Resetting Georgia’s Budget Cycle

Resetting Georgia’s Budget Cycle

by Trevor Thomas

September 10, 2009

In these tough economic times, much has been reported on the difficulties that local, state, and federal governments have had setting their budgets. Even with layoffs, furloughs, pay-cuts, tax increases, and so on, politicians at all levels are still facing some very difficult budget decisions.

The financial problems for governments show no immediate signs of letting up. This is especially true for U.S. states. The Center on Budget and Policy Priorities reports that, “On July 1 — the start of the fiscal year in most states — an unusually high number of states were still struggling to adopt budgets for fiscal year 2010. Most states have adopted budgets that closed the shortfalls they faced with a combination of federal stimulus dollars, service reductions, revenue increases, and funds from reserves. But these budgets are already falling out of balance as the economy has caused state revenues to decline even more than projected.”

Of course, no state has seen more financial difficulties than the great liberal experiment that is most commonly called California. Given the Golden State’s financial crisis and its current gubernatorial race, some interesting economic ideas are being proposed.

California republican gubernatorial candidate, Tom Campbell, has a particularly interesting budget plan. According to columnist George Will, Campbell “favors resetting the budget cycle so that the state would accumulate one year's revenues to be spent the following year, when precise knowledge would replace wishful thinking about available revenues.”

Campbell is no economic novice. He has a Ph.D. in economics from the University of Chicago, where Milton Friedman was his faculty advisor. Campbell has served as a California State Senator, has been elected to the U.S. Congress five times, and has served as Director of Finance for the State of California.

According to Campbell’s Web site, under current law, California’s legislature and governor set a budget based on what they expect revenue to be. Instead, Campbell notes, “they should set the budget on the lower of: 1) what they expect revenue to be, or 2) what the revenue actually was in the previous fiscal year. When revenue is growing, the extra amount will earn interest. When revenue is falling, the legislature will have one year’s lead time; they can spread the necessary cuts over two years. It will take some years to phase in this proposal. To be conservative, let’s give it 10 years. After 10 years, we will collect money in the current year, put it in an interest bearing account, and not spend it until the next year. What’s in that account is what we have to spend.”

Like many other states, Georgia’s constitution requires that it operate under a balanced budget. Also, like virtually every other state (according to my research), to determine the size of its budget, Georgia must make a revenue estimate. According to the Legislative Budget Office, “The Governor, who is the Budget Director, is responsible for making the official revenue estimate. He is assisted in this responsibility by a state economist under contract as a consultant with the Governor's Office of Planning and Budget, which manages the budget for the Governor. The basis for making revenue projections is a computerized econometrics model. From this model, a range of estimates is provided to the Governor by this economic consultant.”

Georgia is currently among at least 15 states which already have new shortfalls in their 2010 budgets. Trying to nail down accurate budget numbers is, to say the least, an inexact science. Why not remove the guesswork and let the previous year’s revenue fund the following year’s budget?

After all, isn’t this how it works with virtually every family, church, and business that operates with a budget? The previous month’s (or week’s) earnings pay for the next month’s expenses. Is it so far fetched to think that our government would budget as do most other institutions?

As U.S. Senate candidate, Rand Paul, (Congressman Ron Paul’s son) puts it, “People think that there is a different logic for an economy than there is for an individual.” In other words, what doesn’t make sense in a family or business budget should not make sense for the government.

Georgia will elect a new governor next year. Almost certainly the economic plan for each candidate will be the foremost issue throughout the campaign. I would like to see at least one of the candidates have the forward vision of Dr. Campbell and put the state of Georgia on an economic path that brings us into to an era of more financial accountability and less uncertainty.