Evidence doesn't support Branstad's claims on biennial budgeting

Governor Terry Branstad, Republican Iowa House Speaker Kraig Paulsen and Democratic Senate Majority Leader Mike Gronstal met yesterday to talk about the state budget. Paulsen left the meeting feeling less optimistic that the Iowa legislature will finish its work for the year on schedule, by April 29. Senate President Jack Kibbie concurred that the budget discussion “didn’t go very well.” Unresolved issues include the overall amount of state spending, allocations for education and human services, and the right approach for commercial property tax reform.

Kibbie told IowaPolitics.com that the biggest roadblock is Branstad’s commitment to two-year budgeting. The governor vetoed a one-year transportation appropriations bill last week, claiming two-year plans were essential to “restore predictability and stability to the state budgeting process.” In a press release on Monday, Branstad repeated that his administration “remains committed to a biennial state budget,” which, he said, would provide “predictability for communities while ensuring a solid fiscal foundation for future generations of Iowans.”

I’ve never understood how Branstad can say with a straight face that it’s fiscally responsible to approve a two-year spending plan in the absence of two-year revenue projections. Furthermore, most states that adopt biennial budgets face a projected budget gap larger than Iowa’s for fiscal year 2012. Names and numbers are after the jump.

Ronald Snell compared the pros and cons of annual vs. biennial budgeting in this report for the National Conference for State Legislatures. In recent decades, many states have moved away from biennial budgeting. Iowa did so in the 1980s, when the legislature began holding annual sessions. Currently twenty states adopt biennial budgets; of those, 15 have state legislatures that meet every year, like the Iowa House and Senate.

In March, Elizabeth McNichol, Phil Oliff and Nicholas Johnson of the Center on Budget and Policy Priorities reported here on fiscal challenges facing all 50 states and the District of Columbia. Table 2 shows that 13 states and Washington, DC all faced mid-year budget gaps in fiscal year 2011. Iowa is not on that list, because revenues have been running ahead of projections in the current fiscal year. Six of the states that have had to deal with mid-year budget gaps use biennial budgeting (Texas, Washington, Arizona, Oregon, Wisconsin and Connecticut). When you consider the projected shortfall as a percentage of total state spending, all four states facing the largest budget gaps in the current year use biennial budgeting (in descending order, Texas, Washington, Arizona and Oregon).

Table 1 of the CBPP’s report from last month shows that 44 states plus Washington, DC face projected budget gaps for fiscal year 2012, which starts on July 1 in Iowa. The chart shows each state’s projected 2012 shortfall, in dollar terms and as a percentage of fiscal year 2011 spending.

The CBPP lists the states alphabetically, but I’ve put them in descending order from the largest 2012 projected shortfalls to the smallest, expressed as a percentage of each state’s current-year spending. I’ve indicated which states use biennial budgeting.

Nevada 45.2% biennial

New Jersey 37.4%

Texas 31.5% biennial

California 29.3%

Oregon 25.0% biennial

Minnesota 23.6% biennial

Louisiana 20.7%

New York 18.7%

Connecticut 18.0% biennial

South Carolina 17.4%

Pennsylvania 16.4%

Vermont 16.3%

Washington 16.2% biennial

Maine 16.1% biennial

Florida 14.9%

Illinois 14.6%

Mississippi 14.1%

Alabama 13.9 %

Colorado 13.8%

Virginia 13.1% biennial

Wisconsin 12.8% biennial

North Carolina 12.7% biennial

Arizona 11.5% biennial

Rhode Island 11.3%

Ohio 11.0% biennial

South Dakota 10.9%

Maryland 10.7%

Oklahoma 9.4%

Nebraska 9.2% biennial

Kentucky 9.1% biennial

Missouri 9.1%

Kansas 8.8%

New Mexico 8.3%

Utah 8.2%

Hawaii 8.2% biennial

Georgia 7.9%

Delaware 6.3%

Michigan 5.9%

Massachusetts 5.7%

Washington, DC 5.2%

Idaho 3.9%

Iowa 3.5%

Indiana 2.0% biennial

Note: both New Hampshire (which uses biennial budgeting) and Tennessee (which uses annual budgeting) also have projected budget shortfalls, but the CBPP did not have numbers available to use in Table 1. Five states are not listed in that table because as of March 2011, they were not projecting shortfalls for fiscal year 2012. Those include three states that adopt two-year budgets (Montana, North Dakota and Wyoming) and two that adopt annual budgets (Arkansas and West Virginia).

Clearly biennial budgeting offers no protection against large budget shortfalls. Almost all states have tight budgets coming out of the “great recession,” which caused the steepest state revenue declines seen in six decades.

Many states with biennial budgeting are facing higher than average shortfalls for the coming fiscal year. Governors and legislators will need to adjust state spending mid-cycle. That blows apart Branstad’s claim that two-year budgets offer “predictability and stability” to citizens and local governments.

I am not suggesting that two-year budgeting causes fiscal problems. The Pew Center on the States’ “Beyond California” report from late 2009 identified “four common threads” among the states in the worst fiscal condition: “unbalanced economies” that rely too much on one sector; a “history of persistent shortfalls”; statutes that make it more difficult for lawmakers to raise taxes or cut spending; and a political culture of “putting off tough decisions.” Incidentally, that report evaluating all 50 states put Iowa in the “least like California” category.

Branstad misled voters about Iowa’s so-called “budget deficit” throughout his 2010 gubernatorial campaign. His rhetoric about “bad budgeting practices” sending “shock waves” through the system falls flat when you realize that Iowa goes into fiscal year 2012 in a stronger position than most other states. Our projected shortfall is quite manageable, one of the smallest in the country as a percentage of state spending.

For reasons I don’t understand, few Iowa journalists and commentators have challenged Branstad on the wisdom of approving a two-year spending plan when Iowa doesn’t have two-year revenue projections. (Todd Dorman and the Cedar Rapids Gazette’s editorial board are exceptions.) It’s challenging to predict state revenues more than a year in advance. Iowa’s non-partisan Revenue Estimating Conference has not released even preliminary estimates for fiscal year 2013.

By digging in his heels on biennial budgeting, Branstad is delaying a compromise on the 2012 budget. School districts will be forced to adopt spending plans for the coming academic year without knowing how much state funding to expect. The governor should acknowledge that evidence doesn’t back up his assertions about two-year budgets. Maybe then we will learn the real reason he won’t give ground on this issue.

UPDATE: I highly recommend reading Bryan Leonard’s policy brief for State Budget Solutions: “Are Biennial Budgets Better?” Excerpt:

The frequency with which legislators meet during the second year of a budget biennium suggests that most of the potential advantages are unlikely to materialize; it seems that biennial budgets are more of a formality than a fundamentally different way of doing business. One reason that states find themselves having to update their budgets is that revenues-hard enough to predict as it is-are incredibly difficult to accurately forecast for two fiscal years.

What benefits there are to be gained by planning further into the future are confounded by the fact that the future is, well, unknowable. States with two-year budgets are no less subject to economic downturns than their annually-budgeting counterparts in this era where states are so heavily dependent on tax revenues for operations. One thing that states can perhaps rely on with more certainty than tax revenue is federal grant money, which is given out on an annual basis.

There is no clear winner between annual and biennial budgeting, but this shouldn’t be too surprising. Most of the arguments for and against biennial budgeting implicitly juxtapose two budgets; one with an extremely short time-frame and the other with a much, much longer time-frame. Economists are wont to insist that analysis take place at the margin, and that is exactly what is called for here. In reality, the difference between a one-year budget and a two-year budget is a very small one. Small enough, in fact, that there does not seem to be a significant difference between the two.

Fundamentally, the arguments supporting biennial budgeting do not offer anything intrinsically appealing. Rather, they point to other responsible practices that biennial budgeting encourage, including long-term planning, program evaluation, efficient budgeting, etc. These are valid policy goals, but legislators shouldn’t delude themselves into thinking that these ideals will suddenly become reality because their budget period is one year longer. Instead, policymakers should pursue meaningful reform directly.

Whether the budget session lasts one year or two, reality-based budgeting is absolutely critical to long-term sustainability. Pension liabilities don’t go away when the budget is one year longer, nor do revenues magically increase. Legislators need to get real about their priorities this year. […]

There are no silver bullets for state budgets, least of all how long the budget period lasts.

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