Lone Star Lessons

What Texas and Florida can teach big spending states


One of the most profound spillover effects of the current economic crisis is that it has also exposed a festering fiscal health crisis in state and local government. "Drunken sailor" spending in recent years and declining property values (and thus reduced property tax revenues) have combined to produce massive state and city budget shortfalls.

A recent study by the Center for Budget & Policy Priorities found that at least 41 states have recently faced, or are facing, budget deficits. Today 13 states are staring at budget shortfalls in excess of $1 billion in fiscal year 2009, with California ($31 billion) and New York ($6.4 billion) leading the pack. Moody's recently reported that 30 states are in recession, and 19 more are at risk.

At the local level, New York City is facing a $2.3 billion shortfall, and its transit agency, the New York Metropolitan Transit Authority, is $1 billion in the hole (both figures are larger than some state deficits).

How governments find themselves in this position is obvious: They're addicted to spending taxpayer dollars. Kudos to New York Gov. David Paterson for a refreshing bit of political honesty, telling The Wall Street Journal last week that, "What's actually more embarrassing than the fact that we have such a huge deficit now, when bonuses are down and capital gains are down, is the fact that when there was…wealth, we overspent."

This hasn't stopped the big spenders from seeking a federal bailout. In September, we saw California Gov. Arnold Schwarzenegger fire the first shot across the bow, hinting at possibly needing $7 billion in federal assistance to keep the state's doors open. The Governator has increased state spending by over 40 percent since he made his failed promise to blow up the boxes of state government.

Several weeks ago we saw a parade of governors and mayors on Capitol Hill asking for a bailout of state and local government. On that occasion, South Carolina Gov. Mark Sanford was the voice of fiscal sanity, offering a cautionary warning that "[t]his $150 billion may in fact further infect our economy with unnecessary government influence and unintended fiscal consequences."

Most recently, the mayors of three big cities—Philadelphia, Atlanta, and Phoenix—sent a letter to Treasury Secretary Hank Paulson asking the feds to use a portion of the $700 billion bailout to assist struggling cities.

States are looking to the feds for help because the two usual go-to sources of funding for state and local governments—taxes and bonds—are going to be severely constrained in the coming years. The political will to raise state and local taxes is almost non-existent. And the tough credit market means states—especially those with big deficits—are going to have a hard time borrowing, prompting some analysts to believe we've seen the end of an era of relatively cheap money and easy borrowing for governments.

So what's a state to do to climb out of the fiscal hole they've dug themselves into? It's simple: Spend within your means and partner with the private sector more often to deliver more services.

Texas is currently the envy of the nation with an $11 billion budget surplus. How did the state do it? For starters, the Texas Constitution gives the state Comptroller of Public Accounts (a chief fiscal officer, of sorts) the responsibility to certify the state's budget and send back any spending bills that the state can't afford. It's an elected position and the current comptroller, Susan Combs, launched a "Where the Money Goes" website to boost transparency and show taxpayers where their money is going. Having a third-party enforce prudent fiscal forecasting and spending helps to avoid the situation so many states now face—governors and legislators gravitate to the rosiest of revenue projections to help justify new spending, and then when the mythical money doesn't materialize, the state faces a budget "crisis."

Texas also engages in performance-based budgeting—tying a given programs' funding to its effectiveness at meeting clear performance targets. A Sunset Advisory Commission conducts mandatory periodic reviews of all state agencies to find duplicative or unnecessary programs that must be cut. Since the Sunset Commission was created in 1977, over 47 governmental agencies have been eliminated and another 11 have been consolidated.

Similarly, Washington state and South Carolina apply a performance budgeting model in which state activities are ranked in order of priority and effectiveness. The administration then "purchases" (funds) the activities from the top of the list down until all available revenues have been used up, ditching the lowest priority activities and eliminating poor-performing, unnecessary, or wasteful ones.

Policymakers also seem to be increasingly recognizing that privatization and competitive service delivery are proven tools for doing more with less. Competitive sourcing allows the private sector to compete for jobs and contracts that are currently performed by the government. Federal employees actually won 83 percent of the job competitions from fiscal year 2003 through fiscal year 2007. But the competition still helps save a lot of money. Taxpayers saved $25,000 for every job that was put up for competition because even when the government kept the job it significantly improved efficiency and reduced costs.

Privatization is also coming back into vogue these days, partially buoyed by the successful track record of former Florida Gov. Jeb Bush. The state engaged in over 138 privatization initiatives saving taxpayers over $550 million in aggregate during Bush's term (1999-2007). When many other states were raising taxes, Bush's privatization initiatives helped Florida to shed almost $20 billion in taxes and over 3,700 positions in the state workforce.

And at the urban level, Chicago Mayor Richard Daley, a Democrat, has been on a privatization tear in recent years. Under his watch he's privatized over 40 services and activities, saving taxpayers millions. Since 2005, Daley has initiated long-term lease agreements with the private sector for the Chicago Skyway toll road, Midway Airport, four major downtown parking garages, and the city's parking meter system downtown. Chicago netted over $5 billion in the process to pay down city debt, establish a $500 million rainy day fund, and shore up public pensions.

There are ways for cities and states to dig out of this fiscal mess. Making taxpayers pay for a federal handout won't solve a problem rooted in a state government's addiction to spending. As state and local governments begin to reckon with the magnitude of their fiscal crunch, privatization and more prudent fiscal stewardship will be the key to "right-sizing" government and avoiding future binge spending when economic conditions do improve.

Leonard Gilroy is the director of government reform at The Reason Foundation.

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  1. The other good thing about being lean during good times, is you have a bit extra during tough times to help smooth things out, and pay for extra unemployemnt costs etc. Just like with indivduals it’s good when the state saves for a rainy day.

  2. Wow, talk about misinformation. Sure, Chicago mayor Daley netted billions by “privatizing” the Skyway and the parking meters. But he also sold off their future revenues for DECADES for these lump sum payments. This is the exact opposite of fiscal responsibility. Rather, it is pure and simple theft from the next two generations of Chicago residents.

  3. Making taxpayers pay for a federal handout won’t solve a problem rooted in a state government’s addiction to spending.

    I’m confused. Is this to imply that the crisis is in any way rooted in “government’s addiction to spending?” Really, Kroneborge puts it best: save so you have money for the bad times. Texas did the right thing by accumulating a surplus. Now it’s time to see them do the right thing and spend that money.

  4. Phoenix, btw, has spent millions of dollars building a light rail system (a system that forgot to build a stop at the airport) and has also given away millions of dollars in subsidies and tax incentives.

    For example, over the next 10 years, Phoenix has promised a retail mall developer $97.4 million in subsidies. I wrote about that here:

    Ironically this “economic development” project is built in an area of Phoenix that is 3x wealthier than the average Phoenician and 3x whiter than any other part of the city. But isn’t that how most wealth transfers go – steal from the poor to give to the rich?

    Here in Nevada the state raised taxes back in 2003 to cover a potential budget shortfall then, but the result was a 28% increase in government spending in just 1 year. Spending increased again and again and didn’t stop until the economy went down. Now the big spenders are screaming to raise taxes again.

    To make matters worse, Obama’s campaign did so well that the big spenders now have control of the Assembly and Senate and are just two easy votes shy of overriding the Governor’s (allegedly) promised veto of any tax increase.

  5. Talk about moral hazard. Once we start bailing out states and cities, why would any state or city not open up the spending spigot because the federal gov’t is waiting in the wings to give you money. If you don’t then your state or local citizens will just be the ones paying for other states and cities extravagance. You in a sense have to spend just to keep up with the other states and cities, otherwise you will be losing buying power to the people in these poorly run cities and states that are getting “free” money or basically your money. It is a catch 22 that cannot end well. This will be very similar to what has happened to Medicaid where the states try to spend more and more money because they get “free” money from the gov’t at some other states expense.

  6. don’t florida and texas receive more from the federal government than they give in terms of tax dollars, whilst california gives way more than it gets?

  7. High oil prices translate into higher tax revenues. Do they not?

  8. don’t florida and texas receive more from the federal government than they give in terms of tax dollars, whilst california gives way more than it gets?

    That’s me!

  9. Go Texas! I love living in a state that manages a surplus without having an income tax. There’s still lots to bitch about here but I’ll take this for Thanksgiving.

  10. Um..Florida is in the hole about a billion bucks this year, probably 3.5 billion next year. Not exactly the model to emulate, is it?

  11. I hate to pee on the cornflakes when my state looks like it is actually doing something right, but surely the high oil prices played a part in Texas’ budget surplus? That and the fact the leg still only meets for 180 days every other year, so they haven’t had a chance to spend it yet?

  12. Got to admit the guy raises some really good points.


  13. “don’t florida and texas receive more from the federal government than they give in terms of tax dollars, whilst california gives way more than it gets?”

    Federal spending per dollar of Federal taxes, 2005:

    California: $0.78
    Texas: $0.94
    Florida: $0.97

    Federal Spending Received Per Dollar of Taxes Paid by State, 2005

  14. average Phoenician

    .. Phoenician ?? .. really??

    millions of dollars building a light rail system (a system that forgot to build a stop at the airport)

    .. and they just bumped our taxes to pay for this boondoggle .. thnx ..

    .. Hobbit

  15. Maybe the Governator of CA should approach Texas, and ask the Lone Star State to loan California that 11 billion dollar surplus, but then again, they probably figure that we are a poor risk, and couldn’t pay them back.

  16. FYI, the Argentine financial crisis was largely brought on by the inability of the central government to control the spending of the state and local governments.

  17. “Texas is currently the envy of the nation with an $11 billion budget surplus.”

    Among state controllers … maybe. But I doubt that many California residents are yearning to move to Texas.

  18. Texas, on the other hand, is currently the envy of the nation with an $11 billion budget surplus. How did the state do it?


  19. Patrick,

    Unless Pheonix is much less white than I ever would have expected, I doubt any area can be 3x whiter than Phoenix as a whole. That would require Phoenix to be at most 33% white and that area to be 99% white.

    Maybe the minority population in that area is 1/3 of the norm, but that doesnt mean 3x whiter.

  20. “California: $0.78
    Texas: $0.94
    Florida: $0.97”

    If these numbers are correct, then what the hell is the point of Florida paying any Federal income tax? I’m sure plenty of money gets siphoned off in the Federal government only to mostly come back to the state. I don’t understand. I’m sure someone out there will tell me why this is both efficient and necessary. I suspect it has something to do with Aunt Mabel and her “job down to the Federal Building.”


  21. But I doubt that many California residents are yearning to move to Texas.

    No, the motherfuckers keep moving out here, to Colorado, and shitting up the local politics every election, and local traffic every time the heavens so much as lay a light dusting of snow on things.

  22. People keep commenting on Texas’ Oil situation as if, A. California doesn’t have oil… which… is crap – there are even Derricks *in* Los Angeles, and B. as if Texas is the only state with natural resources and an economy.

  23. What I meant there – is that you can’t just say “ohh, big oil in Texas is why there’s a surplus!” because you’re ignoring the effect government spending & policy has on all that stuff and pretending that oil is the only major source of revenue possible… California has a $40-50 billion dollar a year film industry, hundreds of wealthy wineries, multiple international ports and has a highly educated/wealthy population….. if any state *should* have a massive surplus, it’s CA. We don’t, not because we’re missing oil, but because the overwhelming majority of the state is filled with politically/philosophically retarded individuals

  24. But I doubt that many California residents are yearning to move to Texas.

    Every third car you see on the streets of Austin has a California license plate. They have been coming here in droves for years now.

  25. Florida is on a collision course with fiscal disaster. Watch when the next major hurricane hits. This WILL eventually happen, even though sadly it doesn’t seem too likely to happen to the perp, which is Governor Crist.

    The clusterfuck will be due to Crist’s insurance pre-bailout, where coastal residents are to be supported by the rest of us in taking a BIG risk. Don’t talk about Florida and small spending unless you take this coming clusterfuck into account, because it’s set in our laws. Right now.

  26. Pireader said: “…I doubt that many California residents are yearning to move to Texas.”

    Texans don’t want them here. Most of us would like to send back the ones we already have.

  27. –“Drunken sailor” spending in recent years and declining property values (and thus reduced property tax revenues) have combined to produce massive state and city budget shortfalls.–

    In California, the author’s explanation is only half right. It’s the spending — PERIOD.

    Prop 13 has a little appreciated smoothing effect on the property tax revenue stream. In San Diego County, with the last two years’ plummeting real estate values, the property tax revenues are expected to RISE 2% this fiscal year. This may be a tad optimistic, but the county assessor has been a good guesser on this annual projection. Even if it drops a bit, the swing is minimal.

    Moreover, the canard that Prop 13 starves govt doesn’t stand scrutiny (I wish it did!). In my area, the property tax revenues these past 8 years — including this abysmal fiscal year — has DOUBLED! Statewide property tax REVENUES today are higher than PRE-Prop 13 revenues, even after adjusting for inflation and population growth.

  28. For me, our California fiscal tragedy has moved from the abstract to the personal. My elder son, age 29, is a traveling software consultant making a comfortable 6 figure income (well, this week, anyway). He can live where he pleases.

    He’s chosen to leave his family in lovely San Diego and move to — you guessed it — Austin, TX. The TX zero income tax and the low housing costs are just too tempting. He loves CA as a place to live, but not $30,000 a year’s worth.

    Hence our confiscatory state policies split my family. My wife and I are pissed at this. I’d consider moving as well, but it would bring too much joy to my government employee oppopnents.

    My son’s departure is not an isolated event. In the last 5 years, CA has had an ANNUAL domestic migration (movement between states) outflow of a quarter million people. And it’s growing rapidly.

    Unfortunately, these are not the welfare queens leaving. They are the ambitious, the productive — and the retiring government employees with their huge pensions who want to get more bang for their buck (actually, OUR buck!).

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