Download 1 A Whole Lot of Alliteration: Spending Sustainability, Sufficiency

AWholeLotofAlliteration:
SpendingSustainability,SufficiencyandSoundness
‘Tistheseason,forbudgeting.Andoften,forgnashingofteethandrendingof
garments.Notsothisyear.
IfyouhavefolloweddevelopmentssincejustbeforethispastChristmas,youknow
thattheDelawareEconomicandFinancialAdvisoryCouncil(DEFAC),thebodythat
forecaststheamountofrevenuesthattheGeneralAssemblyislimitedtospend,sent
ourlegislatorsaholidaysurprise.Whilenottrimmedwithribbonsandbows,
DEFAC’sforecastsforeachofthecurrentfiscalyearthatendsJune30andthenext
fiscalyearthatbeginsJuly1wererevisedupwards,substantially.
Inalittleunderstoodquirkofourbudgetingsystem,this$170millionbasketof
goodnews,whilerealizedaboutequallyoverthetwobudgetyears,essentially
createsadouble-windfallinthenextfiscalyear.Thatisbecausethisyear’sspending
isalreadyfixedbythebillthatpassedduringthelastlegislativesession.Unlessthe
GeneralAssemblyweretopassa“supplementalspendingbill”forthecurrentyear,
unanticipatedmoniesthatcomeintoourcofferscannotbeexpendedthisyear,but
areeffectivelyrolledintothefundsavailablefornextyear’sbudget.
ThatiswhytheGovernor,inhisBudgetProposalinJanuary,wasabletoproposea
morethan5%increasetoouroperatingbudgetfornextyear.Somequickly
denouncedthisincreaseas“eye-popping”or“jaw-dropping”–implyinglackoffiscal
restraint,whileothersimmediatelysettotalkingaboutthemanywaysto
appropriatethisnewfoundwealth.
Forthoserunningforre-electionthisyearoneithersideoftheaisle,theampedup
budgetproposalprovidesaplatformfromwhichtoethercriticizelargesseor
trumpettheallocationofthe“winnings”.ThequestionIgetposed,andlikelyone
thatanynormalpersonwouldentertaingiventheseopposingviewsonour
spending,is:“What’sreality?Whatisresponsible?”
Hereweneedtotakeadeepbreathanddrawonalittleperspective.Ratherthan
gettingcaughtupinaknee-jerkreactiontooneyear’sspendinggrowth,weshould
haveameansofputtingourannualspendingincontextandansweringsomebasic
questions:
•whatisourlongtermtrendinspendinggrowth–isitsustainable?
•isourlevelofspendingrelativelyhighorlow–isitsufficient?
•doesourbudgetingsystemleadtosustainableandsufficientspendingover
time–isitsound?
Asthisisfartoomuchtocoverinonesitting,Iamgoingtoconfinethefollowingtoa
discussionofthefirstquestion,addressingspendinggrowthandsustainabilityhere
anddeferringtheequally,ifnotmore,importanttopicsofsufficiencyandsoundness
tofutureupdates.You’llthankmeforthatbythetimeyouaredonereading.
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FramingtheQuestions
Inanalyzingourbudgetgrowth,twoconsiderationsarekey:thebaseandthetrend.
Recognizethattheproprietyofa5%increaseisanissueoftrend;however,oneyear
doesnotmakeatrend.Also,notethatthebudgetbasereferredtointhisinstanceis
ourState’sGeneralFund.Butthatfundrepresentslessthanhalfoftotalstate
spending.Thebettertestofsustainabilityshouldfocusonourtotalspend.
Thequestionsweshouldbeaskingthereforeare:“Whatisourtrendrateoftotal
spending?”and“Whatdowemeasurethistrendagainsttoknowifwecansustain
it?”Or,inlayperson’sterms:“Isourspendingkeepingupwithourneeds?And,can
weaffordourneeds?”
Beforeweentertainthesequestions,recallthatourGeneralAssemblyisrequiredby
lawtobalancetheGeneralFundannuallybylimitingspendingtoprojected
revenues.Revenues,however,arebasedonthetaxsystemvotedonbytheGeneral
AssemblyandapprovedbytheGovernor.Intheoryandpractice,asupermajorityof
ourelectedofficialscansimplymandatehighertaxestopayforthespendingthey
wanttodo.Onecannotdetermineatrendinsustainablespendinggrowthby
comparingittoasetofrevenuegoalpoststhatthepoliticalclasscanmaneuver.A
truestudyrequireslookingpastourpoliticallydeterminedspendingandrevenues
toanobjectivesetofbenchmarksandtrends.
So,let’sbeginwithtrend.Trendisbestexaminednotoverasetnumberofyears
(i.e.,4quarters,10yearsorageneration),butoveraneconomiccycle–those
periodsofexpansionandcontractionthatoccurregularlyifnotpredictably.Our
lastexpansionpeakedin2007,theensuingcontractiontroughedin2009andthe
currentexpansionisstillinprocess(ifeversoweakly).
Ifwelookattheeightyearsofthecurrentcyclethrough2015,theaveragegrowth
rateoftotalstatespendingis2.3%.Ofparticularinterest,totalstatespendinggrew
throughtherecessionaryperiod,evenasGeneralFundspendingcontracted.This
divergencehighlightstheneedtolookatthetotalityofthemoneywespendandnot
focusexclusivelyontheGeneralFund.
Butestablishingtherightbaseandcalculatingthetrendisonlyhalfoftheexercise.
Toknowifthatleveloftrendissustainableoverthelongterm,weneedtohavea
baseofcomparison.Our2.3%growthintotalspendingmaynotsoundlikealot,but
whatistherightpointofreference?
InflationandPopulationGrowth–AreWeKeepingUp?
OnepositioncitedbyDEFAC’sAdvisoryCouncilonRevenuesadvocatestargeting
spendinggrowthagainstatwo-parttestthatcombinesinflationwithpopulation
growth.Thetheoryisthatgovernmentspendingshouldnotgrowmorequickly
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thanthegeneralincreaseinthepricesofgoodsandservicesplusthenumberof
peopleforwhomthegovernmentisresponsible.
Delaware’spopulationgrowthhasaveragedroughly1%overtheperiodunder
measurement.Thatmetricisstraightforward;thechoiceofinflationgaugesisnot.
Dependinguponthemeasureofinflationthatyouuse,combinedpriceand
populationgrowthaveragedsomewherebetween2.2–2.7%overtheperiodfrom
2008–2015(areasonablywiderange).1
TherecentlycompletedreportbytheExpenditureTaskForceCommitteeappliesa
ratenearthemid-pointofthisrangetogrowthintheGeneralFundtojustifyits
statementthat“thestatebudgethasshrunkbyanaverageof0.58percentperyear
duringtheMarkellAdministration.”Usingthemorecomprehensivemeasureof
totalstatespending,thereportmightmorefairlyclaimthatrealspendinggrowth
hasbeenflatovertheperiod–ithaskeptpacewithpopulationgrowthandinflation.
StateandNationalEconomicGrowth–CanWeAffordWhatWeWant?
Asecondcheckonspendinggrowthinvolvescomparingthatrateofincreasetothe
expansionofoureconomy.Afterall,anysystemofspendingthatisgrowingfaster
thantherevenuebasethatsupportsitsimplycannotlastoverthelonghaul.Here
again,wehavedifferentmeasuresagainstwhichtocompare.
Atthestatelevel,moststudiestypicallylookateitherthegrowthinaggregate
personalincomeorgrossstateproduct(GSP).While2015dataisnotavailable,the
figuresfortheremainingperiodofcomparisonreflectagrowthrateof2.3–2.5%,a
virtualdeadheatwiththe2.3%trendofincreaseintotalstatespending.
Atthenationallevel,themostcommonlyusedandbroadestreferenceforeconomic
growthisgrossdomesticproduct,orGDP.Overtheperiodendingin2015,nominal
GDPgrewatanannualizedrateof3.2%,wellaheadofbothourState’seconomic
growthandourtotalstatespending.
SinceDelawarederivesrevenuefromsourcesbothinsideourStateandoutsideof
ourborders,anidealcomparisontostatespendinggrowthmightuseablended
revenuegrowthrate.Regardlessofhowyouconstructit,suchablendedratewould
morethancoverour2.3%spendinggrowth.
SummaryonSustainabilityandCaveats
1ThemostcommonlycitedandbroadestreferencepointforinflationistheConsumerPriceIndex
(usuallytheCPI-U).Itisalsoworthnoting,however,thatinflationvariesbyregionandthatthereisa
PhiladelphiaRegionalmeasureofCPIthatincludestheStateofDelaware.Moreover,government
spendingmightbemoreappropriatelymeasuredbylookingatanarrowerbasketofpubliclyprovidedgoodsandservicesdiscountedbyanindexknownastheStateandLocalPriceDeflator.
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Basedontheforegoing,wecansaytwothingswithsomeconfidenceasconcerns
ourspendinggrowthoverthemostrecenteconomiccycle:(i)wehavespentan
amountsufficienttomaintainourlevelofservicesand(ii)ourspendinghasbeen
withinourmeans.Ofcourse,therearecaveatstotheseconclusions,atleasttwoof
whichmeritmentionhere.
First,thefutureisuncertain,andthisanhistoricalanalysisoverasingleeconomic
cycle.Currenteconomicconditionsraisevalidconcernsregardingadownturnin
Delaware’sgrowthwithoutacommensuratefallinthepricelevelsofanddemand
forgovernmentgoodsandservices.Thereissimplynowayofguaranteeingthat
economicgrowthwillequalorexceedinflationandpopulationgrowth.
Second,thisisastudyofbroad-basedspendinggrowththatcanhidealarming
trends.Eveniftotalsarecontrolled,thereisreasontobeconcernediflargeandfast
growingareasofthebudget“crowdout”otherpublicgoodsandservices.Formal
reportsfromboththeExpenditureReviewCommitteeandtheHealthFundTask
Forcemakeitclearthattherearesignificantcomponentsofourspendingwith
unsustainablegrowthtrajectories.
Inshort,continuedcautionandmoredetailedanalysisarecritical,asthereisno
guaranteethatthepracticesthathaveledtosustainablespendingoverthemost
recentperiodwillcontinuetosafeguardoursolvency.Moreover,itistimetomove
pastjustconsiderationsofsustainabilityandfocusourcollectiveattentiononthe
areasofourbudget’ssufficiencyandsoundness.
LookingAhead–SufficiencyandSoundness
Asimportantasitistooperateinasustainablefashion,Iwouldsubmitthatthisisa
necessarybutinsufficientcomponentofourbudgetsystem.Thedisciplinetolive
withinourmeanssaysnothingaboutthevaluewegetinreturn.Thereisalso
somethingfundamentallyunsoundaboutabudgetingarchitecturethatpermitsthe
levelofvolatilityanddegreeofuncertaintyimposedbyourcurrentsystem.These
featuresareeverybitasimportantifnotmoresothanasingularfocusonmanaging
spendinggrowth.
Inthefirstinstance,theamountofresourcesweconsumeandproduceasastate
governmentandthereturnoninvestmentwegeneratehasenormousimplications
forthehealthofoureconomy.Acrossallfunds,ourstategovernmentspendsor
transferscloseto$10billion–morethan$10,000foreveryman,womanandchild
inthestate,androughly1/6thofourstateeconomyasmeasuredbygrossstate
product.
Ifwearegettingagoodreturnonthatmoney,thenwecanreasonablyassumethat
thoseefficiencieswillfiltertheirwaybackintoourDelawareeconomy,boosting
productivityandgearinggrowth.Ifwefailtogetanadequatereturn,thenwe
jeopardizethoseefficienciesandruntheriskofalowerstandardoflivinginthe
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future.Thisrequiresahardlookattheamountwespendandthevaluewegetin
return.Irefertothisassufficiency.
Second,whileourbudgetingsystemhasproventoproducesustainableoutcomes
duringthemostrecenteconomiccycle,thereisnoaccountingforthecollateral
damageinspiredbyourprocess.Thisvariabilityishighestandmostapparentinthe
swingsinourGeneralFund,fromacontractionofasmuchas6.6%inoneyearto
growthof9.8%inanother.Year-to-yearchangesintotalspendingexhibitless
variance,butstillmorethanthefluctuationsinoureconomyasawhole.
Themannerinwhichwemanageourpublicfiscdirectlyaffectstheriskappetiteof
ourprivatesector.Ifourgovernment’sbudgetingprocessescreateuncertaintyasto
ourmeansofachievingsustainability,confidenceiserodedandinvestmentlevels
fall.Weneedtoexaminenotjusttheends,butthemeanstosustainabilityandseek
outmethodsandrulesthatfosterasounder,morecertainapproachtobudgeting.
LeveragingDEFAC
Thatsaid,themakingoftheannualbudgettakesplaceinapartisancruciblethat
doesnotalwayspermit,muchlessreward,theexaminationoflarge-scale,long-term
trends.Goodpolicy,however,shouldrestonasoundsetofassumptions.AsIhave
previouslyobserved,itisonelevelofknottinesstohaveour62GeneralAssembly
membersconceiveofcompetingpolicyresponsestoacommonlyunderstoodsetof
facts.Itisanentirelydifferentkettleoffishtobeginwith62differentsetsoffacts.
Theformermayproveintractable,thelatterimpossible.
Fortunately,forDelaware,thereisabodywhoseveneration,capacityandmandate
makeittheoptimalvenueinwhichtoexploreandexpoundonthesematters–
DEFAC.Asoneofroughly30members,IhopetousemyserviceontheCouncilto
encouragethisinstitutiontocontinuetoofferguidancetoourGovernorandour
GeneralAssemblyonthesufficiencyofourspendingandthesoundnessofour
budgetingsystems.AnddoingsoshouldnotalwaysrequireanExecutiveOrder.
ThatassistancecanbeginwithagreatercontextualizationofDEFAC’speriodic
revenueandexpenditureforecastsandthedevelopmentofamoremedia-friendly
meansofcommunicatingtheCouncil’sfindings.Itcanalsotaketheformofan
analysisofanysystematicbiasintheforecaststhemselves,withanaimofreducing
thevolatilityofsuchestimatesandavoiding“surprises”,happyorotherwise.
DEFACcanalsobuildontheworkoftheAdvisoryCouncilonRevenuesandthe
ExpenditureReviewCommitteetodevelopageneralframeworkforaddressingthe
sufficiencyofourstatespendingandestablishingameanstoevaluateourreturnon
thatspending.Ideally,aswasthecasewithbothofthesetaskforces,thiswork
couldbehandledinabi-partisanmannerandexpressedinnon-partisanterms.
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Finally,DEFACcanandshouldexaminetheefficacyofourcurrentbudget
framework.Mostofthisarchitecturewasputinplaceduringthelate1970sand
early1980stoaddressandremedyasetoffiscalproblemsthatmaybedifferent
thanthechallengeswefacetoday.Moreover,noonegetseverythingrightthefirst
time,andIamnotcertainthatthefoundationalpiecesofourfiscalsystemshave
receivedrobustreviewinthesubsequent35years.Thattheyhavestoodthetestof
timesowellistestamenttotheiringenuity,butevengeniussuccumbstodiminution
fromthepoliticalprocessoverfourdecades.
Sortofputsa5%spendingincreaseinperspective.
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