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After Furloughs, States Mull Permanent Cuts

Moving from furloughs of state employees to more permanent downsizing, states are girding for the deepest workforce cuts yet when they hammer out their fiscal 2011 budgets next year. In preparation, many are taking stock of every position in state government to determine what effect job cuts and the possible elimination of whole departments will have on revenues, expenses and the quality of government services.

“I think we’re kind of in a permanent retrenchment,” says Raymond C. Scheppach, long-time director of the National Governors Association. “There are a number of areas where we’ve got to sit back and almost look at new models for delivering services.”

For the first time on record, states’ overall spending has declined in back-to-back years, sinking 4.8 percent last fiscal year and at least 4 percent in the current fiscal year,according to the National Association of State Budget Officers (NASBO). The spending drop reflects a plunge in tax revenues last year that is expected to continue for at least two more years. The National Conference of State Legislatures (NCSL) has estimated that $60 billion in shortfalls are looming for 2011 and $50 billion for 2012, despite signs that the Great Recession may be ending.

In the past, states’ toughest budget years have been the two years following the end of a recession. That’s because, by then, Medicaid rolls have swelled as more people lose their jobs and health insurance, even as state revenues continue to lag. But because this recession has been deeper than any in modern history, some predict state revenues will not rebound until late in the next decade. And while some economists say this recession ended this summer, the National Bureau of Economic Research, a private research firm that calculates the official dates of recessions, has yet to declare the end of the current downturn.

With that in mind, some states are moving beyond short-term fixes to rethink the role and structure of government with the goal of delivering high quality, but fewer services, at lower costs. Targeted are functions and agencies that overlap or are no longer relevant.

“The duration of the downturn and the shocking level of revenue shortfall compared to other recent downturns offers states the opportunity to transform state workforces,” said Robert Campbell, director of accounting firm Deloitte’s state government practice. “Unfortunately, many states have not come up for air and continue to focus on short-term across the board cuts and accounting adjustments.”

Since the recession began in December 2007, nearly all states have instituted hiring freezes, at least 75 percent have eliminated vacant positions and more than half have laid off and furloughed workers. In all, nearly 1 million state workers — one in five — have been affected by the cutbacks, according to estimates compiled by Stateline.org.

After hiring freezes, furloughs are the preferred short-term option for most states, because they preserve morale and keep talented workers on the job for better days ahead. But experts say the benefits are illusory. The best employees still tend to look for other jobs.

A better way for states to weather fiscal ups and downs is to increase the number of contract workers, private sector consultants suggest. “Most corporations maintain about 25 percent of their workforce through flexible contracts, while states have contingent labor in the single digits,” said University of San Francisco professor Master Burnett.

Beyond reductions in payroll – which represents nearly 20 percent of state budgets – policymakers are also closely scrutinizing purchases, closing facilities, sleuthing for uncollected revenues, sharing back-office services such as accounting and payroll, increasing use of online technologies and trimming agencies to a smaller, more manageable size. In many cases, states also are sharing services with local governments and other states.

While nearly all states are downsizing, a few have created commissions tasked with finding ways to make state government more efficient for the long-term. Some already have slimmer bureaucracies in the works.

Massachusetts, for example, collapsed four transportation agencies into two, and a legislative commission in Michigan has proposed excising layers of management and reducing employee benefits.

Washington state eliminated at least 75 commissions and boards this year and closed 25 driver’s license centers across the state, replacing them with online kiosks. Oregon also plans to eliminate and consolidate dozens of advisory and regulatory groups.

In addition, Washington State Democratic Gov. Christine Gregoire plans to consolidate all natural resource functions, sharply reducing the number of workers required to protect some of the state’s greatest assets, including Puget Sound and the Columbia River. The proposal would eliminate overlapping services in the departments of fish and wildlife, parks and recreation and natural resources.

“We have three agencies managing natural resources, each with its own scientist standing in the same Washington stream. We need to reform, and we will. We need a lean, nimble state government serving our people in the 21st century,” Gregoire said in her inaugural address this year.

In other cost-cutting measures, Nebraska lawmakers are considering a proposal to merge the governing and administrative staffs of the state's community college and university systems. Kansas has created a cross-agency pool of workers that can step in to help short-staffed departments complete time-sensitive projects without hiring temporary workers.

Among Michigan’s proposals for leaner government are a series of sentencing and corrections policy shifts aimed at reducing the prison population to stem one of the state’s fastest growing expenditures. Louisiana’s budget-cutting panel is also seeking smaller prison populations by proposing that inmates be required to complete a high school equivalency exam before release, so they won’t be as likely to end up back inside.

“We’re seeing sentencing changes in states where they likely would not be occurring if it weren’t for the fiscal crisis,” said Stacy Mazer of NASBO. Since the recession began, more than half the states have trimmed corrections costs by closing prisons, reforming sentencing and probation rules and, in some cases, releasing prisoners early.

Meanwhile, furloughs continue in a few states, although the trend is slowing. Traditionally considered a temporary cost-cutting measure, unpaid days off produce limited savings and can result in revenue loss and unintended longer-term costs, including increased overtime pay and a backlog of unused leave. In addition, furloughed staffers retain their benefits, leaving states liable for pension fund payments and health insurance bills.

Still, in the early days of the Great Recession, furloughs filled a need to quickly cut expenses as revenue dropped precipitously. As the downturn persisted, many states found ways to minimize the negative impacts of forced unpaid leave, including exempting employees in departments such as prisons and hospitals that require 24-hour services and closing agencies on Fridays to avoid the long lines and confusion caused by rolling furloughs. Revenue losses were stemmed by exempting workers paid with federal money – such as Food Stamp and Social Security Administration officials – and those in revenue-producing or self-sustaining departments, such as motor vehicle and business licensing.

Even so, disruptions and public backlash plagued some states. Multiple lawsuits were filed against California Gov. Arnold Schwarzenegger (R) over statewide furloughs and the federal government threatened to withhold aid for administering unemployment benefits because of delays in getting benefit checks to unemployed workers. In Hawaii, furloughs and school closures promise to be major issues in the upcoming gubernatorial campaign.

Another problem is that furloughs, layoffs and hiring freezes have shrunk state workforces without reducing the volume of work, hurting the quality of service and staff morale, state officials say.

“We’re trying to make the work fit the personnel cuts already taken,” said Washington state policy director Robin Arnold-Williams. “This is an opportunity to take advantage of the times we’re in to push forward with a reform agenda. In good times, you get a lot of push back. People just don’t feel the urgency to make the change,” Arnold-Williams said.

Deloitte’s Campbell says not enough states are making the long-term policy decisions needed to cut future costs. “Most are failing to revisit policies long set in statute that are the major drivers of program costs, such as Medicaid. It takes time and a methodical approach to build the necessary political alignment, but it needs to be done for states to curtail long-term costs,” Campbell said.

Among those looking for savings in every corner of government is Michigan’s Democratic Gov. Jennifer Granholm. A legislative commission there was charged in 2007 with slicing $1.5 billion from the state budget over five years. The state, which has seen its revenues slide back to 1969 levels over the last decade, is facing a projected $1 billion revenue gap for fiscal 2011 in an $8 billion budget.

Granholm asked Lieutenant Governor John Cherry this year to propose a plan to reduce the number of state departments from 18 to eight. "At a time when government cannot afford to be all things to all people, we are refocusing our efforts on state government's core functions and how best to provide necessary services and protect the fundamental rights of Michigan citizens," Cherry said.

Mitchell Bean, director of the nonpartisan House Fiscal Agency and one of the authors of the legislative streamlining report agreed that some state services should be eliminated, rather than continuing them with inadequate staff. According to Bean, the prescription for fiscal stability is simple: reduce state services to core functions and adjust the cost of running them to match the state’s ability to raise future revenues.

So far, Cherry has outlined seven core state government functions : public safety, education, public systems (infrastructure), well-being (health care and other low-income supports), sustainability (natural resources), economic opportunity and prosperity (business regulation and consumer affairs), and efficiency and effectiveness (general administration and fiscal management).

“Our goal is not to make recommendations that could solve the fiscal issues in any one year, but rather to make recommendations that, in total, represent a ‘road map’ towards fiscal stability for the state,” the Michigan commission wrote in its report.

In another downsizing strategy, states are expected to outsource more of their work in the future, particularly information technology. But many will not be able to make the initial investments for several years.

“The current crisis offers an opportunity to find better ways of doing business and better ways of providing service, but for many states there is a conflict.” said Georgia’s technology chief, Patrick Moore. “States need to do things better, faster, cheaper, but if they’re behind in technology, as most states really are, it’s difficult to leverage in a time like this.”

In May, Georgia completed an outsourcing project that allowed the state to reduce staff responsible for telecommunications from 600 to 165.

For now, most states are in the planning phase of major streamlining efforts, with reports due to policymakers this month and next. In January, statehouses are expected to be dominated by downsizing proposals, said NCSL policy analyst Todd Haggerty.

Inevitably, the big spending cuts facing many states next year will translate into eliminating whole agencies and programs, said Scott Pattison, director of NASBO. “Small cuts aren’t going to do it. Something’s got to give.”