Agenda 2005: A Guide to the Issues – Spending

Spending

Agenda

• Encourage more transparency and disclosure of government spending in a manner that is understandable and accessible to taxpayers
• Implement a reasonable limit on government spending
• Establish a formal, objective analysis of all spending
• Consolidate support services and utilize technology to reduce costs
• Commission a Sunset Commission to audit every spending program
• Adopt a capital charge system
• Reform the state retirement system by adopting a defined contribution plan
• Create a Regulatory Review and Innovation Commission

Facts

• In comparing spending among states, it is necessary to combine local and state spending due to the differences between states. For example, 72 percent of New Mexico’s K-12 education spending is at the state level, while in Nevada that number is only 29 percent. In addition, in order to adjust for different populations, it is necessary to use per-capita comparisons. When comparing fiscal year 2002 state and local direct general expenditures per capita, Georgia ranks 40th highest among the states.Georgia’s budget from FY 1991 to FY 2003 outpaced the increase in inflation and population by 5.6 percent or $780 million. Source: Twelve Years of Budget Growth: Where Has The Money Gone? – Allan Essig. Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, July 2003 (http://frp.aysps.gsu.edu/frp/frpreports/Report_84/index.htm)

• “The policy decision that had the greatest impact on the growth of the state budget being above the Baseline budget was the decision to raise teacher salaries at rates considerably higher than the rate of inflation. … Between FY 1995 and FY 2001, the average salary for a teacher in public elementary and secondary education in Georgia increased from $34,002 to $42,216. Georgia’s ranking of average salary as compared to other states improved from 24th to 16th. Between FY 1995 and FY 2002 the average salary for faculty at a public four-year college increased from $44,869 to $59,799. Georgia’s ranking of average salary as compared to other states increased from 36th to 26th.” Source: Twelve Years of Budget Growth: Where Has The Money Gone? – Allan Essig. Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, July 2003 (http://frp.aysps.gsu.edu/frp/frpreports/Report_84/index.htm)
• Georgia is one of only seven states receiving the highest bond ratings from all three bond rating services.

Overview

Georgia has benefited from a long history of conservative fiscal policy. Georgia is one of only seven states with a AAA bond rating (the highest) by all three major bond rating agencies, it has been among the leaders in efforts to privatize state government services, and it has eliminated outdated job protections for state employees hired after July 1, 1996. However, the state must continue to identify waste and become more efficient in order to maintain its competitive advantage.

Economic Freedom

The recently published Economic Freedom of North America 2004 Annual Report by the Fraser Institute states that “… research has found that economic freedom is positively correlated with per capita income, economic growth, greater life expectancy, lower child mortality, the development of democratic institutions, civil and political freedoms, and other desirable social and economic outcomes.”

The Fraser Institute’s often-cited Economic Freedom of the World compares the economic freedom of every country in the world. Just as this report “seeks to measure economic freedom on an international basis, Economic Freedom of North America has the goal of measuring differences in economic freedom among the Canadian provinces and US states.” Of the 50 U.S. states and 10 Canadian provinces, Georgia ranks third highest in the report. From 1981 through 2001 (the latest data studied), Georgia has consistently been among the highest rated states along with Delaware, Colorado, Tennessee, Nevada and Indiana. The study attempts to measure the size of government, property takings, discriminatory taxation and labor market freedom. The full report and underlying data is available from the Economic Freedom Network (http://freetheworld.com/).

Economic Freedom of North America – Top 15 States/Provinces

1. Delaware
2. Colorado
3. Georgia
4. Nevada
5. New Hampshire
6. South Dakota
7. Louisiana
8. Tennessee
9. Texas
10. Alberta
11. Arizona
12. Connecticut
13. Massachusetts
14. North Carolina
15. Indiana

Agenda:

Encourage more transparency and disclosure of government spending in a manner that is understandable and accessible to taxpayers

The best protection against wasteful government spending is transparency and disclosure. Information on government spending and programs should be easily accessible. With the Internet, cost is no longer an excuse. Information should be in a common, comparable format that can be easily understood by an average citizen.

Consider, for example, the area where we spend our greatest amount of money – K-12 education. Georgia spends more money on K-12 education than all but 18 states (16 if capital spending is included), according to the U.S. Census Bureau. Where is this money going? Unfortunately, it’s hard to tell. Budget information is readily available on the Georgia Department of Education’s Web site for each school system, but trying to find out how much money gets to your child’s elementary school and how it is spent is difficult. Finding comparative information on similar schools is next to impossible. The same is true for other local government functions. Is your fire department spending more or less than similar counties? Even if you can find out how much you are spending, it is again very difficult to find comparisons.

Taxpayers deserve easy access to local and state government spending and performance data. Thanks to legislation passed several years ago, all local governments must now keep their accounting books in the same format. This mandate gives the state a tremendous opportunity to make data available for taxpayers to compare their local community’s spending with similar communities around the state. Giving taxpayers access to this information will help identify unfunded state mandates and inefficiencies as well as model programs other communities could emulate.

Implement a reasonable limit on government spending

Reducing government spending is not easy. Where do you start – education, health care, corrections? Trying to lower the cost of state government by selecting certain programs for elimination one by one is both time consuming and politically difficult. Some programs may deserve a quick death, but there is a better way to attack government waste: Limit the growth of government.

In Georgia’s case, its thriving economy during the 1990s created a surge in government revenues and spending. Spending increased faster than inflation and population growth combined, despite significant tax cuts during this same time period. Georgia taxpayers deserve to know when the silent growth of government exceeds certain benchmarks.

Colorado is the best example of a state spending limit in practice. Growth in state and local revenues is constitutionally limited to the inflation rate plus the percentage change in population from the prior year. For example, if population increased 2 percent in the previous year and inflation was 3 percent, the increase in state spending would be limited to 5 percent. Excess revenues must be refunded in the following year unless voters agree to let the state keep the excess. Between 1997 and 2002, Colorado issued annual rebates to taxpayers totaling more than $3.2 billion. An initiative to increase spending for Colorado public schools was approved in 2001, proving that a spending limit doesn’t mean that deserving programs won’t be funded – it simply requires making your case publicly to citizens rather than cutting a back-room budget deal.

The Colorado law also applies to local government. Georgia has tried to arbitrarily limit local tax increases with caps on tax rates, such as limiting state and local sales tax rates to 7 percent and limiting millage rates for schools to 20 mills. A better policy would be to limit local spending increases and eliminate these crude caps in order to give local governments more flexibility.

For more information see:

• “Tax and Spending Limits: Theory, Analysis and Policy,” Barry Poulson, Independence Institute, February 26, 2004, http://www.i2i.org/article.aspx?ID=976. This study reviews the experience of tax and spending limits in several states and proposes model legislation based on this analysis.
• “A Celebration of TABOR,” Fiscal Policy Center, Independence Institute, http://www.i2i.org/TABOR2003.aspx – This page contains a collection of studies on Colorado’s Taxpayer’s Bill of Rights (TABOR) law.

Establish a formal, objective analysis of all spending

The state of Georgia has begun a process of fundamentally reviewing its core functions and setting priorities. This is important because there is nearly unlimited demand for government spending, but limited funds. Identifying core functions and priorities helps agencies and elected officials allocate these limited resources most effectively.

The old adage, “What gets measured, gets done” is very true. Establishing performance indicators for government services is another method to ensure accountability of taxpayer funds. If programs are not meeting their performance goals, they should either be eliminated or fundamentally reformed.

For more information see:

• Determining Government’s Core Functions, Georgia Public Policy Foundation, March 5, 2003, http://www.gppf.org/article.asp?RT=8&p=pub/GovernmentReform/core_functions.htm
• Citizen’s Budget: Part 3 – Target Spending Reductions Based on Priorities and Performance-Based Budgeting, Reason Public Policy Institute and The Performance Institute, April 30, 2003, http://www.rppi.org/partthree.pdf

Identify opportunities for contracting out

“It is not government’s obligation to provide services,
but to see that they’re provided.”
– former New York Governor Mario Cuomo

The Government Performance Project at Syracuse University reported that at the end of 2000, contracting consumed on average about 19 percent of state operating budgets. (John R. Bartle, “Procurement and Contracting in State Government, 2000,” Government Performance Project, Syracuse University, P.4, cited by Geoffrey F. Segal, Adrian T. Moore, and Adam B. Summers in “Competition and Government Services: Can Massachusetts Still Afford the Pacheco Law?” White Paper No. 19, Pioneer Institute for Public Policy Research, October 2002, P.9.) Based on Georgia’s budget of more than $16 billion, that would equal approximately $3 billion annually spent on purchases and contracts for a potential conservative estimate of cost savings of 15-30 percent.

There are obviously some functions of government that are inherently governmental in nature, such as police powers, e.g. the State Patrol, that you would never contract out. But many functions in government agencies are commercial in nature – printing, management, administrative support, etc. These functions should be reviewed for their potential to be contracted out. Even if these functions are kept in-house, the competition from the outside will enhance efficiency and customer service more effectively than leaving government employees insulated inside large bureaucracies. The federal government and the State of Virginia have implemented well-designed competition programs that Georgia should consider.

For the federal program, see http://www.whitehouse.gov/omb/procurement/fair-index.html, for Virginia’s see http://www.vipnet.org/ccc/commercial.htm.

Georgia has been a leader in contracting out services. The Governor’s Privatization Commission was created in 1995 and disbanded two years later. As opposed to other privatization studies, many recommendations of this commission were actually implemented, saving Georgia taxpayers millions of dollars. The responsibility for further privatization has shifted from the Commission to state department heads, with the Governor’s Office of Planning and Budget responsible for oversight.

Privatization has also been successful in many of Georgia’s cities. In a 1999 privatization survey conducted by the Georgia Municipal Association, 81 percent of the cities responding indicated that they had privatized at least one municipal service. Almost 44 percent of the responding cities indicated that the privatized service had saved the city money, while 48 percent of the cities indicated that the privatized service had improved service delivery.[1]

Two local governments that have done an outstanding job lowering the cost of government through competition are Indianapolis and Charlotte. Both cities saved taxpayers millions of dollars by encouraging competition for and/or privatization of city services. Former Indianapolis Mayor Stephen Goldsmith used what he called the Yellow Pages test. In looking for ways to increase competition, the mayor’s rule of thumb was to “look in the city’s yellow pages. If the phone book lists three companies that provide a certain service, the city probably should not be in that business, at least not exclusively.”[2]

For more information see:

• Citizen’s Budget: Part 6 – Enact Competitive Sourcing and Procurement Reforms, Reason Public Policy Institute and The Performance Institute, April 30, 2003,http://www.rppi.org/partsix.pdf

Consolidate support services and utilize technology to reduce costs

The federal government has saved a significant amount of money by consolidating support services and using Web-based technology. Examples include training, recruitment, payroll, travel, records management and procurement.[3] The state of Florida will save $24 million a year by Web enabling and outsourcing its human resources, payroll and benefit administration functions now serving 135,000 employees across 30 agencies. Florida’s HR outsourcing and technology enhancement initiative will also allow it to reduce the number of employees delivering HR services by 1,000.[4] The State of Georgia and several Georgia cities have already begun to show progress in this area by automating drivers’ license renewals and corporate registrations and implementing e-procurement and e-training.

For more information see:

• Citizen’s Budget: Part 4 – Streamline and Reorganize State Government through Consolidation and e-Government, Reason Public Policy Institute and The Performance Institute, April 30, 2003, http://www.rppi.org/partfour.pdf.

Commission a Sunset Commission

The Governor and the Legislature are often too close to political pressures to adequately and appropriately review the performance of each state program. A Sunset Commission would conduct a thorough audit of state finances and expenditures and to recommend ways the government can cut costs, reduce waste, and improve efficiency and service levels. The success of such commissions in other states, such as Texas, Illinois and Virginia, suggest that this would represent a significant first step in helping legislators to identify ways to improve state budgeting and services.

The Commission would analyze every spending program and make recommendations to the Legislature. Examples of the types of questions that would be asked:

• Is this program a legitimate function of government?
• Is this program a local, rather than state, responsibility?
• Could this program be operated more efficiently through privatization or competition?
• Does this program duplicate other programs at the federal, state or local level?
• Does this program offer services that should be the responsibility of private charities or individuals?

The Commission could also authorize recovery auditing to correct errors in vendor payments. Georgia has had its share of problems with wasteful and inaccurate payments to vendors. A recovery audit engages an outside auditor to find incorrect or duplicate payments, pricing errors and fraud. The auditor is frequently paid from the savings so no additional funding is necessary. Georgia has initiated such an audit of its pharmaceutical purchasing.

Adopt a capital charge system

Most city agencies have little incentive to extract the greatest value from the use of their assets because the capital cost of land and buildings and other assets are not reflected in their budgets. This can be rectified by assessing a “cost of capital” charge on all assets. A capital charge essentially applies an interest rate to all capital, creating an actual cost for using capital. The charge creates an incentive to balance a capital expenditure against its usefulness in achieving the agency’s goals because, suddenly, the once-invisible costs of land and buildings become very real to agencies that find themselves charged for their use. New Zealand adopted a capital charge in the 1990s and studies have shown that most chief financial officers of departments believe it’s caused them to pay greater attention to asset utilization.[5]

Reform the state retirement system by adopting a defined contribution plan

Georgia should immediately begin the process of modernizing state government. A good place to start is its much-abused state employee retirement system. While nearly the entire private sector has moved to 401(k) accounts and IRAs, state government still offers a defined benefit plan that discourages employee mobility and encourages political cronyism.

In an era of government downsizing, employees need flexibility to change jobs rather than clinging to an unwanted job simply to maximize retirement benefits. Pension reform will help government attract the best employees and directly impact government efficiency. It also will eliminate the “golden parachutes” given by powerful elected officials to their favored friends.

The following table lists the benefits of a defined contribution plan.

Defined Benefit Plans	Defined Contribution Plans
Participants must typically work a certain number of years before being vested.	Participants are typically vested immediately.
Primarily benefit workers that spend 20-30 years with the same employer. This is because at the point of retirement, the pension benefit is calculated in large part by using the average salary from the previous two or three years’ work. In government service, senior employees have the highest salaries, and therefore younger potential employees are faced with the prospect of working for the same employer for the rest of his or her life to receive the full benefits provided by the plan.	Helpful in attracting a new generation of workers into public service. These plans are similar to the popular 401(k) plans available only to employees in the private sector, and are portable between jobs. This portability is extremely important because most experts assert that the average employee will have a minimum of seven different jobs over his or her lifetime. These plans allow for the movement of a worker between the public and the private sectors.
Value of benefits determined by a politically-set formula.	Value of benefits determined by the investment performance of the account.
Benefits and investments are typically quite conservative because benefits are based uponprojected investment returns and the investment risk must represent the average risk tolerance of the entire group.	Individuals determine their own risk/return tradeoff. For example, a younger person is free to choose a higher risk/return investment portfolio than someone closer to retirement.

Source: American Legislative Exchange Council

Create a Regulatory Review and Innovation Commission

Government often operates on the theory, “If you can’t tax it, regulate it.” That’s why Georgia should focus on eliminating unnecessary government regulations. A Regulatory Reform Commission with a clear mandate should be set up to review new regulatory proposals and to make recommendations to abolish regulations made obsolete by time or technology.

The cost of regulation is a hidden tax on economic growth. Reasonable regulation to protect health, human safety and the environment is important, but many regulations are either outdated, needlessly complex and/or inflexible. This particularly places a burdensome compliance cost on small businesses, which do not have extensive legal and regulatory experts on their staff to guide them through the often complex requirements of the law. Because small businesses are the jobs engine of our economy, it is critical that Georgia address this issue.

Colorado, Virginia and Pennsylvania provide good models of systematic review of regulations and legislation and weighing their impact on the state’s businesses and business climate. Georgia should create a similar Regulatory Review and Innovation Commission that would focus on results rather than process and would effectively communicate to lawmakers the costs and benefits of proposed and existing rules, regulations and laws.

Eliminating unnecessary government regulations that present obstacles to investment, entrepreneurship and business survival will boost risk-taking, innovation and job creation. Most people assume that the recent growth in outsourcing is due to wage rates, but a National Association of Manufacturing study found that wage costs account for around 10 percent of manufacturing costs. The other costs identified in the study as more important to U.S. competitiveness were regulatory costs, tort costs and the U.S. tax code.[6] By keeping regulations under control, Georgia’s competitive position will be strengthened — an extremely important attribute in an era where both capital and labor can easily move across state, national and international borders.

For more information see:

• Pennsylvania Independent Regulatory Review Commission,
• Colorado Office of Economic Competitiveness and Regulatory Reform,
• Regulatory Reform at the Local Level: Regulating for Competition, Opportunity, and Prosperity, Adrian T. Moore and Tom Rose, Reason Public Policy Institute, February 1998

 

 

State Spending Growth: Baseline Budget vs. Actual Budget
(baseline budget based on growth in population and inflation)
	FY 1991 Budget	FY 2003 Budget	Baseline Budget	Difference Between FY 2001 and Baseline Budget		Difference as a Percentage of Budget
Education	$2,845,332,437	$6,001,209,008	$5,099,904,429	$901,304,579		17.7%
Corrections	$437,152,821	$927,037,519	$783,542,049	$143,495,470		18.3%
Juvenile Justice	$72,809,211	$272,089,291	$130,501,453	$141,587,838		108.5%
Medicaid Benefits	$687,460,289	$1,609,241,220	$1,508,246,859	$100,994,361		6.7%
DTAE	$127,838,855	$277,871,777	$229,135,244	$48,736,533		21.3%
Judicial Branch	$56,234,292	$136,885,691	$100,792,973	$36,092,718		35.8%
Regents	$909,857,468	$1,665,559,739	$1,630,806,323	$34,753,416		2.1%
Debt Service	$351,257,589	$625,421,301	$629,585,531	($4,164,230)		-0.7%
Natural Resources	$70,302,446	$111,298,112	$126,008,389	($14,710,277)		-11.7%
Agriculture	$38,220,486	$44,039,095	$68,505,466	($24,466,371)		-35.7%
Forestry	$34,417,892	$35,460,912	$61,689,790	($26,228,878)		-42.5%
All Other Agencies	$538,264,018	$925,740,816	$1,038,894,003	($113,153,187)		-10.9%
Transportation	$500,037,860	$667,076,123	$896,255,659	($229,179,536)		-25.6%
Human Resources	$962,995,666	$1,405,981,127	$1,681,566,906	($275,585,779)		-16.4%
Property Tax Cut		$377,500,000		$377,500,000
PeachCare		$60,873,226		$60,873,226
Total Budget	$7,632,181,330	$15,143,284,957	$13,985,435,074	$1,157,849,883		8.3%
Total Budget less tax cut	$7,632,181,330	$14,765,784,957	$13,985,435,074	$780,349,883		5.6%
Source: Twelve Years of Budget Growth: Where Has The Money Gone? – Allan Essig. Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, July 2003
http://frp.aysps.gsu.edu/frp/frpreports/Report_84/index.htm

 

Georgia State and Local Spending (FY 2002)
Spending	Amount (thousands)	Summary	%	Per-Capita Rank*
Current Operations – Air Transportation	$119,909		0.3%	34
Current Operations – Correctional Institutions	$773,941		1.7%	22
Current Operations – Corrections – Other	$862,899		1.9%	6
Current Operations – Elementary & Secondary Education	$10,664,242		23.7%	19
Current Operations – Higher Education Auxiliary Enterprises	$252,559		0.6%	47
Current Operations – Other Higher Education	$3,126,190		7.0%	42
Current Operations – Educ. Scholarships, Assistance, & Subsidies	$609,925		1.4%	5
Current Operations – Other Education	$461,940		1.0%	19
Current Operations – Social Insurance Administration	$139,922		0.3%	31
Current Operations – Financial Administration	$643,418		1.4%	45
Current Operations – Fire Protection	$564,766		1.3%	28
Current Operations – Judicial and Legal Services	$647,851		1.4%	33
Current Operations – Legislative Services	$30,264		0.1%	50
Current Operations – Central Staff Services	$547,559		1.2%	10
Current Operations – General Public Buildings	$202,729		0.5%	24
Current Operations – Health Services – Other	$1,312,707		2.9%	29
Current Operations – Own Hospitals	$3,297,834		7.3%	10
Current Operations – Other Hospitals	$3,611		0.0%	14
Current Operations – Regular Highways	$669,575		1.5%	50
Current Operations – Toll Highways	$13,144		0.0%	23
Current Operations – Housing & Community Development	$567,755		1.3%	31
Current Operations – Libraries	$106,545		0.2%	50
Current Operations – Natural Resources, Agriculture-Other	$204,952		0.5%	28
Current Operations – Natural Resources, Fish & Game	$42,223		0.1%	41
Current Operations – Natural Resources, Forestry	$40,040		0.1%	19
Current Operations – Natural Resources – Other	$146,781		0.3%	36
Current Operations – Parking Facilities	$1,657		0.0%	47
Current Operations – Parks & Recreation	$451,013		1.0%	37
Current Operations – Police Protection	$1,423,058		3.2%	32
Current Operations – Protective Inspection and Regulation, NEC	$181,371		0.4%	41
Current Operations – Welfare, Fed. Categorical Assistance Prgms.	$206,311		0.5%	36
Current Operations – Welfare, Vendor Payments for Medical Care	$4,984,176		11.1%	33
Current Operations – Welfare – Other	$949,038		2.1%	46
Current Operations – Sewerage	$472,351		1.1%	31
Current Operations – Solid Waste Management	$413,300		0.9%	30
Current Operations – Other Veterans Services	$6,233		0.0%	25
Current Operations – Sea and Inland Port Facilities	$74,116		0.2%	13
Current Operations – General – Other	$1,218,718		2.7%	39
Current Operations		$36,434,623	81.1%	41
Construction – Air Transportation	$96,519		0.2%	30
Construction – Correctional Institutions	$22,861		0.1%	21
Construction – Corrections – Other	$82,051		0.2%	6
Construction – Elementary & Secondary Education	$1,277,034		2.8%	11
Construction – Higher Education – Auxiliary Enterprises	$155		0.0%	43
Construction – Higher Education – Other	$318,497		0.7%	28
Construction – Education – Other	$78,900		0.2%	2
Construction – Financial Administration	$12,494		0.0%	7
Construction – Fire Protection	$19,643		0.0%	17
Construction – Judicial & Legal	$22,711		0.1%	13
Construction – Central Staff Services	$38,345		0.1%	6
Construction – General Public Buildings	$138,105		0.3%	14
Construction – Health – Other	$5,529		0.0%	28
Construction – Own Hospitals	$68,333		0.2%	19
Construction – Regular Highways	$1,864,943		4.1%	25
Construction – Housing & Community Development	$138,478		0.3%	12
Construction – Libraries	$7,839		0.0%	30
Construction – Agriculture – Other	$2,480		0.0%	21
Construction – Forestry	$105		0.0%	21
Construction – Natural Resources – Other	$58,640		0.1%	12
Construction – Parking Facilities	$4,991		0.0%	20
Construction – Parks & Recreation	$196,885		0.4%	16
Construction – Police Protection	$40,223		0.1%	12
Construction – Protective Inspection & Regulation	$2,022		0.0%	8
Construction – Welfare – Other	$10,541		0.0%	9
Construction – Sewerage	$563,414		1.3%	4
Construction – Solid Waste Management	$54,161		0.1%	5
Construction – Other Veterans Services	$3,828		0.0%	3
Construction – Sea and Inland Port Facilities	$30,375		0.1%	13
Construction – General	$363,191		0.8%	21
Total Construction		$5,523,293	12.3%	16
Other Capital Outlay		$1,861,284	4.1%	13
General – Interest on Debt		$1,131,698	2.5%	49
Direct general expenditure		$44,950,898	100.0%	40

* Higher rank equals higher amount. Includes 50 states – District of Columbia excluded. Per capita amounts calculated using April 1, 2002 U.S. Census population for each state.

For a breakdown of state and local revenues, see http://www.census.gov/govs/estimate/0211gasl_1.html

How the state budget process works (Source: State of Georgia Budget documents)

As opposed to the federal government, Georgia’s Constitution mandates that the state budget cannot exceed expected revenues. There is also a limit on how much debt the state is allowed to issue. The State of Georgia FY 2003 Budget Report states that Georgia’s Constitution “limits the highest aggregate annual debt service, including recommended debt, as a percentage of the net treasury receipts for the prior fiscal year. The maximum percentage allowed by the current state Constitution is 10%, effective in FY 1984. Prior to FY 1984 the maximum percentage allowed by the Constitution was 15%.”

The State of Georgia FY 2003 Budget Report states “the Governor, who is the Budget Director, is responsible for establishing the official revenue estimate. The Governor is assisted in this responsibility by a state economist under contract as a consultant with OPB, which serves as the budget staff for the Governor. The basis for making revenue projections is a computerized econometric model. From this model, a range of estimates is provided to the Governor by his economic advisor. In December, just prior to finalizing his budget recommendations to the General Assembly, the Governor adopts a final revenue estimate — an action that, when added to surplus and reserve funds, determines the size of the forthcoming appropriations bill.”

Therefore, the state budget is limited by three factors: 1) the constitutional requirement of a balanced budget, 2) the constitutional limit on debt service, and 3) the Governor’s ability to set the revenue estimate.

Reserves

Two reserves are established by the state on June 30, the end of the state’s fiscal year, if funds are available — the Midyear Adjustment Reserve and the Revenue Shortfall Reserve.

The Midyear Adjustment Reserve is established by the State Auditor on June 30 each year and represents 1% of net revenue collections for that fiscal year, to the extent surplus funds are available up to that total. The Reserve is set aside to be appropriated in an amended budget at the next session of the General Assembly. The Reserve is considered to be the primary fund source for the State Board of Education’s “Midterm Adjustment.” This adjustment is appropriated in the upcoming amended budget each year to provide the state’s share of the increased cost of new students enrolled in the fall.

The Revenue Shortfall Reserve is also established on June 30 after the Midyear Adjustment Reserve has been filled. It is equal to not less than 3% nor more than 5% of the fiscal year’s net revenue collections, to the extent surplus funds are available. The Revenue Shortfall Reserve is often referred to the state’s “rainy day” fund and is available to offset an unexpected shortage in revenues during the upcoming fiscal year.

Occasionally, other reserves can be available for appropriation. For instance, the Motor Fuel Reserve represents funds earmarked for expenditure by the Department of Transportation in years when motor fuel tax collections exceed the original budgeted estimate for motor fuel collections in the preceding fiscal year. All motor fuel tax collections are constitutionally allocated to the Department of Transportation whether appropriated or not, but are routinely included in the state’s amended budgets.

How Budgets are Approved

Three kinds of budgets can be approved in Georgia — an original budget, an amended budget, and a supplementary budget. An original budget is just what is says — the first budget passed for a fiscal year. Generally, this budget remains in effect until the General Assembly convenes in January, at which time the budget is generally changed by adding appropriations, decreasing appropriations, or shifting expenditures between object classes.

An amended budget is one in which any type of change can be made — additions, deletions, or transfers. A supplementary budget is one which includes only new spending. Generally, a supplementary bill is passed early in the session to provide appropriations needed before a more extensive amended bill can be passed. All of these budgets, at the end of the session, become one operating budget for the state, with no distinction made for the various appropriations acts that are passed.The General Assembly can meet at any time in special session and amend the budget in effect. These occasions are rare, having occurred only twice in recent decades. Both were triggered by economic recessions in Georgia that required major budget cuts to avoid spending more money than was available for expenditure.

State law requires all state agencies to submit a request for appropriations for the next fiscal year to OPB no later than September 1 of each year. Most agencies start preliminary work on these requests in the spring for a fiscal year that is 14 to 15 months in the future. At the same time, agencies may request amendments for changes in the current fiscal year’s budget.

In early September, the Governor begins a four-month period in which he studies the budget requests of each department and develops his recommendations to the General Assembly. During this interim, he meets with department heads and consults with OPB staff in finalizing his proposals.

Budget Announcements

The Governor normally appears before a joint meeting of the House and Senate Appropriations Committees during the first week in January to announce his recommendations for amending the current year’s budget. The Governor announces the next year’s budget recommendations during the annual Budget Message, which is delivered to a joint legislative session during the first week of the annual session. The Legislature convenes on the second Monday in January.

Legislative Action

By law, an appropriations bill is introduced in the House of Representatives and first goes to the House Appropriations Committee for consideration before being voted on by the entire House. The bill follows a similar path through the Senate. The House and Senate versions usually differ. While still working within the total revenue estimate established by the Governor, a conference committee is then appointed to reach a compromise on the two versions. The conference committee’s version must be totally accepted or rejected by each house. A rejection results in appointment of a new conference committee.

The process is the same for amended and outyear appropriations bills. The only difference is the General Assembly generally takes actions on amended and supplementary bills before taking up the budget for the following year. That is done because changes in the current year’s budget often impact the following year’s budget.

The Supplemental Budget

The Supplemental Budget receives much attention. Because the Governor traditionally sets a very conservative revenue estimate, actual revenues typically exceed the estimate by a fairly substantial amount. The appropriation of these additional revenues in the supplemental budget often causes debate over whether these are “extra” funds that should be rebated to the taxpayers rather than fund “pork barrel” spending projects, or whether these are simply funds that would normally be appropriated in the original budget if not for Georgia’s traditionally more conservative revenue estimate.

Alan Essig of Georgia State University has explored these questions in his paper, “Where has the Money Gone? Part II: The Supplemental Budget” published in 2001. The executive summary is below:

There have been over $4.1 billion in additional revenues contained in the supplemental budget during fiscal years 1996 through 2001. Additional revenues available in the supplemental budget has increased from $224 million in FY 1996 to $1.2 billion in FY 2001. The increased use of the supplemental budget over the past six years has led to questions regarding the appropriate role of the supplemental budget within the overall budget process. There are three main major policy questions involved in the use of additional funds within the supplemental budget:

1. For what purposes or categories should funds be appropriated within the supplemental budget?

2. Should funds not appropriated within the supplemental budget be rolled over and appropriated within the next fiscal year budget?

3. Should funds not appropriated within the supplemental budget be given back to the taxpayers through a tax cut?

Sources of the $4.1 billion in additional revenues between FY 1996 and FY 2001 include: surplus revenues collected above the Governor’s revenue estimate from the previous fiscal year ($2.9 billion); funds which have lapsed due to state agencies not spending their entire appropriated budget from the previous fiscal year ($452 million); funds from the Midyear Adjustment Reserve ($694 million); and funds from the Motor Fuel Reserve ($156 million). Surplus revenues account for almost 70 percent of all supplemental budget additional revenues between FY 1996 and FY 2001.

The additional $4.1 billion in revenues have been used in several different ways including: separate appropriations bills for one time critical spending ($1.05 billion); pre-funding debt service ($500 million); education mid-term adjustment ($512 million); new debt service ($301 million); and general appropriations to state agencies ($1.25 billion). In addition, a portion of these revenues ($485 million) have not been appropriated in the supplemental budget, but have been rolled over for appropriation in the next fiscal year. Over 34 percent ($1.4 billion) of all available supplemental funds was appropriated for education purposes.

There are several arguments in favor of eliminating the supplemental budget. First, the General Assembly would have to consider only one budget and could thus spend more time considering the regular budget. That would be expected to lead to more informed decisions. Second, all budget requests would be considered together, making it easier to prioritize all budget requests. There is also a philosophical argument that the surplus funds available within the supplemental budget are actually excess revenues, and therefore ought to be returned to the tax payer through a tax cut or tax rebate.

There are also several drawbacks in eliminating the supplemental budget. The option of eliminating the supplemental budget would result in some combination of available supplemental funds being rolled over into the next general budget or available supplemental funds being used for a tax cut or tax rebate. A probable consequence of an elimination of the supplemental budget would be that the Governor would use a more liberal revenue estimate, thereby eliminating or minimizing the surplus, in order to ensure that the priorities of the Governor are funded in the beginning of the fiscal year.

This would leave the state budget in a more precarious position in case of an economic downturn. The elimination of the supplemental budget could also make it more difficult to handle emergencies and make it more important to estimate budget needs accurately in that, as a result of a more liberal revenue estimate, there would be less excess funds available to fund emergencies or shortages. The only way to fund emergencies or shortages in such a situation would be to cut existing funding. This could cause confusion and uncertainty within the state budget process.

A conservative approach to supplemental budget expenditures would limit the purposes/categories that should be funded (have first priority) to the following: education midterm adjustment; unplanned emergencies; predicted emergencies; legislation; and shortages. A less conservative approach to supplemental budget expenditures would include: surplus motor fuel funds, surplus funds from the Hazardous Waste Trust Fund, and surplus funds from the Solid Waste Trust Fund; new debt service; pre-funding of debt service; and a tax rebate. The least conservative approach to supplemental budget expenditures would include appropriations to agencies for various projects requiring one-time influx of funds (without an ongoing budget expense) and for new or expanded programs that have an ongoing budget expense.

The question as to whether funds not appropriated within the supplemental budget should be rolled over and appropriated in the next fiscal years budget or whether such funds should be given back to the taxpayers in the form of a tax cut must be looked at in terms of the states overall budgetary and fiscal picture. All of the surplus funds are not “extra” funds that were unexpected. These funds are part of the overall budgetary and fiscal plan, and therefore should not be considered separately. Any decisions on the appropriateness of tax cuts should be made in regards to the broader overall budgetary, fiscal and economic priorities.

A potential model for a supplemental budget would encompass the funding of budget emergencies, the education midterm adjustment, and one-time expenditures. There is a strong argument to be made for funding new bond projects in the supplemental budget in that there may be cost savings due to the potential of lower interest rates. Any additional funds would then be rolled over into the next fiscal year to be made part of that year’s budget and tax deliberations.

Spending

Agenda

• Encourage more transparency and disclosure of government spending in a manner that is understandable and accessible to taxpayers
• Implement a reasonable limit on government spending
• Establish a formal, objective analysis of all spending
• Consolidate support services and utilize technology to reduce costs
• Commission a Sunset Commission to audit every spending program
• Adopt a capital charge system
• Reform the state retirement system by adopting a defined contribution plan
• Create a Regulatory Review and Innovation Commission

Facts

• In comparing spending among states, it is necessary to combine local and state spending due to the differences between states. For example, 72 percent of New Mexico’s K-12 education spending is at the state level, while in Nevada that number is only 29 percent. In addition, in order to adjust for different populations, it is necessary to use per-capita comparisons. When comparing fiscal year 2002 state and local direct general expenditures per capita, Georgia ranks 40th highest among the states.Georgia’s budget from FY 1991 to FY 2003 outpaced the increase in inflation and population by 5.6 percent or $780 million. Source: Twelve Years of Budget Growth: Where Has The Money Gone? – Allan Essig. Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, July 2003 (http://frp.aysps.gsu.edu/frp/frpreports/Report_84/index.htm)

• “The policy decision that had the greatest impact on the growth of the state budget being above the Baseline budget was the decision to raise teacher salaries at rates considerably higher than the rate of inflation. … Between FY 1995 and FY 2001, the average salary for a teacher in public elementary and secondary education in Georgia increased from $34,002 to $42,216. Georgia’s ranking of average salary as compared to other states improved from 24th to 16th. Between FY 1995 and FY 2002 the average salary for faculty at a public four-year college increased from $44,869 to $59,799. Georgia’s ranking of average salary as compared to other states increased from 36th to 26th.” Source: Twelve Years of Budget Growth: Where Has The Money Gone? – Allan Essig. Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, July 2003 (http://frp.aysps.gsu.edu/frp/frpreports/Report_84/index.htm)
• Georgia is one of only seven states receiving the highest bond ratings from all three bond rating services.

Overview

Georgia has benefited from a long history of conservative fiscal policy. Georgia is one of only seven states with a AAA bond rating (the highest) by all three major bond rating agencies, it has been among the leaders in efforts to privatize state government services, and it has eliminated outdated job protections for state employees hired after July 1, 1996. However, the state must continue to identify waste and become more efficient in order to maintain its competitive advantage.

Economic Freedom

The recently published Economic Freedom of North America 2004 Annual Report by the Fraser Institute states that “… research has found that economic freedom is positively correlated with per capita income, economic growth, greater life expectancy, lower child mortality, the development of democratic institutions, civil and political freedoms, and other desirable social and economic outcomes.”

The Fraser Institute’s often-cited Economic Freedom of the World compares the economic freedom of every country in the world. Just as this report “seeks to measure economic freedom on an international basis, Economic Freedom of North America has the goal of measuring differences in economic freedom among the Canadian provinces and US states.” Of the 50 U.S. states and 10 Canadian provinces, Georgia ranks third highest in the report. From 1981 through 2001 (the latest data studied), Georgia has consistently been among the highest rated states along with Delaware, Colorado, Tennessee, Nevada and Indiana. The study attempts to measure the size of government, property takings, discriminatory taxation and labor market freedom. The full report and underlying data is available from the Economic Freedom Network (http://freetheworld.com/).

Economic Freedom of North America – Top 15 States/Provinces

1. Delaware
2. Colorado
3. Georgia
4. Nevada
5. New Hampshire
6. South Dakota
7. Louisiana
8. Tennessee
9. Texas
10. Alberta
11. Arizona
12. Connecticut
13. Massachusetts
14. North Carolina
15. Indiana

Agenda:

Encourage more transparency and disclosure of government spending in a manner that is understandable and accessible to taxpayers

The best protection against wasteful government spending is transparency and disclosure. Information on government spending and programs should be easily accessible. With the Internet, cost is no longer an excuse. Information should be in a common, comparable format that can be easily understood by an average citizen.

Consider, for example, the area where we spend our greatest amount of money – K-12 education. Georgia spends more money on K-12 education than all but 18 states (16 if capital spending is included), according to the U.S. Census Bureau. Where is this money going? Unfortunately, it’s hard to tell. Budget information is readily available on the Georgia Department of Education’s Web site for each school system, but trying to find out how much money gets to your child’s elementary school and how it is spent is difficult. Finding comparative information on similar schools is next to impossible. The same is true for other local government functions. Is your fire department spending more or less than similar counties? Even if you can find out how much you are spending, it is again very difficult to find comparisons.

Taxpayers deserve easy access to local and state government spending and performance data. Thanks to legislation passed several years ago, all local governments must now keep their accounting books in the same format. This mandate gives the state a tremendous opportunity to make data available for taxpayers to compare their local community’s spending with similar communities around the state. Giving taxpayers access to this information will help identify unfunded state mandates and inefficiencies as well as model programs other communities could emulate.

Implement a reasonable limit on government spending

Reducing government spending is not easy. Where do you start – education, health care, corrections? Trying to lower the cost of state government by selecting certain programs for elimination one by one is both time consuming and politically difficult. Some programs may deserve a quick death, but there is a better way to attack government waste: Limit the growth of government.

In Georgia’s case, its thriving economy during the 1990s created a surge in government revenues and spending. Spending increased faster than inflation and population growth combined, despite significant tax cuts during this same time period. Georgia taxpayers deserve to know when the silent growth of government exceeds certain benchmarks.

Colorado is the best example of a state spending limit in practice. Growth in state and local revenues is constitutionally limited to the inflation rate plus the percentage change in population from the prior year. For example, if population increased 2 percent in the previous year and inflation was 3 percent, the increase in state spending would be limited to 5 percent. Excess revenues must be refunded in the following year unless voters agree to let the state keep the excess. Between 1997 and 2002, Colorado issued annual rebates to taxpayers totaling more than $3.2 billion. An initiative to increase spending for Colorado public schools was approved in 2001, proving that a spending limit doesn’t mean that deserving programs won’t be funded – it simply requires making your case publicly to citizens rather than cutting a back-room budget deal.

The Colorado law also applies to local government. Georgia has tried to arbitrarily limit local tax increases with caps on tax rates, such as limiting state and local sales tax rates to 7 percent and limiting millage rates for schools to 20 mills. A better policy would be to limit local spending increases and eliminate these crude caps in order to give local governments more flexibility.

For more information see:

• “Tax and Spending Limits: Theory, Analysis and Policy,” Barry Poulson, Independence Institute, February 26, 2004, http://www.i2i.org/article.aspx?ID=976. This study reviews the experience of tax and spending limits in several states and proposes model legislation based on this analysis.
• “A Celebration of TABOR,” Fiscal Policy Center, Independence Institute, http://www.i2i.org/TABOR2003.aspx – This page contains a collection of studies on Colorado’s Taxpayer’s Bill of Rights (TABOR) law.

Establish a formal, objective analysis of all spending

The state of Georgia has begun a process of fundamentally reviewing its core functions and setting priorities. This is important because there is nearly unlimited demand for government spending, but limited funds. Identifying core functions and priorities helps agencies and elected officials allocate these limited resources most effectively.

The old adage, “What gets measured, gets done” is very true. Establishing performance indicators for government services is another method to ensure accountability of taxpayer funds. If programs are not meeting their performance goals, they should either be eliminated or fundamentally reformed.

For more information see:

• Determining Government’s Core Functions, Georgia Public Policy Foundation, March 5, 2003, http://www.gppf.org/article.asp?RT=8&p=pub/GovernmentReform/core_functions.htm
• Citizen’s Budget: Part 3 – Target Spending Reductions Based on Priorities and Performance-Based Budgeting, Reason Public Policy Institute and The Performance Institute, April 30, 2003, http://www.rppi.org/partthree.pdf

Identify opportunities for contracting out

“It is not government’s obligation to provide services,
but to see that they’re provided.”
– former New York Governor Mario Cuomo

The Government Performance Project at Syracuse University reported that at the end of 2000, contracting consumed on average about 19 percent of state operating budgets. (John R. Bartle, “Procurement and Contracting in State Government, 2000,” Government Performance Project, Syracuse University, P.4, cited by Geoffrey F. Segal, Adrian T. Moore, and Adam B. Summers in “Competition and Government Services: Can Massachusetts Still Afford the Pacheco Law?” White Paper No. 19, Pioneer Institute for Public Policy Research, October 2002, P.9.) Based on Georgia’s budget of more than $16 billion, that would equal approximately $3 billion annually spent on purchases and contracts for a potential conservative estimate of cost savings of 15-30 percent.

There are obviously some functions of government that are inherently governmental in nature, such as police powers, e.g. the State Patrol, that you would never contract out. But many functions in government agencies are commercial in nature – printing, management, administrative support, etc. These functions should be reviewed for their potential to be contracted out. Even if these functions are kept in-house, the competition from the outside will enhance efficiency and customer service more effectively than leaving government employees insulated inside large bureaucracies. The federal government and the State of Virginia have implemented well-designed competition programs that Georgia should consider.

For the federal program, see http://www.whitehouse.gov/omb/procurement/fair-index.html, for Virginia’s see http://www.vipnet.org/ccc/commercial.htm.

Georgia has been a leader in contracting out services. The Governor’s Privatization Commission was created in 1995 and disbanded two years later. As opposed to other privatization studies, many recommendations of this commission were actually implemented, saving Georgia taxpayers millions of dollars. The responsibility for further privatization has shifted from the Commission to state department heads, with the Governor’s Office of Planning and Budget responsible for oversight.

Privatization has also been successful in many of Georgia’s cities. In a 1999 privatization survey conducted by the Georgia Municipal Association, 81 percent of the cities responding indicated that they had privatized at least one municipal service. Almost 44 percent of the responding cities indicated that the privatized service had saved the city money, while 48 percent of the cities indicated that the privatized service had improved service delivery.[1]

Two local governments that have done an outstanding job lowering the cost of government through competition are Indianapolis and Charlotte. Both cities saved taxpayers millions of dollars by encouraging competition for and/or privatization of city services. Former Indianapolis Mayor Stephen Goldsmith used what he called the Yellow Pages test. In looking for ways to increase competition, the mayor’s rule of thumb was to “look in the city’s yellow pages. If the phone book lists three companies that provide a certain service, the city probably should not be in that business, at least not exclusively.”[2]

For more information see:

• Citizen’s Budget: Part 6 – Enact Competitive Sourcing and Procurement Reforms, Reason Public Policy Institute and The Performance Institute, April 30, 2003,http://www.rppi.org/partsix.pdf

Consolidate support services and utilize technology to reduce costs

The federal government has saved a significant amount of money by consolidating support services and using Web-based technology. Examples include training, recruitment, payroll, travel, records management and procurement.[3] The state of Florida will save $24 million a year by Web enabling and outsourcing its human resources, payroll and benefit administration functions now serving 135,000 employees across 30 agencies. Florida’s HR outsourcing and technology enhancement initiative will also allow it to reduce the number of employees delivering HR services by 1,000.[4] The State of Georgia and several Georgia cities have already begun to show progress in this area by automating drivers’ license renewals and corporate registrations and implementing e-procurement and e-training.

For more information see:

• Citizen’s Budget: Part 4 – Streamline and Reorganize State Government through Consolidation and e-Government, Reason Public Policy Institute and The Performance Institute, April 30, 2003, http://www.rppi.org/partfour.pdf.

Commission a Sunset Commission

The Governor and the Legislature are often too close to political pressures to adequately and appropriately review the performance of each state program. A Sunset Commission would conduct a thorough audit of state finances and expenditures and to recommend ways the government can cut costs, reduce waste, and improve efficiency and service levels. The success of such commissions in other states, such as Texas, Illinois and Virginia, suggest that this would represent a significant first step in helping legislators to identify ways to improve state budgeting and services.

The Commission would analyze every spending program and make recommendations to the Legislature. Examples of the types of questions that would be asked:

• Is this program a legitimate function of government?
• Is this program a local, rather than state, responsibility?
• Could this program be operated more efficiently through privatization or competition?
• Does this program duplicate other programs at the federal, state or local level?
• Does this program offer services that should be the responsibility of private charities or individuals?

The Commission could also authorize recovery auditing to correct errors in vendor payments. Georgia has had its share of problems with wasteful and inaccurate payments to vendors. A recovery audit engages an outside auditor to find incorrect or duplicate payments, pricing errors and fraud. The auditor is frequently paid from the savings so no additional funding is necessary. Georgia has initiated such an audit of its pharmaceutical purchasing.

Adopt a capital charge system

Most city agencies have little incentive to extract the greatest value from the use of their assets because the capital cost of land and buildings and other assets are not reflected in their budgets. This can be rectified by assessing a “cost of capital” charge on all assets. A capital charge essentially applies an interest rate to all capital, creating an actual cost for using capital. The charge creates an incentive to balance a capital expenditure against its usefulness in achieving the agency’s goals because, suddenly, the once-invisible costs of land and buildings become very real to agencies that find themselves charged for their use. New Zealand adopted a capital charge in the 1990s and studies have shown that most chief financial officers of departments believe it’s caused them to pay greater attention to asset utilization.[5]

Reform the state retirement system by adopting a defined contribution plan

Georgia should immediately begin the process of modernizing state government. A good place to start is its much-abused state employee retirement system. While nearly the entire private sector has moved to 401(k) accounts and IRAs, state government still offers a defined benefit plan that discourages employee mobility and encourages political cronyism.

In an era of government downsizing, employees need flexibility to change jobs rather than clinging to an unwanted job simply to maximize retirement benefits. Pension reform will help government attract the best employees and directly impact government efficiency. It also will eliminate the “golden parachutes” given by powerful elected officials to their favored friends.

The following table lists the benefits of a defined contribution plan.

Defined Benefit Plans	Defined Contribution Plans
Participants must typically work a certain number of years before being vested.	Participants are typically vested immediately.
Primarily benefit workers that spend 20-30 years with the same employer. This is because at the point of retirement, the pension benefit is calculated in large part by using the average salary from the previous two or three years’ work. In government service, senior employees have the highest salaries, and therefore younger potential employees are faced with the prospect of working for the same employer for the rest of his or her life to receive the full benefits provided by the plan.	Helpful in attracting a new generation of workers into public service. These plans are similar to the popular 401(k) plans available only to employees in the private sector, and are portable between jobs. This portability is extremely important because most experts assert that the average employee will have a minimum of seven different jobs over his or her lifetime. These plans allow for the movement of a worker between the public and the private sectors.
Value of benefits determined by a politically-set formula.	Value of benefits determined by the investment performance of the account.
Benefits and investments are typically quite conservative because benefits are based uponprojected investment returns and the investment risk must represent the average risk tolerance of the entire group.	Individuals determine their own risk/return tradeoff. For example, a younger person is free to choose a higher risk/return investment portfolio than someone closer to retirement.

Source: American Legislative Exchange Council

Create a Regulatory Review and Innovation Commission

Government often operates on the theory, “If you can’t tax it, regulate it.” That’s why Georgia should focus on eliminating unnecessary government regulations. A Regulatory Reform Commission with a clear mandate should be set up to review new regulatory proposals and to make recommendations to abolish regulations made obsolete by time or technology.

The cost of regulation is a hidden tax on economic growth. Reasonable regulation to protect health, human safety and the environment is important, but many regulations are either outdated, needlessly complex and/or inflexible. This particularly places a burdensome compliance cost on small businesses, which do not have extensive legal and regulatory experts on their staff to guide them through the often complex requirements of the law. Because small businesses are the jobs engine of our economy, it is critical that Georgia address this issue.

Colorado, Virginia and Pennsylvania provide good models of systematic review of regulations and legislation and weighing their impact on the state’s businesses and business climate. Georgia should create a similar Regulatory Review and Innovation Commission that would focus on results rather than process and would effectively communicate to lawmakers the costs and benefits of proposed and existing rules, regulations and laws.

Eliminating unnecessary government regulations that present obstacles to investment, entrepreneurship and business survival will boost risk-taking, innovation and job creation. Most people assume that the recent growth in outsourcing is due to wage rates, but a National Association of Manufacturing study found that wage costs account for around 10 percent of manufacturing costs. The other costs identified in the study as more important to U.S. competitiveness were regulatory costs, tort costs and the U.S. tax code.[6] By keeping regulations under control, Georgia’s competitive position will be strengthened — an extremely important attribute in an era where both capital and labor can easily move across state, national and international borders.

For more information see:

• Pennsylvania Independent Regulatory Review Commission,
• Colorado Office of Economic Competitiveness and Regulatory Reform,
• Regulatory Reform at the Local Level: Regulating for Competition, Opportunity, and Prosperity, Adrian T. Moore and Tom Rose, Reason Public Policy Institute, February 1998

 

 

State Spending Growth: Baseline Budget vs. Actual Budget
(baseline budget based on growth in population and inflation)
	FY 1991 Budget	FY 2003 Budget	Baseline Budget	Difference Between FY 2001 and Baseline Budget		Difference as a Percentage of Budget
Education	$2,845,332,437	$6,001,209,008	$5,099,904,429	$901,304,579		17.7%
Corrections	$437,152,821	$927,037,519	$783,542,049	$143,495,470		18.3%
Juvenile Justice	$72,809,211	$272,089,291	$130,501,453	$141,587,838		108.5%
Medicaid Benefits	$687,460,289	$1,609,241,220	$1,508,246,859	$100,994,361		6.7%
DTAE	$127,838,855	$277,871,777	$229,135,244	$48,736,533		21.3%
Judicial Branch	$56,234,292	$136,885,691	$100,792,973	$36,092,718		35.8%
Regents	$909,857,468	$1,665,559,739	$1,630,806,323	$34,753,416		2.1%
Debt Service	$351,257,589	$625,421,301	$629,585,531	($4,164,230)		-0.7%
Natural Resources	$70,302,446	$111,298,112	$126,008,389	($14,710,277)		-11.7%
Agriculture	$38,220,486	$44,039,095	$68,505,466	($24,466,371)		-35.7%
Forestry	$34,417,892	$35,460,912	$61,689,790	($26,228,878)		-42.5%
All Other Agencies	$538,264,018	$925,740,816	$1,038,894,003	($113,153,187)		-10.9%
Transportation	$500,037,860	$667,076,123	$896,255,659	($229,179,536)		-25.6%
Human Resources	$962,995,666	$1,405,981,127	$1,681,566,906	($275,585,779)		-16.4%
Property Tax Cut		$377,500,000		$377,500,000
PeachCare		$60,873,226		$60,873,226
Total Budget	$7,632,181,330	$15,143,284,957	$13,985,435,074	$1,157,849,883		8.3%
Total Budget less tax cut	$7,632,181,330	$14,765,784,957	$13,985,435,074	$780,349,883		5.6%
Source: Twelve Years of Budget Growth: Where Has The Money Gone? – Allan Essig. Fiscal Research Program, Andrew Young School of Policy Studies, Georgia State University, July 2003
http://frp.aysps.gsu.edu/frp/frpreports/Report_84/index.htm

 

Georgia State and Local Spending (FY 2002)
Spending	Amount (thousands)	Summary	%	Per-Capita Rank*
Current Operations – Air Transportation	$119,909		0.3%	34
Current Operations – Correctional Institutions	$773,941		1.7%	22
Current Operations – Corrections – Other	$862,899		1.9%	6
Current Operations – Elementary & Secondary Education	$10,664,242		23.7%	19
Current Operations – Higher Education Auxiliary Enterprises	$252,559		0.6%	47
Current Operations – Other Higher Education	$3,126,190		7.0%	42
Current Operations – Educ. Scholarships, Assistance, & Subsidies	$609,925		1.4%	5
Current Operations – Other Education	$461,940		1.0%	19
Current Operations – Social Insurance Administration	$139,922		0.3%	31
Current Operations – Financial Administration	$643,418		1.4%	45
Current Operations – Fire Protection	$564,766		1.3%	28
Current Operations – Judicial and Legal Services	$647,851		1.4%	33
Current Operations – Legislative Services	$30,264		0.1%	50
Current Operations – Central Staff Services	$547,559		1.2%	10
Current Operations – General Public Buildings	$202,729		0.5%	24
Current Operations – Health Services – Other	$1,312,707		2.9%	29
Current Operations – Own Hospitals	$3,297,834		7.3%	10
Current Operations – Other Hospitals	$3,611		0.0%	14
Current Operations – Regular Highways	$669,575		1.5%	50
Current Operations – Toll Highways	$13,144		0.0%	23
Current Operations – Housing & Community Development	$567,755		1.3%	31
Current Operations – Libraries	$106,545		0.2%	50
Current Operations – Natural Resources, Agriculture-Other	$204,952		0.5%	28
Current Operations – Natural Resources, Fish & Game	$42,223		0.1%	41
Current Operations – Natural Resources, Forestry	$40,040		0.1%	19
Current Operations – Natural Resources – Other	$146,781		0.3%	36
Current Operations – Parking Facilities	$1,657		0.0%	47
Current Operations – Parks & Recreation	$451,013		1.0%	37
Current Operations – Police Protection	$1,423,058		3.2%	32
Current Operations – Protective Inspection and Regulation, NEC	$181,371		0.4%	41
Current Operations – Welfare, Fed. Categorical Assistance Prgms.	$206,311		0.5%	36
Current Operations – Welfare, Vendor Payments for Medical Care	$4,984,176		11.1%	33
Current Operations – Welfare – Other	$949,038		2.1%	46
Current Operations – Sewerage	$472,351		1.1%	31
Current Operations – Solid Waste Management	$413,300		0.9%	30
Current Operations – Other Veterans Services	$6,233		0.0%	25
Current Operations – Sea and Inland Port Facilities	$74,116		0.2%	13
Current Operations – General – Other	$1,218,718		2.7%	39
Current Operations		$36,434,623	81.1%	41
Construction – Air Transportation	$96,519		0.2%	30
Construction – Correctional Institutions	$22,861		0.1%	21
Construction – Corrections – Other	$82,051		0.2%	6
Construction – Elementary & Secondary Education	$1,277,034		2.8%	11
Construction – Higher Education – Auxiliary Enterprises	$155		0.0%	43
Construction – Higher Education – Other	$318,497		0.7%	28
Construction – Education – Other	$78,900		0.2%	2
Construction – Financial Administration	$12,494		0.0%	7
Construction – Fire Protection	$19,643		0.0%	17
Construction – Judicial & Legal	$22,711		0.1%	13
Construction – Central Staff Services	$38,345		0.1%	6
Construction – General Public Buildings	$138,105		0.3%	14
Construction – Health – Other	$5,529		0.0%	28
Construction – Own Hospitals	$68,333		0.2%	19
Construction – Regular Highways	$1,864,943		4.1%	25
Construction – Housing & Community Development	$138,478		0.3%	12
Construction – Libraries	$7,839		0.0%	30
Construction – Agriculture – Other	$2,480		0.0%	21
Construction – Forestry	$105		0.0%	21
Construction – Natural Resources – Other	$58,640		0.1%	12
Construction – Parking Facilities	$4,991		0.0%	20
Construction – Parks & Recreation	$196,885		0.4%	16
Construction – Police Protection	$40,223		0.1%	12
Construction – Protective Inspection & Regulation	$2,022		0.0%	8
Construction – Welfare – Other	$10,541		0.0%	9
Construction – Sewerage	$563,414		1.3%	4
Construction – Solid Waste Management	$54,161		0.1%	5
Construction – Other Veterans Services	$3,828		0.0%	3
Construction – Sea and Inland Port Facilities	$30,375		0.1%	13
Construction – General	$363,191		0.8%	21
Total Construction		$5,523,293	12.3%	16
Other Capital Outlay		$1,861,284	4.1%	13
General – Interest on Debt		$1,131,698	2.5%	49
Direct general expenditure		$44,950,898	100.0%	40

* Higher rank equals higher amount. Includes 50 states – District of Columbia excluded. Per capita amounts calculated using April 1, 2002 U.S. Census population for each state.

For a breakdown of state and local revenues, see http://www.census.gov/govs/estimate/0211gasl_1.html

How the state budget process works (Source: State of Georgia Budget documents)

As opposed to the federal government, Georgia’s Constitution mandates that the state budget cannot exceed expected revenues. There is also a limit on how much debt the state is allowed to issue. The State of Georgia FY 2003 Budget Report states that Georgia’s Constitution “limits the highest aggregate annual debt service, including recommended debt, as a percentage of the net treasury receipts for the prior fiscal year. The maximum percentage allowed by the current state Constitution is 10%, effective in FY 1984. Prior to FY 1984 the maximum percentage allowed by the Constitution was 15%.”

The State of Georgia FY 2003 Budget Report states “the Governor, who is the Budget Director, is responsible for establishing the official revenue estimate. The Governor is assisted in this responsibility by a state economist under contract as a consultant with OPB, which serves as the budget staff for the Governor. The basis for making revenue projections is a computerized econometric model. From this model, a range of estimates is provided to the Governor by his economic advisor. In December, just prior to finalizing his budget recommendations to the General Assembly, the Governor adopts a final revenue estimate — an action that, when added to surplus and reserve funds, determines the size of the forthcoming appropriations bill.”

Therefore, the state budget is limited by three factors: 1) the constitutional requirement of a balanced budget, 2) the constitutional limit on debt service, and 3) the Governor’s ability to set the revenue estimate.

Reserves

Two reserves are established by the state on June 30, the end of the state’s fiscal year, if funds are available — the Midyear Adjustment Reserve and the Revenue Shortfall Reserve.

The Midyear Adjustment Reserve is established by the State Auditor on June 30 each year and represents 1% of net revenue collections for that fiscal year, to the extent surplus funds are available up to that total. The Reserve is set aside to be appropriated in an amended budget at the next session of the General Assembly. The Reserve is considered to be the primary fund source for the State Board of Education’s “Midterm Adjustment.” This adjustment is appropriated in the upcoming amended budget each year to provide the state’s share of the increased cost of new students enrolled in the fall.

The Revenue Shortfall Reserve is also established on June 30 after the Midyear Adjustment Reserve has been filled. It is equal to not less than 3% nor more than 5% of the fiscal year’s net revenue collections, to the extent surplus funds are available. The Revenue Shortfall Reserve is often referred to the state’s “rainy day” fund and is available to offset an unexpected shortage in revenues during the upcoming fiscal year.

Occasionally, other reserves can be available for appropriation. For instance, the Motor Fuel Reserve represents funds earmarked for expenditure by the Department of Transportation in years when motor fuel tax collections exceed the original budgeted estimate for motor fuel collections in the preceding fiscal year. All motor fuel tax collections are constitutionally allocated to the Department of Transportation whether appropriated or not, but are routinely included in the state’s amended budgets.

How Budgets are Approved

Three kinds of budgets can be approved in Georgia — an original budget, an amended budget, and a supplementary budget. An original budget is just what is says — the first budget passed for a fiscal year. Generally, this budget remains in effect until the General Assembly convenes in January, at which time the budget is generally changed by adding appropriations, decreasing appropriations, or shifting expenditures between object classes.

An amended budget is one in which any type of change can be made — additions, deletions, or transfers. A supplementary budget is one which includes only new spending. Generally, a supplementary bill is passed early in the session to provide appropriations needed before a more extensive amended bill can be passed. All of these budgets, at the end of the session, become one operating budget for the state, with no distinction made for the various appropriations acts that are passed.The General Assembly can meet at any time in special session and amend the budget in effect. These occasions are rare, having occurred only twice in recent decades. Both were triggered by economic recessions in Georgia that required major budget cuts to avoid spending more money than was available for expenditure.

State law requires all state agencies to submit a request for appropriations for the next fiscal year to OPB no later than September 1 of each year. Most agencies start preliminary work on these requests in the spring for a fiscal year that is 14 to 15 months in the future. At the same time, agencies may request amendments for changes in the current fiscal year’s budget.

In early September, the Governor begins a four-month period in which he studies the budget requests of each department and develops his recommendations to the General Assembly. During this interim, he meets with department heads and consults with OPB staff in finalizing his proposals.

Budget Announcements

The Governor normally appears before a joint meeting of the House and Senate Appropriations Committees during the first week in January to announce his recommendations for amending the current year’s budget. The Governor announces the next year’s budget recommendations during the annual Budget Message, which is delivered to a joint legislative session during the first week of the annual session. The Legislature convenes on the second Monday in January.

Legislative Action

By law, an appropriations bill is introduced in the House of Representatives and first goes to the House Appropriations Committee for consideration before being voted on by the entire House. The bill follows a similar path through the Senate. The House and Senate versions usually differ. While still working within the total revenue estimate established by the Governor, a conference committee is then appointed to reach a compromise on the two versions. The conference committee’s version must be totally accepted or rejected by each house. A rejection results in appointment of a new conference committee.

The process is the same for amended and outyear appropriations bills. The only difference is the General Assembly generally takes actions on amended and supplementary bills before taking up the budget for the following year. That is done because changes in the current year’s budget often impact the following year’s budget.

The Supplemental Budget

The Supplemental Budget receives much attention. Because the Governor traditionally sets a very conservative revenue estimate, actual revenues typically exceed the estimate by a fairly substantial amount. The appropriation of these additional revenues in the supplemental budget often causes debate over whether these are “extra” funds that should be rebated to the taxpayers rather than fund “pork barrel” spending projects, or whether these are simply funds that would normally be appropriated in the original budget if not for Georgia’s traditionally more conservative revenue estimate.

Alan Essig of Georgia State University has explored these questions in his paper, “Where has the Money Gone? Part II: The Supplemental Budget” published in 2001. The executive summary is below:

There have been over $4.1 billion in additional revenues contained in the supplemental budget during fiscal years 1996 through 2001. Additional revenues available in the supplemental budget has increased from $224 million in FY 1996 to $1.2 billion in FY 2001. The increased use of the supplemental budget over the past six years has led to questions regarding the appropriate role of the supplemental budget within the overall budget process. There are three main major policy questions involved in the use of additional funds within the supplemental budget:

1. For what purposes or categories should funds be appropriated within the supplemental budget?

2. Should funds not appropriated within the supplemental budget be rolled over and appropriated within the next fiscal year budget?

3. Should funds not appropriated within the supplemental budget be given back to the taxpayers through a tax cut?

Sources of the $4.1 billion in additional revenues between FY 1996 and FY 2001 include: surplus revenues collected above the Governor’s revenue estimate from the previous fiscal year ($2.9 billion); funds which have lapsed due to state agencies not spending their entire appropriated budget from the previous fiscal year ($452 million); funds from the Midyear Adjustment Reserve ($694 million); and funds from the Motor Fuel Reserve ($156 million). Surplus revenues account for almost 70 percent of all supplemental budget additional revenues between FY 1996 and FY 2001.

The additional $4.1 billion in revenues have been used in several different ways including: separate appropriations bills for one time critical spending ($1.05 billion); pre-funding debt service ($500 million); education mid-term adjustment ($512 million); new debt service ($301 million); and general appropriations to state agencies ($1.25 billion). In addition, a portion of these revenues ($485 million) have not been appropriated in the supplemental budget, but have been rolled over for appropriation in the next fiscal year. Over 34 percent ($1.4 billion) of all available supplemental funds was appropriated for education purposes.

There are several arguments in favor of eliminating the supplemental budget. First, the General Assembly would have to consider only one budget and could thus spend more time considering the regular budget. That would be expected to lead to more informed decisions. Second, all budget requests would be considered together, making it easier to prioritize all budget requests. There is also a philosophical argument that the surplus funds available within the supplemental budget are actually excess revenues, and therefore ought to be returned to the tax payer through a tax cut or tax rebate.

There are also several drawbacks in eliminating the supplemental budget. The option of eliminating the supplemental budget would result in some combination of available supplemental funds being rolled over into the next general budget or available supplemental funds being used for a tax cut or tax rebate. A probable consequence of an elimination of the supplemental budget would be that the Governor would use a more liberal revenue estimate, thereby eliminating or minimizing the surplus, in order to ensure that the priorities of the Governor are funded in the beginning of the fiscal year.

This would leave the state budget in a more precarious position in case of an economic downturn. The elimination of the supplemental budget could also make it more difficult to handle emergencies and make it more important to estimate budget needs accurately in that, as a result of a more liberal revenue estimate, there would be less excess funds available to fund emergencies or shortages. The only way to fund emergencies or shortages in such a situation would be to cut existing funding. This could cause confusion and uncertainty within the state budget process.

A conservative approach to supplemental budget expenditures would limit the purposes/categories that should be funded (have first priority) to the following: education midterm adjustment; unplanned emergencies; predicted emergencies; legislation; and shortages. A less conservative approach to supplemental budget expenditures would include: surplus motor fuel funds, surplus funds from the Hazardous Waste Trust Fund, and surplus funds from the Solid Waste Trust Fund; new debt service; pre-funding of debt service; and a tax rebate. The least conservative approach to supplemental budget expenditures would include appropriations to agencies for various projects requiring one-time influx of funds (without an ongoing budget expense) and for new or expanded programs that have an ongoing budget expense.

The question as to whether funds not appropriated within the supplemental budget should be rolled over and appropriated in the next fiscal years budget or whether such funds should be given back to the taxpayers in the form of a tax cut must be looked at in terms of the states overall budgetary and fiscal picture. All of the surplus funds are not “extra” funds that were unexpected. These funds are part of the overall budgetary and fiscal plan, and therefore should not be considered separately. Any decisions on the appropriateness of tax cuts should be made in regards to the broader overall budgetary, fiscal and economic priorities.

A potential model for a supplemental budget would encompass the funding of budget emergencies, the education midterm adjustment, and one-time expenditures. There is a strong argument to be made for funding new bond projects in the supplemental budget in that there may be cost savings due to the potential of lower interest rates. Any additional funds would then be rolled over into the next fiscal year to be made part of that year’s budget and tax deliberations.