"States face the most dire fiscal situation since World War II," the National Governors Association and the National Association of State Budget Officers declared last November. In fiscal 2002, state revenues actually declined for the first time since the associations began keeping records. They cited four converging factors: an explosion of health care costs, a collapse of capital gains tax revenues, slow economic growth, and outdated revenue systems that tax less and less of the new economy. "Many states have exhausted budget cuts and drawing down rainy-day funds," the report concluded, "and the most difficult decisions still lie ahead."
By late February, with only four months left in fiscal 2003, states still faced deficits of $30 billion. Fiscal 2004 looked even worse, with states reporting $82 billion in expected shortfalls. In most states, no easy choices remain to plug these holes. The rainy day funds are dry; across-the-board cuts have been made; expenses and payments have been shifted into future years.
Washington State is no exception. In the current biennium (2001-03), general fund revenue declined for the first time in 30 years. Halfway through the biennium the governor and legislature had to cut $1.5 billion and eliminate 1340 jobs.
Democratic Governor Gary Locke and his staff were frustrated by the process. "Every step we took, we asked ourselves, why aren't we asking the right questions, why are we so focused on the cuts and not on the keeps?" says Marty Brown, director of the Office of Financial Management (OFM). "What about the other 85 percent? We were missing something. We knew it in our guts."
Governor Locke was tired of across-the-board cuts. He wanted to focus on the big question: What should state government do and what should it stop doing? In the upcoming biennium, he faced an estimated $2.1 billion deficit in the general fund - almost 10 percent -- plus another $600 million in the health services account. "Closing the $2 billion gap we face in the next biennium would require an across-the-board cut of 15 percent - if that's all we did," the governor announced. "And that is not what we are going to do. I don't want to thin the soup. I want state government to do a great job in fulfilling its highest priorities."
In August 2002, Locke's chief of staff, Fred Kiga, asked the Public Strategies Group, Inc. (PSG) for help. "PSG made Washington State an 'unreasonable' proposal," says PSG co-founder Peter Hutchinson. "In the time available-which was ten weeks-we were not going to help them find cuts equivalent to 10% of their general fund budget. So we shifted the focus from spending cuts and tax increases to helping them buy the best possible results for citizens with the resources they did have."
Like most governments, Washington traditionally started with last year's budget and added money to cover inflation, caseload increases, and the like. Then it asked each agency to propose cuts. "But this familiar approach leaves us focused on what to cut, not what we keep," says Wolfgang Opitz, deputy director of OFM. "It accepts, with little question, most of the status quo level of spending. Moreover, it leads quickly to discussions about how fairly we've treated each agency's programs in the cut exercise."
In contrast, Hutchinson proposed a top-to-bottom review of everything state government did -- from the citizens' perspective, not the agencies'. He proposed to start not with last year's spending but with the results the governor wanted to produce. He urged the governor and his staff to focus not on how to cut 10 percent but on how to maximize the results produced with the remaining 90 percent. Governor Locke decided this unreasonable approach was the only reasonable thing to do.
PSG helped the governor's budget staff design a process to answer four key questions:
These four questions led to four very clear objectives.
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1. Set the price of government.
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This was the purview of a Guidance Team, made of up senior cabinet members, including chief of staff Fred Kiga, and several leaders from business and private think tanks. Its first task was to decide how much citizens were willing to spend. In early November, despite heavy lobbying by Locke, voters soundly defeated a gas tax increase to pay for long-needed transportation projects -- another in a string of successes for a powerful anti-tax coalition. This reality - plus a fear that tax increases would further depress the state's economy -- led the team to advise the governor against raising taxes. So he chose to build on the budget on expected revenues, with no tax increases.
The team also decided that the process should review all available funds, for the first time widening attention beyond the state's general fund to include its dedicated funds and revolving funds, as well as monies raised and spent locally.
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2. Set the priorities of government.
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Here the Guidance Team was assisted by a Staff Team, made up of senior people from the Office of Financial Management. Working together, they defined the key results they believed the citizens most wanted from state government. The Guidance Team refined these into 10 desired end results, which the governor called the "Priorities of Government." They included improvements in:
- student achievement in elementary, middle and high schools;
- the quality and productivity of the workforce;
- the value of a state college or university education;
- the health of Washington citizens;
- the security of Washington's vulnerable children and adults;
- the vitality of businesses and individuals;
- statewide mobility of people, goods, information and energy;
- the safety of people and property;
- the quality of Washington's priceless natural resources; and
- cultural and recreational opportunities.
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3. Allocate available resources across the results areas.
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The next challenge was to decide how to allocate the state's entire budget among the 10 results. The two teams set aside ten percent of the budget for overhead functions, such as pension contributions and internal services, then parceled the rest out among the 10 results, using a citizen's point of view (based on perceived value) rather than an analysis of past practice. In some areas their choices reinforced past patterns, but in a few they made strategic changes - allocating more resources to student achievement, for example, and fewer to public safety.
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4. Develop a purchasing plan for each result.
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The Staff Team then put together 10 "Results Teams," one for each outcome. The job of each Results Team was to produce a "purchasing plan" to procure the best results for citizens possible, given their available resources. Teams included knowledgeable people from agencies involved in that policy area, and each was chaired by a senior staff member from the Office of Financial Management.
"We asked them to forget the loyalties they have to the agencies they represent," said Gov. Locke. "`Be like citizens,' we said. `Tell us where to put the money, so we get the best results. Tell us what similar programs can be consolidated. Tell us what programs don't make a large enough difference in getting the results we want.'"
Each of the 10 Results Teams went through three "tollgates." Ahead of each tollgate, the Staff Team looked at the Results Teams' work and suggested ways to improve it. After each tollgate, the teams received feedback from the Staff and Guidance Teams, to guide their next submission.
At the first tollgate, teams had to present at least three indicators they would use to measure progress toward their outcome, so progress could be measured concretely. They also had to present a "strategy map," which used available evidence about "what really matters" to create an explicit cause-effect diagram -- showing the best ways to achieve the desired outcomes.
At the second tollgate, each team had to present its general purchasing plan: the five or six key purchases and/or strategies it would use to achieve the desired outcome. This step stimulated a kind of creativity that is absent from traditional budget processes. Asking how to produce specific results, rather than how to cut budgets, elicits far more strategic thinking about the best uses of public money. For example, the team dealing with K-12 education said they needed to purchase more early childhood education; start to move to a "pay for skills" compensation system for teachers; and move away from an "across the board" basis of funding toward targeted funding for those schools and kids most in need. The health team decided the highest impact strategies focused on prevention -- mitigating environmental hazards, improving food sanitation, providing public health clinics, and the like. They proposed spending more on these strategies and less on health insurance for childless adults.
Before tollgate three, the 10 Results Team leaders met together to talk about what they needed to purchase from one another. The higher education team decided to use some of its funds to pay for better K-12 education, to better prepare its incoming students. Two teams jointly bought improved water quality, to leverage both health and natural resources outcomes. Several teams decided to use some of their money to fund prisons, to reduce the number of low-risk prisoners who would be released early. This cross-team buying was important because the work of state government is so interconnected: inputs in one area contribute to outcomes in others.
Finally, the process turned to existing state activities - where traditional budget processes start. Each Result Team was given a subset of the 1300 state activities funded by the traditional budget. "Their mission," the governor explained, "was to get more yield on less acreage." To do so they had to put together a detailed purchasing plan, indicating four things:
- what they would buy -- both new and existing activities;
- what else they would buy if they had more money;
- what they would eliminate first if they had less money;
- and what they would not buy.
This product gave the Staff Team and Guidance Team a prioritized ranking of all existing activities of state government. Using these and similar rankings provided by the agencies, they made final recommendations to the governor. The result was, in effect, ten strategic programs for state government -- linking results, indicators, strategies, and purchase plans.
The governor embraced the product, following the purchase plans closely in finalizing his budget proposal. Under each of his 10 priority results, his budget showed those activities that would be purchased and those that would not. It was clear, easy to understand, and it explained in simple terms why some activities continued and others were eliminated.
The governor held back some of the more far-reaching reform proposals, such as the K-12 education reforms mentioned earlier, for further work. He proposed a joint legislative-executive study of the K-12 financing system to examine the options more carefully and build the political support necessary for reform. Next year, Opitz says, the finance office and the Results Teams will also work to deepen the reexamination of other strategies to produce the 10 results, in preparation for the next budget cycle. The finance office will also work with agencies to develop outcome and output measures for each activity, so the state can move to full-fledged results-based budgeting.
"NEVER HAS SUCH BAD NEWS BEEN RECEIVED SO WELL"
Governor Locke had warned that the budget would be painful, and it was. It proposed to eliminate health insurance for nearly 60,000 of the working poor, dental, hearing and optometric coverage for poor adults on Medicaid, and 2,500 state jobs. If passed, it would suspend cost-of-living increases for state employees, eliminate teacher pay increases, and suspend a $221 million class-size-reduction effort mandated by a citizen initiative. University tuition would rise by nine percent a year for two years; 1200 low-risk felons would leave prison early; and a series of smaller programs would shut down.
Yet the editorial response was overwhelmingly positive. As former chief of staff Joe Dear put it, "Never has such bad news been received so well."
"Gov. Gary Locke's budget is a big step forward for Washington," declared the Seattle Times.
"Few Washingtonians will find much to like about the brutal state spending plan Gov. Gary Locke recommended Tuesday," added the Tacoma News Tribune. "But as ugly as the result was, there's a lot to like about the way Locke and his staff arrived at it, using a new process that forced hard choices about the core priorities of state government."
Liberal interest groups such as labor objected strenuously to the deep cuts. But conservatives applauded. "Three cheers!" said the conservative Evergreen Freedom Foundation. "OFM's model will revolutionize state spending and take necessary steps toward assuring accountability to taxpayers."
After six years in office, Governor Locke had been widely seen as a status-quo manager. But by setting clear priorities and making tough choices - while refusing to raise taxes or make across-the-board cuts - he transformed his image. When Republican John Carlson ran against him in 2000, his central message was that Locke had failed to show any leadership. Soon after the budget was released, he wrote a column indicating he had changed his mind. Locke's "newly proposed $22.9 billion budget for the next two years is a work of bold, impressive statecraft," he wrote. He told the Seattle Times: "He is willing to face down the most powerful interest groups in his own party to bring this budget in without a major tax increase. Genuine leadership is doing what must be done when you don't want to do it. And I think the governor is doing that."
In a late January survey, voters agreed. Sixty-four percent endorsed the following statement: "Whether or not I agree with all of the Governor's budget recommendations, I respect his leadership and vision to solve the current problem and get the state's economy back on track." Only 29 percent disagreed.
The Republican legislature also liked the new budget format. "It was astounding," says Finance Director Brown. "I've never been to a set of hearings where the reception was so positive, despite the amount of bad news we had to deliver." With the budget framed around 10 desired results and all activities listed in order of importance - including those that would survive and those that would be eliminated - legislators found the budget documents very clear. "They seemed to understood the whole picture. I think there have been a lot of `aha' moments when we've done presentations to the public and to interest groups too: `Here's the $24 billion we're buying and the $2.4 billion we're not.'"
One committee chair asked what would happen if a proposed revenue change in health were not approved, Opitz recalls. "I said: `Just move the line up $389 million. That shows you what's still on the list and what's off.' There was no hemming and hawing. It made it very clear that our choice was probably better than cutting deeper into the Medicaid program."
In early April (2003), when the State Senate released and passed its own budget, it began with the words: "Following the Governor's Lead."
Public reaction was similar. "When we've taken this public, no matter what the setting -- business, labor, social services advocates, health care, the classroom, the rotary meeting -- people understand what we're doing and not doing in a much more fundamental way than ever before," according to Opitz. "When they say, `Well, I don't like that cut,' I say, `Okay, then what from above this line do you not want to do?' And the response is usually `Oh.. Well, I'm learning to like the cut a little more now.' It seems to be helping re-subscribe everyone to the basic business of state government."
Perhaps most important, this results-based budget process can help public leaders win back some of the support government has lost in recent decades. The Everett Daily Herald put it well: "The public is not in a forgiving mood. It still holds a grudge for a government it sees as wasteful and unresponsive. Locke's plan, or one like it, might be a good step toward proving otherwise. The more thrifty government becomes, the more generous voters might be at the ballot box in years to come."
Connie Nelson and David Osborne are partners in the Public Strategies Group, a consulting firm whose mission is to be the best resource on transforming governance in the world.
