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At Issue: Starting from zero

Published (1/9/2009)
By Nick Busse
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Barring a miraculous economic turnaround or a sudden windfall of new revenue, legislative leaders and Gov. Tim Pawlenty face the likelihood of having to squeeze, trim and slash the state’s $37 billion biennial budget down to $32 billion by the end of May.

It’s an unappealing task — so much so that they’re considering an altogether different approach to budgeting: starting from scratch.

The idea is called zero-based budgeting, and it works like this: instead of constructing a budget based on what was spent the last time around and then adjusting the numbers up or down as needed, you start with zero and build your way up to whatever amount is available.

Pawlenty, in responding to the release of the state’s dismal November budget forecast — which predicts a whopping $4.85 billion shortfall — made a succinct case for this kind of budgeting.

“The projection now is that there will be $32 billion coming into the state of Minnesota in the next two-year budget cycle,” the governor said. “We have $32 billion to spend; there is no deficit if we live within that amount of money.”

DFL and Republican House leaders have also come out in support of some kind of zero-based budgeting process to fix the deficit. 

House Speaker Margaret Anderson Kelliher (DFL-Mpls) said she would welcome zero-based budgeting as a “refreshing change,” and during a recent appearance on Twin Cities Public Television’s “Almanac,” both she and House Minority Leader Marty Seifert (R-Marshall) stressed the benefit such a process would have in forcing lawmakers to take a critical, top-to-bottom look at the state’s budget.

We think we have to start at the basics, really, because members need to have a really good grounding in what is in these budgets to begin with,” Kelliher said. “And so I think the first few weeks will be taken up with a lot of committees going back to the basics of budgeting here — in some cases, zero-based budgeting.”

How it works (when it does)

Most zero-based budgeting involves two basic steps. First, state agencies are asked to submit “decision packages” — budget requests that take into account alternative (usually reduced) levels of funding. In essence, they are forced to ask the question, “What would be our priorities if we had our funding cut by 10 percent? What about 5 percent? Or 20 percent?”

Next, lawmakers examine these decision packages and start figuring out how they fit with the state’s overall priorities. From there, they can begin to decide which agencies and programs should receive funding based on current budget projections.

This process has several advantages over traditional budgeting methods. For one, it allows agency managers facing imminent budget cuts to have some input into how money should be spent within their agencies. For another, it gives them an opportunity to evaluate their agencies’ effectiveness and look for ways to improve programs and make them more cost-efficient. Above all, zero-based budgeting forces government to evaluate the merits of its activities, rather than just assuming an ongoing level of funding into the future.

If zero-based budgeting sounds simple in theory, in practice it can be a complicated, lengthy and frustrating process.

“It’s easy to talk about; actually implementing it takes a lot of time, and takes some willingness to spend time examining that budget,” said Bill Marx, chief fiscal analyst for the House.

According to Marx, the size and complexity of state government makes zero-based budgeting a logistical challenge.

“If you take a small agency — a veterinary medicine licensing council, for example, which is maybe a two-person operation or something — on a small scale like that, (zero-based budgeting) is a relatively easy thing to do,” Marx said. “When you get a Department of Human Services or a Department of Revenue … or, even more complicated, money to school districts or local government aid or something, this is quite a task.”

In fact, the inherent complexity of zero-based budgeting is widely considered to be its main drawback. Many states that in the past have attempted zero-based budgeting have reportedly abandoned the process because of its time-consuming nature and the sheer amount of paperwork it generates.

A “Questions and Answers on Zero-Based Budgeting” document compiled by the National Conference of State Legislatures concludes that “Literal across-the-board zero-base budget review of all state programs at the level of the political decision-making process is probably not possible on an annual or biennial basis.”

Marx agrees.

“If we try to do it on the whole budget, it’s going to be a dismal failure, because there is absolutely no way that there is time or staff to make it work,” he said.

Marx said the key to successful zero-based budgeting would be to break the budget down into “manageable components” that would allow lawmakers to finish combing through the budget in time for the May 18 constitutional adjournment deadline. The main thing, he said, is to figure out what the state’s priorities are.

“If committees that look at this are really being careful about it, they won’t simply ask, ‘What are you doing and how much could you cut back?’ It’d be, ‘How does this fit into bigger priorities?’”

Mixed results

Marx said that, to his knowledge, Minnesota has never attempted zero-based budgeting. Several other states have, and the results have been largely mixed, according to an NCSL survey.

In Idaho, an attempt to use zero-based budgeting on approximately 75 percent of state agencies’ budgets failed, for the most part, due to a lack of sufficient time and training for agency staff. Some results of the process turned out to be useful, however, to the extent that certain agencies were able to clarify their budget priorities.

In Montana, zero-based budgeting was attempted twice in the late 1970s, but was abandoned after officials found it to be too complicated and time-consuming. The state, however, still uses zero-based budgeting in certain areas, such as capital expenses.

Officials in Rhode Island, meanwhile, reported some success with zero-based budgeting, which allowed the state to shift priorities within its existing resources and eliminate some 1,300 state jobs.

Some states opt to use zero-based budgeting only on certain agencies or programs. Nevada, for example, has used the process in selected areas like equipment purchases and capital improvement projects. Ohio occasionally asks individual agencies to perform zero-based budgeting for specific budget cycles, on a kind of rotating basis.

For the most part, the experience of most states that have attempted zero-based budgeting has been that the process is problematic. According to the NCSL, the Northern Marianas Islands, a small U.S. territory located in the northern Pacific Ocean, is the only part of the country that regularly uses true zero-based budgeting on its entire budget.

How a zero-based budgeting process would play out in Minnesota remains to be seen, but Marx warns that whatever solutions are ultimately found, the resulting budget cuts are still likely to be painful.

“Is it going to find magic solutions? No. When you make cuts, you’re eliminating some things, or scaling them back, and that has consequences. … Unless we think agency managers are doing a lousy job now, it’s not going to help us find these magic pots of money.”

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