The politics of public budgeting 9th edition pdf

The Politics of Public Budgeting Eighth Edition

2

3

The Politics of Public Budgeting Getting and Spending, Borrowing and Balancing

Eighth Edition

Irene S. Rubin Northern Illinois University

4

FOR INFORMATION:

CQ Press

An Imprint of SAGE Publications, Inc.

2455 Teller Road

Thousand Oaks, California 91320

E-mail: order@sagepub.com

SAGE Publications Ltd.

1 Oliver’s Yard

55 City Road

London, EC1Y 1SP

United Kingdom

SAGE Publications India Pvt. Ltd.

B 1/I 1 Mohan Cooperative Industrial Area

Mathura Road, New Delhi 110 044

India

SAGE Publications Asia-Pacific Pte. Ltd.

3 Church Street

#10-04 Samsung Hub

Singapore 049483

5

Copyright © 2017 by CQ Press, an Imprint of SAGE Publications, Inc. CQ Press is a registered trademark of Congressional Quarterly Inc.

All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the publisher.

All trademarks depicted within this book, including trademarks appearing as part of a screenshot, figure, or other image are included solely for the purpose of illustration and are the property of their respective holders. The use of the trademarks in no way indicates any relationship with, or endorsement by, the holders of said trademarks.

Printed in the United States of America

Library of Congress Cataloging-in-Publication Data

Names: Rubin, Irene, author.

Title: The politics of public budgeting : getting and spending, borrowing and balancing / Irene S. Rubin.

Description: Eighth edition. | Los Angeles : Sage/CQ Press, 2016. | Includes

bibliographical references and index.

Identifiers: LCCN 2016016509 | ISBN 9781506354804 (pbk. : alk. paper)

Subjects: LCSH: Local budgets—Political aspects—United States. | Budget—Political aspects—United States.

Classification: LCC HJ9147 .R83 2016 | DDC 352.4/80973—dc23 LC record available at https://lccn.loc.gov/2016016509

This book is printed on acid-free paper.

Acquisitions Editor: Carrie Brandon

Editorial Assistants: Zachary Hoskins and Duncan Marchbank

Production Editor: Veronica Stapleton Hooper

Copy Editor: Karin Rathert

6

https://lccn.loc.gov/2016016509
Typesetter: C&M Digitals (P) Ltd.

Proofreader: Sally Jaskold

Indexer: Sheila Bodell

Cover Designer: Anupama Krishnan

Marketing Manager: Amy Whitaker

7

Contents Tables, Figures, and Minicases Foreword Acknowledgments 1 The Politics of Public Budgets

What Is Budgeting? Governmental Budgeting

Minicase: City Manager Replies to Scathing Budget Critique Minicase: Missouri Constitutional Amendment Reduces Governor’s Powers Minicase: The Courts and New Jersey Pension Reform Minicase: Doctoring Audit Reports Minicase: The Federal Debt Limit as a Constraint Minicase: Highly Constrained Budgeting—Colorado’s TABOR Amendment

The Meaning of Politics in Public Budgeting Budgetary Decision-Making Microbudgeting and Macrobudgeting Summary and Conclusions Useful Websites

2 Revenue Politics Raising Taxes

Minicase: Louisiana—Getting Around the No Tax Increase Pledge Minicase: A Recent Tax Increase in Philadelphia

The Politics of Protection Minicase: Wisconsin and Unexamined Tax Breaks Minicase: Illinois and the Role of the Press Minicase: Tax Breaks for Hedge Fund Managers Minicase: California and Enterprise Zone Tax Breaks Minicase: North Carolina and Business Tax Breaks Minicase: Michigan—Terminating Its Film Subsidy Minicase: New Mexico and Tax Expenditure Reporting

Tax Reform Minicase: Georgia Tax Reform Left Hanging Minicase: Michigan Tax Reform or Class Warfare?

8

Summary and Conclusions Useful Websites

3 The Politics of Process Budget Process and the Characteristics of Public Budgeting

Minicase: Harrisburg—Whose Priorities Dominate? Macro- and Micropolitics

Minicase: Republican Macrolevel Reform Proposals Designing Process to Achieve Policy and Political Goals

Minicase: Micropolitics—Bending the Rules to Win Individual Decisions Minicase: How the Governor’s Veto Is Used

Variation Between and Among Federal, State, and Local Governments

Minicase: Maine—The Governor Versus the Legislature Minicase: Limits of Governor’s Vetoes in New Mexico Minicase: San Diego—Fiscal Problems, Strong Mayor, and Veto Powers

Summary and Conclusions Useful Websites

4 The Dynamics of Changing Budget Processes Overview

Minicase: New York State—Powerful Governor, Weak Legislature, Informal Budgeting Minicase: The Governor Versus the Courts

Federal Budget Process Changes Minicase: Deeming Resolutions and Ad Hoc Budgeting Minicase: Ad Hoc Scoring Rules Minicase: Overseas Contingency Operations

Changes in Budget Process at the State Level Minicase: Maryland’s Legislative Budget Power Minicase: South Carolina’s Legislatively Dominated Budget Process Begins to Budge Minicase: The Executive and the Legislature in Florida’s Budgeting

Changes in Budget Process at the Local Level Minicase: Florida and Unfunded Mandates

Summary and Conclusions Useful Websites

5 Expenditures: Strategies, Structures, and the Environment Strategies

9

Minicase: A $17,000 Drip Pan Minicase: Homeland Security—A Program Tied to a Goal of Unlimited Worth Minicase: Amtrak Train Wreck Minicase: Congressional Budget Office and Scoring

Structure Minicase: Budgetary Implications of Direct College Loans Versus Loan Guarantees Minicase: An Open-Ended Discretionary Program— Immigration Enforcement Minicase: California and Mandatory Spending on Redevelopment Agencies Minicase: Fannie and Freddie Minicase: New Jersey’s Fund Diversion From the Unemployment Insurance Fund

The Environment Strategy, Structure, and Environment Combined: The Medicare Example Summary and Conclusions Useful Websites

6 The Politics of Balancing the Budget Balance as a Constraint

Minicase: Is the Wisconsin Budget Balanced? Minicase: Balance in the Federal Highway Trust Fund

Multiple Actors, Ideologies, and Deficits The Environment, Unpredictability, and Deficits Increasing Stress Between Payer and Decider

Minicase: Chicago’s Parking Meters Minicase: Iowa’s Privatization of Medicaid

The Politics of Deficits: The Federal Level The Politics of Deficits: States

Minicase: Detroit Bankruptcy Minicase: Why Did Jefferson County, Alabama, Declare Bankruptcy?

The Politics of Balance in Cities Minicase: The Politics of Deficits—An Urban Example

Summary and Conclusions Useful Websites

7 Budget Execution: The Politics of Adaptation Minicase: Missouri—An Executive Abuses Discretion?

10

Tools for Changing the Budget Minicase: Using Holdbacks to Change Legislative Priorities —Maryland Minicase: Herbert Hoover and Legislative Vetoes Minicase: The National Weather Service Reprogramming

Summary and Conclusions Useful Websites

8 Controlling Waste, Fraud, and Abuse The Politics of Finding Waste, Fraud, and Abuse

Minicase: President Obama Fires an IG Minicase: Who Guards the Guards? Not the Guards Themselves Minicase: Acting IG for Homeland Security—Too Close to the Department Minicase: New York State and Medicaid Minicase: The Massachusetts Inspector General Versus the Governor Minicase: Baltimore’s Departing IG

Summary and Conclusions Useful Websites

9 Budgetary Decision-Making and Politics Real-Time Budgeting A Comparison of the Decision-Making Streams Common Themes Reconceptualizing Reform Avenues for Research Summary and Conclusions Useful Websites

Notes Author Index Subject Index About the Author

11

Tables, Figures, and Minicases

Tables 2.1 Hedge Funds: Long-Term Contribution Trends 54 3.1 Mayoral Veto Power in Large U.S. Cities 93 3.2 Mayoral Veto Power in California Cities 94 6.1 Average Annual Increase/Decrease in State (Maryland) Aid to Local Governments: 2002–2008 Versus 2008–2014 215 8.1 State Inspectors General 272

12

Figures 1.1 Pork-Barrel Spending, 1991–2015 13 1.2 Number of Pork Projects, 1991–2015 14 1.3 Decision Making: Environment, Process, and Strategies 32 2.1 Minnesota’s Tax System Fairer 45 2.2 Reduction in Income Inequality From Government Transfers and Federal Taxes, 1979–2011 67 4.1 Emergency Supplemental Appropriations, Defense and Nondefense, 2000–2012 123 5.1 Federal Homeland Security Spending 153 5.2 Relationship Between U.S. Health Care Spending and Life Expectancy in OECD Countries 180 6.1 Federal Surplus or Deficit in Current Dollars, 1940–2015 201 6.2 Federal Surplus or Deficit as a Percentage of GDP, 1940–2015 202 6.3 Total Federal Spending and Receipts, as a Percentage of GDP, 1930–2017 204 6.4 Minnesota’s History of Funding Local Governments, in Constant Dollars per Capita, 1972–2014 213 7.1 Supplemental Spending as a Percentage of the Deficit and Budget Authority, 2000–2010 236

13

Minicases City Manager Replies to Scathing Budget Critique 8 Missouri Constitutional Amendment Reduces Governor’s Powers 11 The Courts and New Jersey Pension Reform 17 Doctoring Audit Reports 21 The Federal Debt Limit as a Constraint 23 Highly Constrained Budgeting—Colorado’s TABOR Amendment 25 Louisiana—Getting Around the No Tax Increase Pledge 39 A Recent Tax Increase in Philadelphia 42 Wisconsin and Unexamined Tax Breaks 50 Illinois and the Role of the Press 51 Tax Breaks for Hedge Fund Managers 53 California and Enterprise Zone Tax Breaks 55 North Carolina and Business Tax Breaks 58 Michigan—Terminating Its Film Subsidy 60 New Mexico and Tax Expenditure Reporting 62 Georgia Tax Reform Left Hanging 69 Michigan Tax Reform or Class Warfare? 70 Harrisburg—Whose Priorities Dominate? 76 Republican Macrolevel Reform Proposals 79 Micropolitics—Bending the Rules to Win Individual Decisions 82 How the Governor’s Veto Is Used 87 Maine—The Governor Versus the Legislature 89 Limits of Governor’s Vetoes in New Mexico 90 San Diego—Fiscal Problems, Strong Mayor, and Veto Powers 95 New York State—Powerful Governor, Weak Legislature, Informal Budgeting 105 The Governor Versus the Courts 106 Deeming Resolutions and Ad Hoc Budgeting 118 Ad Hoc Scoring Rules 120 Overseas Contingency Operations 124 Maryland’s Legislative Budget Power 128 South Carolina’s Legislatively Dominated Budget Process Begins to Budge 130 The Executive and the Legislature in Florida’s Budgeting 133 Florida and Unfunded Mandates 142 A $17,000 Drip Pan 149

14

Homeland Security—A Program Tied to a Goal of Unlimited Worth 152 Amtrak Train Wreck 153 Congressional Budget Office and Scoring 156 Budgetary Implications of Direct College Loans Versus Loan Guarantees 157 An Open-Ended Discretionary Program—Immigration Enforcement 160 California and Mandatory Spending on Redevelopment Agencies 165 Fannie and Freddie 167 New Jersey’s Fund Diversion From the Unemployment Insurance Fund 170 Is the Wisconsin Budget Balanced? 188 Balance in the Federal Highway Trust Fund 189 Chicago’s Parking Meters 197 Iowa’s Privatization of Medicaid 198 Detroit Bankruptcy 219 Why Did Jefferson County, Alabama, Declare Bankruptcy? 223 The Politics of Deficits—An Urban Example 226 Missouri—An Executive Abuses Discretion? 232 Using Holdbacks to Change Legislative Priorities—Maryland 239 Herbert Hoover and Legislative Vetoes 242 The National Weather Service Reprogramming 249 President Obama Fires an IG 264 Who Guards the Guards? Not the Guards Themselves 268 Acting IG for Homeland Security—Too Close to the Department 270 New York State and Medicaid 285 The Massachusetts Inspector General Versus the Governor 287 Baltimore’s Departing IG 289

15

Foreword

In this edition of The Politics of Public Budgeting, as in prior editions, I argue that public budgeting is necessarily and appropriately political, in the sense of reflecting public priorities. The process of tapping into public needs and desires and incorporating them into the public budget is complicated and not necessarily smooth. In recent years, that process has become tumultuous, much more partisan, and ideological. The work of government budgeters has become more difficult, sometimes nightmarish. Courts mandate spending while ideologues prohibit tax increases; bridges collapse from lack of sufficient money and maintenance, taking lives and property and cutting off transit routes. Social service providers don’t get their contractual payments and as a result shrink services and lay off staff. States run out of unemployment funds and have to borrow, at above market rates, from the federal government or tighten eligibility, shorten the time that the unemployed can receive benefits, and/or reduce the amount of money they can receive.

While the practical problems are often overwhelming, for those who study public budgeting and seek to understand it, it has become more exciting. Many years ago, there was a movie serial called The Perils of Pauline, where the heroine experienced a series of dramatic, life threatening events that were resolved just before the end of each episode. Budgeting has become a bit like that, only sometimes the budget does not escape in time, and government partly or completely shuts down.

Example: Illinois Illinois has a Republican governor and a Democrat-dominated legislature. The governor’s budgetary powers are very strong: He can reject legislative decisions, rewrite portions of legislation, and reduce budget lines. His policies stand unless a supermajority of the legislature votes to overturn his decisions. The state is in severe fiscal stress, the origins of which stretch back in time.

The governor’s solution is to radically change the government. His policies include cutting social services for the poor, elderly, and

16

handicapped, while allowing a tax increase to lapse, making the financial stress more severe, and from the governor’s perspective, strengthening his argument that services needed to be cut, public pensions reformed, property taxes frozen, and public unions disempowered. The Democratic legislature has not been willing to go along with the governor’s radical program, which also contains term limits for themselves. While they have not been able to overrule the governor, they don’t have to pass a budget that the governor feels he can sign. One result has been a long running budget stalemate.

Back in June of 2015, the governor drastically reduced eligibility for day care subsidies for poor people. He also increased the amount that parents had to pay as their share of the costs. One result was that 90 percent of new applicants had to be rejected. The governor argued that such cuts were necessary, because the state was in financial trouble and could not afford the payments. He ignored the consequence that low income families might be unable to afford day care and hence might be unable to work and become or remain dependent on the public sector. He did not mention the possibility that poor parents might have to leave their children in unsafe conditions. Under prior rules, when family members took care of the children while the parents worked, the care providers were eligible for some pay, which may have helped lift the family out of poverty. The governor’s supporters argued that family members would continue to provide day care even if they were not paid.

The governor urged the legislature not to restore the childcare eligibility levels. The legislature responded by trying to restore the program and protect it in the future, designing new legislation that would make the day care subsidy an entitlement rather than a discretionary program. That means that the program would become a legal requirement for the state to pay, regardless of the levels of appropriations, which were largely controlled by the governor with his strong amendatory veto powers. The legislative proposal would have protected the program from future cuts by the governor, making future changes up to the legislature. But legislators had to pass their proposal with a supermajority or the governor would exercise his veto and in all probability, they would unable to muster enough votes to override. Earlier in the year, the legislative Joint Committee on Rules (JCAR), which could have rejected the governor’s restricted eligibility rule, had been unable to achieve a supermajority to overturn the governor’s program changes. Reflecting the trend in the state

17

toward increased political polarization, JCAR had begun to vote along party lines, even though in the past it had acted in a bipartisan fashion.

If the Democrats could get some Republican votes, they would have a chance to pass their legislation. The governor needed to prevent that possibility. The evening before the key vote in the House, some Republicans along with some Democrats met with the governor to argue in favor of restoring the cuts. Confronting the possibility that the legislation reversing his cuts might pass, the governor offered a compromise, raising the income level for eligibility to about 88 percent of what it had been before his cuts but maintaining his increase in the fees that parents would have to pay. Before the governor’s cuts, the income eligibility level was set at 185 percent of the federal poverty level; after his cuts it was 50 percent of the federal poverty level. The governor’s compromise proposal was for 162 percent of the poverty level. At 50 percent of the federal poverty level, even a family working full time for the federal minimum wage ($15,080 per year) would not be eligible for assistance. (The average annual cost of childcare at a day care center is over $11,000.) Some categories of formerly eligible parents were still excluded under the governor’s new proposal but his offer suggested he would restore categories of eligibility pending further review. He also indicated that he would restore eligibility to 100 percent of its former level when the budget was passed. If the legislators really wanted day care assistance at former levels, they had to agree not only to disempower public unions but also themselves and freeze a major revenue source for local governments.

After the compromise was reached between the governor and the bipartisan group arguing for restoration of former program levels, there was insufficient support in the House to pass the legislation for full restoration and a more secure basis for funding. In the short term, more poor people would be eligible for help than under the governor’s original cuts, but poor families might not be able to afford the new higher fees. Most important, under the compromise proposal, the governor retained complete control over the program and could change eligibility or fees in the future almost at will.

Themes of the Illinois Child Care Subsidy Case and This Edition of the Politics of Public

18

Budgeting The story has a number of themes that are emphasized in this edition. One is the increased intensity of partisanship in budgeting and the implications for democracy. A second is that budget stories develop over time—over years and sometimes decades. A third theme is that to understand the politics of public budgeting in the United States, one needs to understand our federal system, the legal, judicial, and behavioral relationships between the national government, the states, and the local governments. Although the national government and the states are in many ways independent of each other, they participate in joint programs, such as the day care subsidy program. Fourth, despite a history of distrust of overly powerful chief executives, the president, governors, and mayors have a great deal of budget power. At the state level, power between the executive and legislative branches is often one sided in favor of the executive, even when the opposition party controls both houses of the legislature. Supermajority voting requirements to override the governor reinforce this outcome.

Partisanship and Ideology The long-term trend toward more intense partisanship was apparent in the Illinois case, where a Democratic majority in the legislature confronted a Republican governor and the Joint Committee on Administrative Rules voted along party lines. This intensified partisanship has been visible at the federal and state levels of government in recent years. Party lines have been more clearly drawn, not only where there is divided government— executive and legislative of the opposite parties—but where there is alternation between parties over time. One party wants to maintain publicly funded health and income support programs while the other wants to reduce them; one is willing to raise taxes especially on the rich, while the other seeks to reduce taxes, especially for the rich.

Along with the rise in voting according to party lines has come an increase in ideology with fixed goals and an unwillingness to bargain or compromise. Reinforcing this ideology, outside groups with particular points of view, like the American Legislative Exchange Council (ALEC), composed of conservative legislators and corporate lobbyists, have written, circulated, and in some cases dictated what they consider model

19

legislation. Some wealthy individuals, such as John Arnold, have funded supposedly neutral think tanks to present research results that support their policy goals. Some conservative groups, such as Americans for Tax Reform, threaten to and in some cases actually campaign against those in their own party who have not been firm enough in adhering to the political positions they espouse. On the left, unions and some advocacy groups try to counter business-backed legislative proposals and what they consider biased studies. Unions often support candidates who have been loyal to their cause and take states to court when policies hurt their constituencies. One result is more budgeting rigidity, fewer options, and less adaptability. A second is a loss of quality of information in budget policy debates, because information that is sometimes touted as nonpartisan is actually biased on one side or another. A third consequence is an increased frequency of hostage taking, to force compliance with ideological policy demands, ignoring the damage that may be done in the process.

Intensified Partisanship: Rhetoric Versus Analysis Political rhetoric has thoroughly penetrated budget stories to the point that readers need to be able to recognize rhetoric and distinguish it from analysis. Program advocates and detractors put out stories that are picked up by the press, stories that are intended less to inform and more to persuade. They often look like factual stories but on further examination, turn out to be misleading or distortionary.

One common technique is to make some proposal look bigger or smaller in order to rouse supporters or opponents. If a particular revenue source generates only a small amount of revenue, opponents to increasing it may report only the proposed percent increase, which looks very large on a small base, and omit the actual dollar increase, which may be both modest and affordable. Those who want to cut spending might cite a huge number of dollars of increased spending in recent years without reporting that the amount is only a tiny portion of the whole. The latter technique is magnified by giving figures that cover many years—much larger than the figure for any one year.

An example of a correct but misleading result occurred recently when the federal Government Accountability Office released a report saying that

20

from 2005 to 2014, the Social Security Disability Insurance program overpaid $11 billion to beneficiaries who were not qualified to receive them.1

Such reports on overpayments are often used by program opponents to demonstrate waste and thereby justify spending reductions. They typically do not report or subtract out underpayments or describe those who were eligible for payments who did not receive them. They multiply the sums involved by the number of years they pick, which could be any number. Many studies reporting overpayments fail to subtract out the amount of money that the government eventually collects back from recipients who received the money in error.

In the case of disability insurance, although it was not the focus of the report, the GAO did note that the federal government wrote off only $1.4 billion over a ten-year period. When looked at as a percent of program outlays over that decade, the overpayments are extraordinarily small. The accuracy rate is 99.88 percent.2 The response to such a report ought to be, what an amazingly efficient organization, but the takeaway from the GAO report was $11 billion of wasteful spending.

Some of the Illinois governor’s supporters have argued that cuts in day care subsidies are justified because much of the money is wasted. There has been no evidence to that effect, however; it appears that cutting programs for the poor is an item of ideology rather than analysis. Because the day care program is a joint federal-state program, the federal government has an interest in assuring that the programs are tightly run. In line with this concern, the Government Accountability Office did a study in 2010 of five state-subsidized day care programs. It noted that in Illinois the fake applications that the GAO tried to submit were examined and rejected while other states accepted them.3 Moreover, the state inspector general for Healthcare and Family Services in an annual report in 2010 described the number of cases of abuse investigated in the day care program as twenty-six, of which five were unfounded and which resulted in six convictions.4 In a typical year, the program serves 150,000 children. The twenty-one cases thus represent .01 percent—one one hundredth of a percent—of youngsters in the program. The six convictions represent an even smaller proportion of the total, .004 percent of the children. In 2014, the inspector general did not even mention childcare fraud or abuse in the annual report. In the Illinois case, there was no effort to either document

21

cheating or provide evidence that cheating was widespread.

Political rhetoric, intended to persuade, often includes extreme examples implying that they are common. Thus public pensions are attacked, because some people have six-figure pensions; conclusion? Pensions are overly generous. Some people gain benefits to which they are not entitled, giving rise to the conclusion that income support programs are riddled with fraud and waste. Given this rhetorical spin on budget discussions, readers need to get into the habit of asking themselves whether the information they are reading is intended to persuade, if there is missing information that might change the interpretation, how many years are included in a study and added up, whether a number is exaggerated or minimized, whether a case is exceptional or common, and the direction of recent trends. Who requested or financed a study may have to become part of the interpretation, and that information is not always easy to find.

Intense Partisanship and Hostage Taking The childcare subsidy example helps to describe recent trends in budgeting. Those trends not only indicate a sharper partisan divide with its accompanying conflicts, rhetorical heat, and distortions, but also an increased willingness to hold government—and in this case children— hostage to satisfy demands of political minorities when majorities won’t go along.

The Republican governor in Illinois was willing to cut off children from day care, making it more difficult for poor parents to work, in order to pressure the legislature to accept his policy agenda, which was not related to the budget and which he knew they did not support. The governor would not approve a budget without legislative acceptance of his unrelated policy agenda, and so the state was without a budget—the stalemate lasted the entire fiscal year 2015–2016. The governor required state employees to continue working and get paid, even without a budget, and he approved the portion of the budget that funded the public schools, while leaving the public universities and contractually provided social services without their funding. Since these constituencies matter to the Democrats who are in the majority in both houses, the governor’s strategy was to force them to agree to his policies by hurting the poor, the elderly, the mentally and physically disabled, and college students who are dependent on government grants and services. If the legislature will agree to the governor’s policy agenda,

22

he will stop hurting those most dependent on state aid—and restore the childcare subsidies to their prior level.

Hostage taking and various forms of extortion have become common in public budgeting. Sometimes the budget as a whole is held up, even to the point of closing down the government until the desired policies are approved. At the federal level, Tea Party Republicans have threatened to not raise the debt ceiling, risking the credit quality of the federal government, in order to get their preferred policies accepted. The budget stalemates typically occur when there is divided government, an executive of one party and one or both houses of the legislature dominated by the other party. It doesn’t matter whether the executive is a Democrat or a Republican. While in Illinois the governor was a Republican and the legislature Democratic, a budget standoff in Pennsylvania also lasted for months, in that case resulting from policy differences between a Democratic governor and Republican legislature. Back in 2011, the Democratic governor in Minnesota tried to use a government shutdown to pressure the Republican-dominated legislature to pass a tax increase on the top earners. In that case, the strategy did not work.

In 1991, Maine, Connecticut, and Pennsylvania shut down; and Pennsylvania had a one-day shutdown in 2007 (Pennsylvania’s recent shutdown has been much longer); Tennessee had a partial shutdown in 2002; Minnesota experienced its first shutdown in 2005; New Jersey experienced its first shutdown in 2006. Michigan had a brief shutdown in 2009. While late budgets have been relatively common over the years, actual shutdowns used to be averted, but in recent years, as partisan differences on policy have intensified, shutdowns have become a little more common and last longer. These shutdowns, even when partial or brief, cause service disruptions and increased costs as well as loss of productivity.

The strategy is to use actual harm and the threat of harm—such as threatening to shut down the government—to force compliance with a given policy rather than bargaining and compromise. The more ideological the participants, the less likely they are to be willing to compromise. In the Illinois case, the governor backed down somewhat and negotiated over specific cuts that he had unilaterally imposed only because there was a real possibility that a coalition of Democrats and Republicans might overturn his decision. And despite the negotiations on this one issue, he maintained

23

his stance against passing any budget if the legislature did not go along with his policy demands.

Implications for Democracy The intensity of partisanship has led to a search for pressure points, such as using the increase in the debt ceiling at the federal level, which used to be automatic, allowing bills to be paid that had already been approved, to force compliance with minority policy proposals. There has been an increased use of supermajority requirements to make it more difficult to pass tax increases. No-tax-increase pledges have also added ideological rigidity to budgeting, so that cutting spending seems like the only option to balance or rebalance budgets, regardless of the will or needs of the citizens.

In the Illinois case, supermajorities were required to override the governor’s rule changes, and supermajorities were required to pass legislation that would restore program cuts and create funding stability. Supermajority requirements empower minorities, allowing them to block the will of the majority. Forcing a legislature to pass laws of which members disapprove by holding the poor, the elderly, and the disabled hostage is neither democratic nor just. One may agree or disagree with the policies being pressed, such as smaller government or better funding for the public schools, without agreeing that forcing compliance through hostage taking is a good way to achieve those policies.

The increase in partisanship seems to legitimate tactics such as the use of shell bills, the content of which is determined at the end of a legislative session without sufficient time for opponents to read and react to them. Increased shopping around for studies that support a predetermined policy preference and supposedly neutral policy shops that tilt one way or another depending on who asks for a study or who funds it also delegitimize the policy debate.

The seemingly irreconcilable positions of two political parties unwilling to compromise leads to budget solutions such as pretending to follow the rules without actually doing so. Having passed an across-the-board cut in federal spending after a period of hostage taking, conservatives then argued that the cuts should not apply to defense. Those who opposed the reductions wanted to keep the ceilings on defense to create pressure to lift

24

the ceilings for nondefense spending as well. While this pressure and counter pressure were ongoing, portions of defense spending were taken off budget, taken out of the rules, so they didn’t have to be offset with revenues and did not have to come under the ceiling. This was an Alice in Wonderland kind of budget approach, to make some expenditure disappear.

Budget Stories Develop Over Time Many of the cases described in this edition took years to reach fruition. In Illinois, the story of the day care subsidy cutback began well before the current governor was elected, as prior governors and legislators continued to spend more than the state was taking in in revenue. The dire fiscal stress created a supportive environment for an increase in the state income tax, which is modest in level and not progressive—that is, rich people do not pay a higher proportion of their income for this tax than poorer people. The tax increase was temporary, but when it came time for it to lapse, it was clear that doing so would dig the state into a deeper hole. The new governor supported the return of the tax to its lower level, exacerbating the financial problems of the state. Then the governor acted on his own initiative to change the rules to kick people out of the subsidized childcare program, arguing that it was necessary because the state was in such bad financial condition.

Only if the researcher’s time span is long enough can he or she see trends or sequences of actions and reactions over time. As described in a later chapter, one city reluctantly agreed to set up an inspector general office to root out corruption but then stalled for years in actually setting up and funding the office. In one state, citizens voted to require a supermajority of legislators to pass a tax increase; that public vote was binding only for several years. As soon as it was legally possible, the legislature rescinded the requirement and, desperate for additional revenue, passed a tax increase. At the federal level, an agreement to cut spending worked out in one year set spending ceilings for the next several years. The amount of money given out in tax breaks is usually available several years later, when credits are finally used. State commissions have been appointed to look at unfunded mandates to see if any can be eliminated to save local governments money. Such commissions may take years to make recommendations, and then it takes time for legislatures to act—or fail to

25

act—on the recommendations. Sometimes the commissions are then disbanded. Some events only occur episodically, as when a state takes over a local government revenue source, or the opposite, when a state takes over and funds what had been a local government responsibility. The balance of budgetary power between executives and legislators is not fixed and shifts more toward one or the other over a period of years. All these stories develop over time.

Whether a program grows from one year to the next is much less interesting or important than whether it continues to grow faster than other programs year after year and similarly if cuts occur year after year in particular programs, such as state funding for higher education. Are decreases in state aid to local governments during a recession restored after the recession ends? The stories lie less at a given point in time than in the trends over time.

Federalism Federalism is emphasized more in this edition than in prior editions. The structure of federalism is a key to understanding the politics of budgeting at all levels of government. Federalism is not just about grants from the federal government to the states or from the states to the local governments, the conditions attached to those grants, or mandates that are or are not adequately funded. It is also about taxes, the assignment of responsibilities or preemption of some revenue source, and about jointly provided programs, where the federal government and the states share costs and the states determine program rules, such as eligibility, scope, and the size of payments. The day care subsidy program in Illinois was one illustration of a shared program, but the really big one is Medicaid. In recent years, Medicaid has become very expensive and a topic of partisan contestation. President Obama has sought to expand the program, with the federal government paying for most of the costs, but some states have resisted, despite the offer of money.

The federal government can persuade, offer incentives to the states, and mandate some behaviors as conditions of grants. It can preempt some areas of responsibility but at a fundamental level, the states and the national government are both sovereign and independent. The states are not subordinate units of the federal government. The monetary relationship is thus key to cooperation and policy implementation. The states, by contrast,

26

have direct authority over the local government as well as responsibility for them. They don’t have to persuade; they can order. They can determine the scope of services, taxing powers, and budget processes. They can help their local governments when they encounter fiscal stress, or they can hang them out to dry, metaphorically. In the Illinois case, the governor wanted the state legislature to pass a law that would freeze property taxes for local governments.

Because the local governments are subordinates of the state government, the states are responsible for their local governments. In the past, this has meant that states have taken measures to assure the fiscal health of their local governments and have helped them out when they got into trouble. However, the number of municipal bankruptcies of large cities and counties has increased in recent years. Some states have taken over the finances of their local governments, others have allowed or encouraged them to declare bankruptcy under federal law. There has thus been a marked change in the relationship between some states and their local governments, shifting from prevention and help to overruling the local elected officials and taking over budgeting, deciding which creditors lose how much money. This shift may reflect the increase in partisanship and ideology noted above, as some governors, intent on keeping taxes down, cut aid to local governments, deny them additional revenue sources, and refuse to spend much money to bail them out.

Executive Versus Legislative Budget Power The Illinois case illustrates one extreme of executive budget power compared to the legislature. The governor was able to change the eligibility criteria and the fees charged to parents in the day care program on his own initiative. The legislative committee charged with overseeing the rules issued by the executive branch was unable to muster a supermajority to overturn the governor’s rule change. The governor maintains the ability to reduce any appropriation the legislature passes, on a line-by-line basis, for this and any other program. That is why the legislature sought to change the structure of the day care program and turn it into an entitlement, which would give the legislature more and the governor less power over the program’s design. In that, they did not succeed.

While Illinois is on the extreme end of executive budgeting power, the

27

cases related later in the book illustrate that the general direction of change is toward stronger and more unified executives with more authority over budgeting, even in states that have historically had strong legislatures.

At the national level, the president has weaker veto powers than many governors, but his power over the budget is still considerable. Nevertheless, it is continually being contested, as Congress works to control the way money is spent and “handcuffs” agencies that diverge from congressional intent and instructions. The president can order the agencies to refuse to implement legislative earmarks or issue signing statements indicating that he won’t carry out some portion of a law that he thinks violates the constitution or other legitimate responsibilities. Congress can limit the amount of discretion executive agencies have in spending money, can use inspectors general to criticize agencies and the president, and can threaten to not raise the debt ceiling (for more on the politics of the debt ceiling see p. 23), among other tactics.

At all levels of government, the balance between the executive and legislative branches with regard to budgeting is somewhat fluid, depending as much on personality and skills as formal powers. It is one area where informal relations may be as important as formal powers. Thus, when the governor in Illinois sensed that he might be facing a coalition of Democrats and Republicans who could overturn his policies, he backed off and negotiated a settlement with a group of legislators.

Conclusion To understand the politics of budgeting today, one has to know not only what happened yesterday and the rules of the game but also that the rules continue to change or may be suspended entirely from time to time. The laws guiding the congressional budget process have changed over the years, but even if one understood all the arcane details, one might not be prepared for the ad hoc nature of the decision-making that sometimes overtakes the formal rules.

This book should help explain the politics of budgeting in two ways. First, it sets out the separate clusters of budgetary decision-making—revenue, budget process, spending, balance, and implementation—and describes the politics that characterize each one. Second, the book emphasizes the direction of change, patterns of adaptation, and chains of action and

28

reaction, over time. That the politics of budgeting keeps changing creates some challenges but also rewards curiosity and invites new editions of the book.

Notes 1. Government Accountability Office, “Disability Insurance: SSA Could Do More to Prevent Overpayments or Incorrect Waivers to Beneficiaries,” Report to the Subcommittee on Social Security, Committee on Ways and Means, House of Representatives, October 2015, http://www.gao.gov/assets/680/673426.pdf.

2. David Dayen, “Why $11 Billion in Government Overpayments Is Actually an Insignificant Amount,” The Washington Post, November 4, 2015, https://www.washingtonpost.com/news/federal- eye/wp/2015/11/04/why-11-billion-in-government-overpayments-is- actually-an-insignificant-amount/.

3. GAO, “Child Care and Development Fund: Undercover Tests Show Five State Programs Are Vulnerable to Fraud and Abuse,” Washington, DC: GAO, 2010.

4. http://www.state.il.us/agency/oig/docs/2010%200ig%20annual%20report%20final%20062011.pdf

29

http://www.gao.gov/assets/680/673426.pdf
https://www.washingtonpost.com/news/federal-eye/wp/2015/11/04/why-11-billion-in-government-overpayments-is-actually-an-insignificant-amount/
http://www.state.il.us/agency/oig/docs/2010%200ig%20annual%20report%20final%20062011.pdf
Acknowledgments

I would like to thank all those who provided the information on which this book revision is based, including legislative budget offices, investigative journalists, those who design and maintain openness websites, and staff who respond to my queries. I also want to acknowledge the struggles of those in the budgeting trenches, as they wrestle with tax and expenditure limits, with shrinking tax bases, with unfunded and underfunded mandates, and with contradictory demands from rigid partisans. Finally I need to mention the terrific team at CQ Press, who have always been supportive of this project, and the gentle reviewers of the last edition who offered guidance and suggestions for this one.

Publisher’s Acknowledgments SAGE wishes to acknowledge the valuable contributions of the following reviewers.

Whitney Afonso, University of North Carolina at Chapel Hill Leann Beaty, Eastern Kentucky University James Jimenez, University of New Mexico Mark Nagel, Metropolitan State University Paul Pope, Montana State University Lonce Sandy-Bailey, Shippensburg University of Pennsylvania

30

1 The Politics of Public Budgets

A public budget links tasks to be performed with the amount of resources required to accomplish those tasks, ensuring that money will be available to wage war, provide housing, or maintain streets. Most of the work in drawing up a budget is technical, such as estimating how much it will cost to feed a thousand shut-ins with a Meals-on-Wheels program or how much revenue a 1 percent tax on retail sales will produce. But public budgeting is not only a technical, managerial process, it is also necessarily and appropriately political.

Budgets reflect choices about what government will and will not do. They reflect the public consensus about what kinds of services governments should provide and what citizens are entitled to as members of society. Should government provide services that the private sector could provide, such as water, electricity, transportation, and housing? Do all citizens have a guarantee of health care, regardless of ability to pay? Is everyone entitled to some kind of housing? Should government intervene when market failures threaten people’s savings and investments? Budgets reflect priorities—between police and flood control, day care and defense, the Northeast and the Southwest. The budget process mediates among groups and individuals who want different things from government and determines who gets what. These decisions may influence whether the poor get job training or the police get riot training—either one a response to an increased number of unemployed. Budgets reflect the degree of importance that legislators place on satisfying their constituents and responding to interest group demands. For example, legislators may decide to spend more money to keep a military base open because the local economy depends on it and to spend less money to improve combat readiness. Budgets provide accountability for citizens who want to know how the government is spending their money and whether government has generally followed their preferences. Budgeting links citizen preferences and governmental outcomes; it is a powerful tool for implementing democracy. Budgets reflect citizens’ preferences for different forms and levels of

31

taxation as well as the ability of some taxpayer groups to shift tax burdens to others. The budget indicates the degree to which the government redistributes wealth upward or downward through the tax system. At the national level, the budget influences the economy, and so fiscal policy influences how many people are out of work at any time. Budgetary decision-making provides a picture of the relative power of budget actors within and between branches of government as well as of the importance of citizens, interest groups, and political parties.

Budgeting is both an important and a unique arena of politics. It is important because of the specific policy decisions it reflects: decisions about the scope of government, the distribution of wealth, the openness of government to interest groups, and the accountability of government to the public at large. It is unique because these decisions take place in the context of budgeting, with its need for balance, its openness to the environment, and its requirement for timely decisions so that government can carry on without interruption.

Public budgets clearly have political implications, but what does it mean to say that key political decisions are made in the context of budgeting? The answer has several parts: First, what is budgeting? Second, what is public budgeting, as opposed to individual or family budgeting or the budgeting of private organizations? Third, what does political mean in the context of public budgeting?

What Is Budgeting? The essence of budgeting is that it allocates scarce resources, implying choices among potential expenditures. Budgeting implies balance between revenues and expenditures, and it requires some kind of decision-making process.

Making Budgetary Choices All budgeting, whether public or private, individual or organizational, involves choices between possible expenditures. Since no one has unlimited resources, people budget all the time. A child makes a budget (a plan for spending, balancing revenues and expenditures) when she decides

32

to spend money on a marshmallow rather than a chocolate rabbit, assuming she has money for only one. The Air Force may choose between two different airplanes to replace current bombers. These examples illustrate the simplest form of budgeting, because they involve only one actor, one resource, one time, and two straightforward and comparable choices.

Budgeting is usually more complicated, with many possible options that are not always easily comparable. To simplify this complexity, budgeters usually group together similar things that can be reasonably compared. When I go to the supermarket, I compare main dishes with main dishes, beverages with beverages, desserts with desserts. This gives me a common denominator for comparison. For example, I may look at the main course and ask about the amount of protein for the dollar. I may compare the desserts in terms of the amount of cholesterol or the calories. Governmental budgeters also try to make comparisons within categories of similar things. For example, weapons are compared with weapons and computers with computers. They could be compared in terms of speed, reliability, and operating costs, and the one that did the most of what you wanted it to do at the least cost would be the best choice. As long as there is agreement on the goals to be achieved, the choice should be straightforward.

Sometimes, however, budgeting requires comparison of different, seemingly incomparable things. How do I compare the benefits of providing shelters for the homeless with buying more helicopters for the navy? I may move to more general comparisons, such as how clearly the need was described or who received the benefits last time and whose turn it is this time. Are there any specific contingencies that make one choice more likely than the other? For example, will the country be embarrassed to show our treatment of the homeless in front of a visiting dignitary? Or are disarmament negotiations coming up, in which we need to display strength or make a symbolic gesture of restraint? Comparing dissimilar items may require agreement on priorities. Such priorities may be highly controversial.

Not only does budgeting have to deal with a large number of sometimes incomparable possible expenditures, it also involves multiple resources, resulting in multiple and sometimes unrelated budgets. Budgeting often allocates money, but it can allocate any scarce resource—for example,

33

time. A student may choose between studying for an exam or playing softball and drinking beer afterward. In this example, it is time that is at a premium, not money. It could be medical skills that are in short supply, or expensive equipment, or apartment space, or water.

Government programs often involve a choice of resources and sometimes involve combinations of resources, each of which has different characteristics. For example, some federal farm programs involve direct cash payments plus loans at below-market interest rates, and welfare programs often involve dollar payments plus food stamps, which allow recipients to pay less for food. Federal budgets often assign agencies money, personnel, and sometimes borrowing authority, three different kinds of resources. Some programs offer tax breaks, while others offer direct payments and still others offer insurance that is unavailable or extraordinarily expensive in the private sector.

Balancing and Borrowing Budgets have to balance. A plan for expenditures that pays no attention to ensuring that revenues cover expenditures is not a budget. That may sound odd in view of huge federal deficits, but a budget may technically be balanced by borrowing. Balance means only that outgo is matched or exceeded by income. Borrowing means spending more now and paying more in the future, when the debt has to be paid off. It is a balance over time.

To illustrate the nature of budget balance, consider me as shopper again. Suppose I spend all my weekly shopping money before I buy dessert. I have the option of treating my dollar limit as if it were more flexible, by adding the dimension of time. I can buy the dessert and everything else in the basket, going over my budget, and then eat less at the end of the month. Or I can pay the bill with a credit card, assuming I will have more money in the future with which to pay off the bill when it comes due. The possibility of borrowing against the future is part of most budget choices.

A budget is not balanced if there is no plan for and reasonable expectation of paying back the loan over time. Similarly, a budget is not balanced if insufficient money is set aside each year to pay for future expenses. For example, a number of years ago, San Diego approved an increase in pension benefits for its employees but did not increase its annual

34

contributions to the pension system to cover the increased costs, because pension board members hoped a strong stock market would reduce the need for city contributions. When the market faltered, the city was stuck with a huge deficit in the pension fund.

Process Budgeting cannot proceed without some kind of decision process. The process determines who will have a say at what point in the decision- making and structures the comparisons among alternatives. A successful budget process assures that decisions are made in proper order and in a timely way.

Returning to the shopping example, if I shop for the main course first and spend more money than I intended on it because I found some fresh fish, there will be less money left for purchasing the dessert. Hence, unless I set a firm limit on the amount of money to spend for each segment of the meal, the order in which I do the purchasing counts. Of course, if I get to the end of my shopping and do not have enough money left for dessert, I can put back some of the items already in the cart and squeeze out enough money for dessert.

Governmental budgeting is also concerned with procedures for managing trade-offs between large categories of spending. Budgeters may determine the relative importance of each category first, attaching a dollar level in proportion to the assigned importance, or they may allow purchasing in each area to go on independently, later reworking the choices until the balance between the parts is acceptable.

The order of decisions is important in another sense. I can first determine how much money I am likely to have, and then set that as an absolute limit on expenditures, or I can determine what I must have, what I wish to have, and what I need to set aside for emergencies and then go out and try to find enough money to cover some or all of those expenditures. Especially in emergencies, such as accidents or illnesses, people are likely to obligate the money first and worry about where it will come from later. Governmental budgeting, too, may concentrate first on revenues and later on expenditures or first on expenditures and later on income. Like individuals or families, during emergencies governments commit expenditures first and worry about where the money will come from later.

35

Governmental Budgeting Public budgeting shares many of the characteristics of budgeting in general but differs from personal and business budgeting in some key ways:

1. In public budgeting there are a variety of participants, who have different priorities and different levels of power over the outcome. In family and business budgeting there may be only one key actor or a few, and they may have similar views of what they want the budget to achieve.

2. Individuals and small business owners spend their own money. By contrast, in governmental budgeting, elected officials spend citizens’ money, not their own. Public officials can force expenditures on citizens that they do not want, but citizens can vote the politicians out of office. Consequently, public officials try not to stray too far from what they think the public wants. Because of the variety of budgetary actors and demands, there is no single set of demands to follow. To create enough coherence to guide decisions, budget processes in the public sector involve the negotiation of consent among representatives of competing groups and interests.

3. Because elected officials make spending decisions for citizens, accountability is an important part of public budgeting. The budget document helps explain to the public how its money was spent. That document is necessarily public, unlike business budgets, and may be the focus of public controversy, if citizens do not like what they see or do not fully understand it.

4. Public budgets are planned well in advance of the beginning of the fiscal year and are intended to last a whole year or even two years. Many changes can occur over that period of time—in the economy, in public opinion, in political coalitions, in the weather. Public budgets need to be able to respond to such events during the year without major policy changes. If the deals that were necessary to prepare the budget come undone during budget implementation, budget actors will lose their trust in the process. Private sector budgets are more flexible: They can be remade from week to week or month-to-month, and policy changes can be adopted at any time. Private sector budgets are not designed to last unchanged for eighteen months or more. Moreover, private sector budgets are less open to pressures from the outside, from public opinion, or frequent changes in elected officials.

5. Public budgets are incredibly constrained compared with those in the

36

private sector. There are often rules about the purposes for which revenue can be spent and the time frame in which it can be spent as well as requirements for balance and limits on borrowing. Capital projects may require public referendums for approval, and taxation growth may be limited to the inflation rate unless citizens approve higher rates in a referendum. Other levels of government may mandate some activity or expenditure or limit the amount or form of taxation. Past agreements may bind current decision makers. Courts may play a role in budgeting, sometimes telling jurisdictions that they must spend more money on education or prisons or that a proposed program is illegal or that officials cannot cut spending in some area because such reductions violate the constitution. Rather than one bottom line, which is the business model, government agencies may have multiple bottom lines, in each of several funds or accounts, each of which must balance.

The minicase concerning the DeKalb budget (see box on p. 8) should give the reader a feel for governmental budgeting and some of the ways it differs from personal or business budgeting. One key feature of public budgeting is an ongoing, not always courteous, dialogue between opponents and supporters, because no matter how many interests are served by a budget, some claimants will feel they did not get all they wanted or expected. Sometimes politicians and professional staff ignore and at other times respond to the constant stream of criticism and lack of understanding of the issues opponents demonstrate.

The venue of the Dekalb debate was the local newspaper. Accountability does not happen by itself; budgets do not wade into crowds and attract circles of admiring readers. Budgets have to be interpreted; someone has to tell a good story to get the readers involved. This is where newspapers come in, but reporters are not necessarily knowledgeable, and newspapers are not necessarily neutral. Public officials often think they are giving clear signals on the budget and are puzzled by citizen responses. The budget can be harder to explain than elected officials imagine. Public budgeting is complex and rule bound, whereas political dialogue is simple, simplifying, and sometimes biased.

Another theme that emerges from the DeKalb minicase is that nearly all new administrations have to run against their predecessors. They come into office and find a mess and try to clean it up. If they get started without

37

a process of reckoning, they are likely to be blamed for the financial mistakes of their predecessors, who, as in this case, may have run down fund balances and put off expenditures until the next administration. The inherited budget may be booby-trapped in a variety of ways, because time is an element in budgeting and expenditures can be put off or revenue moved up.

Prior administrations may still be around to find fault, hoping to return to office. Other potential electoral rivals can play a similar role, picking the budget apart, making normal decisions look odd, emphasizing projects that have not been completed or that came in over estimated costs. Taxpayer groups may criticize the budget from their own point of view. Politics thus infiltrates budgeting whenever the budget goes public. Budgeters have to stay alert to the political implications of their actions and the implications of politics for their actions. Keeping governmental finances afloat can be difficult when others are intentionally rocking the boat. There can be great temptation to keep parts of the budget obscure to prevent massive criticism from political opponents.

The attack and defense of the DeKalb budget made clear that there is policy in the budget, not just technical decisions about the timing of debt issuance or increases in the property tax rate. The editorial was wrong in some of its charges, but it was right in noting the increase in fees for developers. These fees were not just a way of balancing the budget; they reflected a judgment about who should pay for government and who should benefit from public spending. In this case, the former mayor had implemented a policy whereby all residents paid for growth. He claimed that everyone benefited, but it seemed likely that developers and new businesses benefited disproportionately compared with existing residents and businesses. In many cities, growth is highly subsidized, often by citizens who do not benefit directly from it and who might prefer that additional growth not take place. In DeKalb, the citizens were asked in a political campaign precisely whether they wanted to continue to subsidize growth, and they said no, voting to change mayors in order to change the existing policy. If politicians drift too far in their policies from what citizens wish, they are likely to be turned out of office at the next opportunity.

The manager’s letter to the editor made clear that public budgeting is constrained—by other levels of government, through prior agreements to

38

earmark tax increases and by state-mandated expenditures and by competition with surrounding jurisdictions. The manager defended the charging of fees to developers by noting that surrounding towns were doing the same thing, so the community would not lose development by charging a fee.

The point of the minicase is that public officials must not only do the right thing for the community and follow the public will, as best they understand what that is, but also figure out a way to explain and justify their choices. They are engaged in a dialogue in which there are always other arguments, whose advocates represent legitimate interests. Equally important, engaging in this dialogue is a way of getting the public involved and getting across information about budgetary decisions in a way that people can understand.

In sum, public budgeting is necessarily and legitimately different from personal and business budgeting. It is not only that the budget is fought out in public but that it involves a variety of actors with different perspectives and interests. Moreover, those who make the decisions about spending are not the ones who actually pay the bills, and that fact introduces problems of responsiveness of elected officials and accountability to the public. More than personal or business budgets, public budgets are highly constrained, surrounded by rules, and hence somewhat rigid, while at the same time open to and necessarily influenced by changes in the environment.

Minicase: City Manager Replies to Scathing Budget Critique DeKalb, Illinois, has a council-manager form of government with an active, policy-oriented mayor. One mayor, who favored business development and expansion, was defeated by a candidate who advocated a different balance between new development and existing neighborhoods. Not long after the new mayor and a new manager took office, the local newspaper ran an editorial criticizing the new manager for his fiscal practices.

Filled with innuendo, exaggeration, and outright mistakes, the editorial was a thinly disguised effort to discredit the new administration and its policies of balanced growth. It argued that taxes and fees were growing, that the city was trying to build too large a fund balance (demonstrating unnecessary

39

taxation), and that it was unclear where the increased revenues were going. The editorial further charged that the former administration had run a tight ship and that the city was in good financial shape when the new mayor took over, but that now staff were resigning and were not being replaced, reportedly to save money. The implication was that the new manager and mayor were fouling things up.

The new manager responded with a letter to the editor. In his reply, he documented the problems he had inherited from the prior administration. The city finances had not been so fine when he began his term. Property taxes increased due to state-mandated expenditures; the increase in sales taxes was obligated to the Tax Increment Financing District, a district formed a number of years earlier to fund economic development, and to other units of government through existing intergovernmental agreements. The actual amount of sales tax revenue going into the general fund was decreasing, not increasing, so there was no puzzle about where the increased revenue was going, contrary to what the newspaper editorial had said.

Finally, the editorial had correctly pointed out that the city had increased the fees levied on developers to pay the present and future costs of growth. The new administration’s goal was for growth to fund itself, rather than be subsidized by the existing community residents. The manager argued that such policies were common, not only elsewhere in the country, but in the neighboring cities with which DeKalb was competing. This fee policy symbolized the policy difference between the current and previous administrations.

A Variety of Actors The actors involved in budgeting have different and often clashing motivations and goals. In the executive branch, bureau chiefs, budget officers, and chief executives are involved in the budget process; in the legislative branch, legislators and their staff members make proposals and react to proposals given to them. Interest groups may be involved at intervals, and sometimes citizens get into the act or the press gets involved in budget issues. At times, courts play a role in budgets. What are these actors trying to achieve?

Bureau Chiefs.

Many students of budgeting assume that agency heads always want to expand their agencies for reasons of personal aggrandizement, but many

40

bureaucrats are more motivated by the opportunity to do good for people —to house the homeless, feed the hungry, find jobs for the unemployed, and send out checks to the disabled.1 In the Office of Personnel Management survey of federal employee attitudes in 2014, 95.3 percent of executives responding to the survey indicated that they agreed or strongly agreed that the work they do is important. Not only are the motivations for growth often less selfish than the traditional model suggests, but agency heads sometimes refuse to expand when given the opportunity.2 Administrators may prefer to hire fewer but more qualified employees and refuse to add employees if doing so would not add to the agency’s capacity to get things done.3 Expansion may be seen as undesirable if a new mission swamps the existing mission, if it appears contradictory to the existing mission, or if the program requires more money to carry out than is provided, forcing the agency to spend money designated for existing programs on new ones or do a poor job. Moreover, most bureaucrats, if not all, believe that their role is to carry out the policies of the chief executive and the legislature. If that means cutting back budgets, agency heads cut back the agencies. Agency heads may be appointed precisely because they are willing to make cuts in their agencies.4

Bureaucrats, then, do not always try to expand their agencies’ budgets. They have other, competing goals, which sometimes dominate. Also, their achievements can be measured in other ways than by expanded budgets. They may try to attain some specific items in the budget, without raising totals, or may try for changes in the wording of legislation. They may strive to obtain a statutory basis for the agency and security of funding. They may take as a goal providing more efficient and effective service rather than expanded or more expensive service.

The Executive Budget Office.

The traditional role of the budget office has been to scrutinize requests coming up from the agencies, to find waste and eliminate it, and to discourage most requests for new money. The executive budget office has been perceived as the naysayer, the protector of the public purse. Most staff members in the budget office are very conscious of the need to balance the budget, avoid deficits, and manage cash flow so that there is money on hand to pay bills. Hence they tend to be skeptical of requests for new money.

41

At the national level, under President Ronald Reagan, budgeting became much more top-down, with the director of the Office of Management and Budget (OMB) proposing specific cuts and negotiating them directly with Congress, without much scrutiny of requests coming up from departments or bureaus. OMB became—and remains—more involved in trying to accomplish the policy goals of the president through the budget.5 At the state level, too, there has been an evolution of budget offices concerned primarily with technical goals toward more attention to political and policy-related goals. When the governor is looking for new spending proposals, these may come from the budget office.

Chief Executive Officers.

The goal of the chief executive officer (the mayor or city manager, the governor, the president) cannot be predicted without knowledge of the individuals. Some chief executives have been expansive, proposing new programs; others have been economy minded, cutting back proposals generated by the legislatures, reorganizing staffs, and trying to maintain service levels without increasing taxes or expenditures. Whatever the policy preferences of the chief executives, they generally want more power to impose those preferences on the budget. In most states, the governor frames the budget proposal, has a powerful veto, and often has the ability to make cuts during the year to rebalance a budget if revenues fall short of projections. As the Missouri minicase, which follows, demonstrates, those powers can be used to override the legislature’s preferences. Similarly, in Wisconsin in 2008, voters passed a constitutional amendment to curtail the governor’s so called Frankenstein veto, which allowed the governor to cross out words and numbers from different sentences creating a new sentence that altered legislative decisions. Governor Doyle had been using that power to increase spending on schools and to allow local governments to increase property taxes more than the legislature wished. The Wisconsin governor’s budget powers are still extremely strong, despite the amendment, as he or she can still eliminate words within a sentence of the budget, delete sentences, and omit digits from a number.

Minicase: Missouri Constitutional Amendment Reduces Governor’s Powers

42

In Missouri in November 2014, voters passed a constitutional amendment permitting the legislature with a two-thirds majority to overturn the governor’s decisions to withhold funds during the year. The amendment also prevents the governor from proposing a budget with revenues the legislature has not already approved.

According to some observers, the Democratic governor, Jay Nixon, was using budget holdbacks as leverage to prevent the legislature from passing additional tax breaks. The governor wanted the legislature to pass comprehensive tax credit reform; he also wanted the legislature to approve using federal dollars to improve and expand Medicaid. He vetoed or withheld spending additions to his budget request. He argued against legislative program spending increases that were likely to balloon in future years. The governor maintained that the finances of the state could not depend on vetoes that might be overridden, presumably his justification for cutting funds during the year in a way that the legislature could not overturn.

Governor Nixon blocked billions of dollars in spending during his administration. In 2011, he cut funding for forty-five programs during the year. He claimed that much of the money was going to storm relief, but a later audit showed that of $172 million withheld that year, only $7.8 million was spent on disaster relief, giving rise to the belief that he was imposing his goals over the legislature’s by remaking portions of the budget during the year. Through the constitutional amendment, the Republican-dominated legislature handcuffed the Democratic governor and gave considerable power over budget implementation back to the legislature.

Sources: Associated Press, “Voters Approve Amendment Limiting Governor’s Budget Powers,” November 4, 2014, http://www.abc17news.com/news/voters-approve-amendment-limiting- governors-budget-powers/29540868; Marshall Griffin, “Schweich Releases Audit Critical of Nixon’s Withholding of Money from the Budget,” St. Louis Public Radio, September 8, 2014, http://news.stlpublicradio.org/post/schweich-releases-audit-critical-nixons- withholding-money-budget. See also Jay Nixon, Office of the Governor, “Governor Nixon Restricts $400 Million From Fiscal Year 2014 Budget, Citing Costs of House Bill 253, June 28, 2013,” online at https://governor.mo.gov/news/archive/gov-nixon-restricts-400-million-fiscal- year-2014-budget-citing-costs-house-bill-253.

Legislators.

Just as executives sometimes have been mischaracterized as always being

43

http://www.abc17news.com/news/voters-approve-amendment-limiting-governors-budget-powers/29540868
http://news.stlpublicradio.org/post/schweich-releases-audit-critical-nixons-withholding-money-budget
https://governor.mo.gov/news/archive/gov-nixon-restricts-400-million-fiscal-year-2014-budget-citing-costs-house-bill-253
fiscally conservative, legislators have sometimes been depicted as always trying to increase spending.6 The argument runs that their success in getting reelected depends on their ability to provide constituent services and deliver “pork”—jobs and capital projects—to their districts. Legislators are reluctant to cut one another’s pork, lest their own be cut in return. As a city council member described this norm of reciprocity, “There is an unwritten rule that if something is in a councilman’s district, we’ll go along and scratch each other’s back.”7

While there is some truth to this picture, the budgetary importance of pork —more properly called legislative earmarks—has been exaggerated. Earmarks are directions in legislation for spending money on particular companies, contracts, locations, or projects or for granting tax breaks to particular companies or individuals. At their peak, earmarks never accounted for more than 1 percent of the federal budget.

Earmarks came under fire at the national level, not because the dollar amounts were so huge, but because the number and costs were growing seemingly out of control and because some of them were embarrassingly wasteful. Even more important, they permit or even invite corruption: Some legislators have rewarded campaign contributions or other favors and gifts with earmarked contracts or tax breaks that benefit specific firms or individuals. The resulting scandals fueled a drive for reform that resulted initially in greater transparency and later in partywide pledges to abstain from earmarks. In 2007, President Bush instructed the agencies to ignore any legislative earmarks that were not written into law. President Obama stated in his state of the union address in 2011 that he would veto any bill with earmarks in it.

While some legislators have found ways around the controls, evidence suggests a dramatic drop in spending for legislative earmarks. This decline is illustrated in Figure 1.1. Figure 1.2 shows the decline in number of earmarks.

These days, legislators seem more likely to favor small government and tax reductions than expanded programs. Predicting the policy goals of legislators in general is as difficult as predicting the policy goals of executives. They have to be examined case by case.

Interest Groups.

44

Interest groups, too, have often been singled out as the driving force behind spending increases. They are said to want more benefits for their members and to be undeterred by concerns for overall budget balance or the negative effects of tax increases. Well-funded interest groups reportedly wine and dine legislators and provide campaign money for candidates who agree with their positions.

Figure 1.1 Pork-Barrel Spending, 1991 to 2015

Source: Reproduced with permission from Citizens Against Government Waste, 2015 Congressional Pig Book, online at http://cagw.org/reporting/2015-pig-book#historical_trends

Figure 1.2 Number of Pork Projects, 1991 to 2015

45

Source: Reproduced with permission from Citizens Against Government Waste, 2015 Congressional Pig Book, online at http://cagw.org/reporting/2015-pig-book#historical_trends

This picture is partly true but oversimplified. Interest groups have other policy goals besides budget levels. Most probably deal with the budget only when a crisis occurs, such as a threat to funding levels. Because they can be counted on to come to the defense of a threatened program, they reduce the flexibility of budget decision-makers, who find it difficult to cut programs with strong interest group backing. But many areas of the budget do not have strong interest group backing. For example, foreign aid programs have few domestic constituencies. Agencies may even have negative constituencies—that is, interest groups that want to reduce their funding and terminate their programs. The American Medical Association sought for years to eliminate the Health Planning Program. Often when interest groups are involved, there are many of them rather than one, and the groups may have conflicting styles or conflicting goals, canceling one another out or absorbing energy in battles among themselves. A coalition of interest groups representing broad geographic areas and a variety of constituencies is likely to be more effective at lobbying. To that end, coalitions may form, but some members of the coalition may not go along with measures supported by others, so the range of items for which the

46

unified group can lobby may be narrow. Extensive negotiations and continual efforts are required to get two or more independent groups together for a lobbying effort, and the arrangement can then fall apart. Interest groups are sometimes more interested in maintaining their autonomy than joining an effective lobbying coalition that may not press their issues enthusiastically. Moreover, some interest groups are interested in lowering taxes rather than maintaining or increasing spending.

Citizens.

Citizens play a role in budgeting when they vote on referendums to limit revenues, forbid some forms of taxation, require budgetary balance, or amend the constitution to limit executive budget power. They may initiate legislation that requires some given percent of revenues to be spent on education or otherwise lock in their budget priorities. They sometimes voice their opinions at budget hearings, reply to public opinion polls, and call or write their elected representatives. Their knowledge of the budget usually is not detailed, but their feelings about the acceptability of taxation and priorities for spending constrain public budgeting. The public’s preferences for less-visible taxes and for taxes earmarked for specific expenditures have been especially important in shaping tax structures. Citizens have reacted to reports of corruption by voting affirmatively on referenda to create offices of the Inspector General to oversee spending and uncover fraud and abuse.

In twenty-four states, citizens can put a proposal on the ballot. Many of these proposals have budgetary implications, sometimes mandating the expenditure of funds without any source of revenue or cutting taxes without any parallel cuts in spending or offsetting tax increases. In Washington state, for example, a citizens’ initiative to increase class sizes was estimated to cost the state about $2 billion for fiscal years 2016 and 2017; the cost was projected to increase to $2.7 billion for the following two years. There was no mention of where this money was supposed to come from.8

The Courts.

The courts play an intermittent role in budgeting.9 They become involved when some budget actors, often interest groups, bring suit against the government. Suits that affect the budget may involve service levels or the

47

legality of particular forms of taxation. If a particular tax is judged unconstitutional, the result is usually lost revenues. If there is a suit concerning levels of service, a government may be forced to spend more money on that service.

Constitutional requirements to provide adequate funding for public schools or to avoid cruel and unusual punishments have often gotten courts involved in mandating spending. For example, after years of underfunding the public schools, the state supreme court in Washington fined the state $100,000 per day for each day that it continued to defy the court mandate to provide adequate spending for education, reducing class sizes, and improving teacher pay. The court had mandated improvements in 2012, but according to the court, the state had done too little to comply. In September of 2015, the court ruled the state in contempt but agreed to wait until the end of the 2015 legislative session before imposing sanctions. When the governor and legislature failed to come up with a plan, the penalty was imposed. Other states have also had battles with courts over school funding that resulted in threatened sanctions. The New Jersey Supreme Court once shut down the schools for eight days, and in 2016, the supreme court in Kansas threatened to shut down the schools if adequate funding was not provided.10

Damage suits against governments can also affect expenditures. These are usually settled without regard to the government’s ability to pay. The result may be forced cuts in other areas of the budget, tax increases, or even bankruptcy. When the courts get involved, they may impose budget priorities. They introduce a kind of rigidity into the budget that says do this or pay this first.

The courts also may intervene in decisions about which actors have more power over budget decisions. In New York, the courts decided in favor of the governor over the legislature; in Maryland, the courts decided that the governor had to fund programs that the legislature had passed and he had approved in prior years. In Chicago, the courts have gotten involved in determining the degree of independence of the inspector general.

Courts sometimes judge whether programs are legal and whether rights have been violated. At the national level, the Supreme Court judged the constitutionality of the Obama administration’s health reform law, which contains both revenue increases and spending cuts. Typical areas in which

48

courts have mandated expenditures by state and local governments, besides school funding, are prison overcrowding (declared cruel and unusual punishment) and the deinstitutionalization of mentally ill and mentally handicapped patients. From the perspective of the courts, the priority of rights outweighs immediate concerns over balanced budgets, autonomy of governmental units, and local priorities.

The courts have increasingly gotten involved in both bankruptcy cases and pension funding issues. In both these situations, one key concern is the circumstances under which a government can go back on prior legal and sometimes constitutionally protected commitments. (See the minicase of New Jersey on p. 17 for one example.)

Minicase: The Courts and New Jersey Pension Reform In New Jersey in 2011, the governor engineered a pension reform to begin to remedy years of state failure to contribute the annually required contributions to the state pension system. The agreement required additional contributions from both the workers and the state to make up for prior underfunding. The reform included a binding promise from the state to discontinue its practice of failing to make its whole payment. The workers were granted an enforceable contractual right to the increased contributions from the state.

Violating his own reform law, the governor then failed to put in the whole state share. The resulting lawsuits reached the state supreme court. The judges decided 5–2 that the governor and legislature could not legally require an increased payment to the pension system, because the state’s constitution prohibits lawmakers from binding the state to financial obligations greater than 1 percent of the budget without citizen approval in a referendum. Under the reform law, the state payment would be closer to 7 percent of the budget.

The employee unions questioned whether the 2011 deal created any new debt or only required the payment of existing debt, but the judges argued that it didn’t matter and invalidated the 2011 reform that prevented the state from shortchanging the pensions. The court argued that although the governor and legislature intended to create a contract, they did not have the legal authority to do so and hence could later violate that illegal contract.

Source: Andrew Seidman and Maddie Hanna, “N.J. Supreme Court Sides With Christie in Pension Case,” Inquirer Trenton Bureau, June 9, 2015

49

online at http://www.philly.com/philly/news/politics/20150610_N_J__Supreme_Court_sides_with_Christie_in_pension_case.html#IUpA1ttsFLpkJwfE.99

The Press.

The press plays several roles in budgeting. First, it helps spread the word about budgetary decisions, explaining the significance of those decisions in more understandable terms than those in the budget document. They frame the issues for the public. Second, reporters tend to look for conflicts, for scandals, or for abuses that make good stories. Third, editorials may call for spending decreases and tax reductions or argue against particular proposed spending cuts. They advise the public on whether to vote for or against referenda and inform citizens of the likely consequence of passage or failure to pass such measures.

Not only do these various budget actors have different and potentially clashing budgetary goals, they wield different levels of power at different times. The courts, the press, and the public are not routinely involved in decision-making, they episodically influence and sometimes determine budgetary decisions. For the routine actors, the combination of different preferences and different levels of power has to be orchestrated by the budget process in such a way that agreement is reached and the players stay in the game, continuing to abide by the rules. If some actors lose on important issues during the creation or approval of budget proposals, they may try later to influence budget implementation to favor themselves. Or the actors with less budget power may try to change the budget process so that they have a better chance of influencing the outcome next time. If some actors feel too powerless over the budget, they may cease to participate or become obstructionist. Why participate in negotiations if the decision will go against you regardless of what you do?

Separation of Payer and Decider One of the major characteristics of public budgeting is that those who pay the bills are not the ones who make the decisions on how the money is to be spent. The possibility exists that elected officials will spend the money differently than taxpayers wish. This problem and its solution over time have been clearly visible at the local level.

In some cities in the later 1800s, the problem was solved by having

50

http://www.philly.com/philly/news/politics/20150610_N_J__Supreme_Court_sides_with_Christie_in_pension_case.html#IUpA1ttsFLpkJwfE.99
taxpayer groups elect their own members as mayors and council or board members.11 Payer and decider were, if not the same individuals, then of the same social class with the same interests. At that time, nearly all local taxation was based on property taxes, and only those who owned property could vote or run for office in many places. Under the control of these taxpayers, local officials spent money on projects that would benefit those paying the taxes—projects such as public markets, ports, roads, and bridges.

Over the years, as more poor people moved into the cities and were permitted to vote without property ownership, a gap began to open between the wealthy people who were paying the bills and poorer people who benefited from government services and elected people who would provide them those benefits. Those who made the taxing and spending decisions were no longer under the thumb of the major taxpayers. What the wealthy wished to spend their tax money on and what elected officials actually spent the money on began to diverge. When tax money was not being spent on the wealthy, they opposed taxation. Antitax revolts subsequently became widespread.

During the twentieth century, property ownership broadened as immigrants and blue-collar workers bought their own homes. Also, over the last generation taxation at the local level has shifted away from dependence on property taxes and toward sales taxes. The result is that there is not now a class of taxpayers and a class of tax users or consumers of government services. Everyone pays local taxes, including the relatively poor in many cities. The result has been to shift the focus of concern to whether everyone benefits from public taxation or only a few. For those services that benefit only a few, the question arises, why should everyone have to pay for them?

At the national level and in some states, the tension between those who pay the taxes and those who benefit from them remains, because the graduated income tax exempts the very poor and taxes the very rich more heavily than the middle class. The result has been an ongoing effort to shift the burden of taxation up or down in a moderated form of class warfare.

At all levels of government, those who demand services that benefit only a narrow group and want others to pay for those benefits have to be strategic. They may form a coalition with others who also want narrow

51

benefits; they tolerate some projects that others want, in exchange for support on their favored projects. Still, there are expenditures in many budgets that benefit one group or interest that are not balanced by benefits to other groups or interests. Such expenditures can be politically contentious and may be disguised or obscured.