioritize our needs and allocate our resources accordingly.

Alaska has experienced unconstrained state government spending growth which has resulted in a structural deficit in which future revenues will not match future spending obligations.  The current practice of performance budgeting adds somewhat to the problem of overspending.  I will address recommendations for the operating budget and capital budget processes.  The more transparent each of these is, the more disciplined the spending.

I’d first like to discuss the capital budget.

The capital budget process is very informal and pretty much nonexistent.  That may be intentional or it may be a serious oversight.  This process should be formalized similar to the operating budget process, in statute.  It should describe the various steps that a capital request must go through to get approved.

Here’s how we see the process as it exists today after the Governor submits it to the Legislature:

1. Requests from community councils, local government entities, school districts, non-profits, special interests, etc. flow up through local channels to respective legislators.  These special interests lobby legislators to put their requests into the capital budget.

2. After an undetermined process, many of the project requests are submitted to the specific committees and vetted/approved to be included in the budget.  Surely, there is some horse trading going on.  But that’s politics.

3. The Senate sends the capital budget to the House in the waning hours of the session so the House does not have adequate time to review and vet the projects, even in their districts.  Met with a deadline, it is approved with little in-depth review.

4. Signed by the Governor who has line item veto power.

To the public, this looks just like a large bucket of pork, payback for getting elected.  We warned you we are not politically correct.  But we are politically right.  The public may be correct in its judgment.  So how do you gain the public’s trust and help your image?

The capital budget process needs to be formalized and put in writing.  Consider the capital budget before the last minutes of the session to provide transparency to the general public.  You should not have to defend capital projects.  The requestor should have to defend it to the public.  How is this done?  Once again, define this in the formalized process.  The requestor should define the project to those legislators in that district; he/she should also be able to defend the project; he/she should also be able to explain the impact of not doing the project to include life and safety and loss of assets.  The requestor should also explain why the project needs state funding and cannot be funded in-house.  Finally, the name of a person who represents the requestor should follow the request throughout the process so the legislators and the public can question that person as to the validity of the project.  The names of the legislator(s) whose district is represented by the requestor should also be attached to the request throughout the process.  This would provide the necessary audit trail for transparency.

If this had occurred in the past, projects like the scientific crime lab built at a cost exceeding $100 million would have drawn attention from the public.  A request for a $10K secure storage unit for “lost and found” items at an Anchorage elementary school would never have gotten to the legislature.  (By the way, when I was a kid, the lost and found storage unit was a cardboard box with many mittens, gloves and hats in it).  Many of the artificial turf football field projects in the Anchorage School District would not have made it to the legislature if the people in those neighborhoods had known.  Everyday basic maintenance from many government entities is submitted as a capital project.  Finally, a capital budget project worth $6 million to fund the building of an education facility and dormitory for a local union should never have been financed by the State with public monies.  It violates the Alaska Constitution.

We can also help by providing transparency through the publication of a “Pork Booklet” which would identify questionable capital projects such as I mentioned.  Unfortunately, this would  probably be after the fact due to the current legislative process.  We would prefer to help you early on to preclude wasteful pork projects from being funded to the detriment of Alaska.

In times of leaner budgets, you need formalization of the capital budget to fend off the special interests and to gain the trust of the everyday Alaskan.  You can build up trust with the people. Once you communicate this message to Alaskans, you will have their support.  You do not need the adverse opinions from the public similar to what the US Congress has.

Now let’s turn to the operating budget.

The operating budget is currently developed through a performance based process which adjusts for inflation and other factors and uses the outcome as a baseline for future budgets.  Thus, spending increases are automatically carried into future years regardless of revenues and priorities.  These resources could be considered “wasted” and could more efficiently be used in other areas.  The system assumes that all current spending is both efficient and effective and that justifications behind existing state programs and expenditures remain valid.

The quality of the scrubbing of the performance based budget by legislators is mostly dependent on the experience level of the particular legislator on finance issues.  I would be the first to admit how mind-numbing and somewhat mind-dulling poring over budgets is.  On the other hand, there are many in the government and special interests who are ready to defend the baseline and lobby for new increases.  You, our legislators, are the citizen’s only defense against wasteful spending and you truly represent Alaska’s citizens.  This is, perhaps, the most important function of the legislature.

So, how do we help legislators become “experts” in scrubbing the baseline budget from previous budget years?  There are several budget processes which can help prevent including waste in the baseline.  Zero based budgeting is a process which the DOD implemented under President Carter in the late 70s.  I was a “victim” of this process which was very detailed and drudge-driven. However, because it required all departments and divisions within an organization to justify their existing spending in the baseline, it was beneficial.  Programs which were in the baseline and no longer needed, such as communications systems which had existed for more than 15 years, were identified and discontinued with substantial savings.  Additionally, many personnel positions were also identified as no longer required and could be shifted to other work centers.  This is probably the most important benefit of ZBB–personnel dollars can be saved and personnel can be more efficiently used in the organization.

Another budget process which is used in several states is priority budgeting in which the results are real and truly measurable.  This process asks 4 basic questions: (1)What are the essential services the State must be perform? (2)How can the State deliver essential services efficiently and effectively (E&E)? (3)How should the State budget be allocated for the delivery of these essential services? and (4)How can the State assure that essential services are delivered efficiently and effectively in the long run?  Most importantly, PROGRAMS rather than agencies are evaluated based on effectiveness and efficiency when one addresses the four questions.  Results must be quantified as much as possible. These questions should be asked regardless of the budget process being used.

Many Departments do a good job of quantifying the results of their performance measures.  For example, the Department of Administration quantifies and measures wait times at the DMV to determine E&E.  A rather simple but also valid measure.  On the other hand, the Department of Health and Social Services has a much more difficult job of measuring the E&E of the Medicaid program.  If one looks at the performance measures of the Medicaid program, they would see the following: “Provide support services through management efficiencies and the capitalization of Medicaid financing to assure that a full range of health care services is available to our customers.  Details >” as a measure of core service.  This is somewhat ambiguous and there is no quantitative metric.  DHSS does a much better job of defining and measuring “Public Assistance”.   One measurement, “to increase the percentage of families and individuals to become economically self-sufficient”, is commendable and they have set a metric of 90% for those who leave the program with earnings and stay off the program for at least 6 months.  However, there is much work to be done in the other performance measures of the DHSS.

Now we would like to turn to the Department of Education and Early Development.  This department manages a budget of more than $1.5 billion dollars.  Here is its mission statement:

“To ensure quality standards-based instruction to improve academic achievement for all students.  Alaska Constitution Article 7, Sec. 1; AS 14.17″

If one looks at the “targets” in the Department, one would note that nowhere is student achievement listed as a performance measurement.  It would seem that this would be the most important factor and a metric should be used to determine the effectiveness and efficiency of the Department’s efforts in improving and assisting Districts in improving student achievement.  The former NCLB and failure to meet the AYP standards could have been used as a measure but was not.  In fact, there were many schools in Alaska which failed to meet AYP for 5 years or more and should have been either taken over by the State, a non-profit entity, or had total replacement of the staff (per the NCLB and State regulations).  Today, under the ASPI, the Department should measure the number of schools which are 2 stars and below (a very low standard itself) and remediate these schools after 3 to 5 years.  Throwing more money at this problem has not, and will not, work to improve student achievement.

A second target under “develop, implement and maintain school effectiveness programs, is “provide support to school districts for Early Learning programs to assist communities, parents, and caregivers in preparing children for school”.  This is the State’s PreK program.  Here is the information provided as a measurement:

The measurement is called the Early Childhood Environment Rating Scale-Revised Edition (ECERS-R)

The ECERS-R is designed for use in classroom-based early childhood care and education programs serving children aged two to six years.  It is organized into six scales: Space and Furnishings; Personal Care Routines; Language-Reasoning; Activities; Interaction; and Program Structure.

Why is measuring space and furnishings important? How will that ensure kids are ready to start school? Personal care?  The only measurement which may be a contributing factor is Language Reasoning.

Another area which we are not sure should be included in the Department of Education is the Alaska State Council on the Arts.  One of its Performance targets is:  TARGET #1: Increase opportunities for citizens to participate in the arts through enhancing grants and services to artists and arts organizations.  This just smacks of crony capitalism.
We like the arts as much as anybody, but we do not believe it should be the mission of the Department of Education to give art grants to special interests.   Now, maybe giving grants to schools to provide instruments, obtain artists for assemblies, etc would fall under the purview of the Department.  But not grants to individuals and organizations.

Regardless of the appropriateness of the program in DEED, the metric of # of grants does not measure effectiveness of the program.  The question to ask is “so what”?  What was the impact on students and education?

(By the way, the 1% for art program comes under the AK State Council on the Arts.)

We have highlighted only 2 departments, but one should look at all departments and ask the efficiency and effectiveness questions.  Also, ask if the performance measure is valid and the metric to measure the target is also measuring the right factor.  We realize it is very tough for legislators to go back to their districts and be hit by special interests, such as the education industry and advocates for social services.  But that is why we have elected you–to represent all the people, not just the lobbyists and those they represent.

So, what can assist you in your efforts to protect the fiscal interests of ALL Alaskans?  One tool that can help is transparency through technology.  Shining the light on budget issues and specific line item spending provides the information to counter the special interests and protects the interests of the general public–those who are not connected to lobbyists.  The average Joe and JoAnne.  The budget should be submitted to the Legislature in a structured format, instead of a pdf, so you the legislators, and the public can be better informed and make better decisions.  It is not expensive, maybe $5K.  Transparency works wonders in the public arena.  Here is a website for more info: https://www.uspirg.org/reports/usp/transparencygov-20-0

Finally, none of this will work if we don’t solve the cultural problem that goes with the budget process.  What is causing the budget problem, both operating and capital?  A budget process is only as good as the culture in government.  If you wonder what I’m talking about just look at Washington, DC and the broken budget problems.  Runaway spending, pork doled out to special interests and supporters, and it seems as if everyone but a few, are oblivious to the deficit and debt problems.  At least the federal  government  can print money.  Alaska cannot-not yet anyway.  Alaska’s spending problems are just a microcosm of the Nation’s spending problems.  We do not have a revenue problem, we have a spending problem.  Hopefully, this will be corrected.  Otherwise, the people of Alaska will eventually be connected to the spending through taxes of one sort or another and a dissolution of the PFD.  Then Alaskans will start paying attention and so will Legislators.

I will close with three of the 7 principles we abide by at the Alaska Policy Forum:

Principle #4: If you encourage something, you get more of it; if you discourage something, you get less of it.
Human beings are creatures of incentives and disincentives.  We respond to incentives and disincentives. Our behavior is affected by them, sometimes very powerfully.  Policymakers who forget this will do dumb things like jack up taxes on some activity and expect that people will do just as much of it as before, as if taxpayers are sheep lining up to be sheared.

Want to break up families? Offer a bigger welfare check if the father splits.  Want to reduce savings and investment?  Double-tax them, and levy a high capital gains tax on top of it.  Want to get less work?  Impose such high tax penalties on it that people decide it’s not worth the effort.

At the Alaska Policy Forum, we believe that government ought to deal with such circumstances the way families all across the state deal with similar circumstances: spend less.  That’s especially true if we want to stimulate a weak economy so it will produce more jobs and more revenue.  When the patient is ill, the doctor doesn’t bleed him.

Principle #5: Nobody spends somebody else’s money as carefully as he spends his own.

Ever wonder about those stories of $600 hammers and $800 toilet seats that the government sometimes buys?  This waste often occurs in government and occasionally in other walks of life, too. Why? It is because invariably, the spender is spending somebody else’s money.

Economist Milton Friedman elaborated on this some time ago when he pointed out that there are only four ways to spend money.

When you spend your own money on yourself, you make occasional mistakes, but they’re few and far between. The connection between the one who is earning the money, the one who is spending it and the one who is reaping the final benefit is pretty strong.

When you use your money to buy someone else a gift, you have some incentive to get your money’s worth, but you might not end up getting something the intended recipient really needs or values.

When you use somebody else’s money to buy something for yourself, such as lunch on an expense account, you have some incentive to get the right thing but little reason to economize.

Finally, when you spend other people’s money to buy something for someone else, the connection between the earner, the spender and the recipient is the most remote — and the potential for mischief and waste is the greatest.  Think about it — somebody spending somebody else’s money on yet somebody else.  That’s what government does all the time.

Nobody spends someone else’s money as carefully as he spends his own.

Principle #6: Government has nothing to give anybody except what it first takes from somebody, and a government that’s big enough to give you everything you want is big enough to take away everything you’ve got.

Finally, we want to thank you for the invitation to present to this committee.  We also want to thank you for all Alaskans for giving great thoughtful consideration to the future of this State and our children.  You have time to discipline the spending.  You must take your cause to the public so they can understand your efforts.  Otherwise, you may be talking a new income or sales tax and a zero PFD to the public.  And any of those would be politically devastating.  We have the resources, we have the revenue, now we need to curb our spending.