Loss Aversion, Time Discounting and Strategic Choices in Cutting Budgets
Author:
Dr. Carolyn Bourdeaux
Associate Professor
Andrew Young School of Policy Studies
Georgia State University
[email protected]
Abstract
Academic scholars of cutback budgeting have pointed out for decades that when confronted with
fiscal stress, policymakers often make budgetary choices that push hard decisions into the future
or that sacrifice the long term fiscal health and organizational capacity of their jurisdiction in
order to avoid political conflict. This research though is hampered by the lack of a theoretical
frame explaining the reasoning behind these choices and by the lack of a systematic process for
classifying budget choices. As a result, it is not clear whether scholars are simply nitpicking the
“bad” decisions while failing to give credit for the “good.” This research draws on theories of
behavioral economics, in particular those associated with loss aversion and time discounting, to
develop a typology of cutback budgeting strategies that are likely to generate political conflict.
The research then empirically examines the universe of choices made in Georgia during
consideration of the FY2009 mid-year budget and the FY2010 general budget. Coding over
1,000 discrete budgetary choices recorded during the budget development and approval process
each year, the analysis shows that policy-makers clearly preferred budget cuts that were conflict
avoiding, and many such choices are ones identified as having a distortionary effect on agency
operations and on overall fiscal health. That being said, each year, policy-makers did take on a
limited set of policies that were high conflict. These types of cuts proved difficult to sustain
through the political process, but some significant ones did survive.
1
Introduction
The Great Recession has generated some of critical assessments of state fiscal decisionmaking (e.g., (The Volker Alliance 2015)) as well as numerous case studies that document a
variety of often problematic fiscal strategies to balance the budget (Bunch 2010, Bifulco et al.
2012, Deschenaux and Juppe 2015, Dautrich, Robbins, and Simonsen 2010, Lauth 2010, 2003,
Conant 2010b, a). While this research includes a number of important observations, some very
basic questions remain: first, why do policy-makers choose one strategy over another? And how
prevalent are different kinds of strategies in a cutback environment or are critical observers of
the process simply cherry picking examples of “bad” practices?
Anecdotal evidence from the current cutback management literature suggests that policymaker choices appear to be oriented towards avoiding political conflict, particularly with
influential interest groups, and that this creates distortions in fiscal decision-making that a
rational individual, removed from the political process, would not make. Further, these scholars
have observed that program eliminations, layoffs, and targeted cuts, which are often associated
with more rational or strategic decision-making, may be more likely to generate controversy than
other types of cuts (Wolman 1980, Levine 1978, 1980, Bardach 1976). However, most of this
research rests on informed observation rather than a systematic study of policy-maker choices.
Additionally, why a particular choice would generate more conflict relative to another type of
choice is not entirely clear, and as a result, efforts to systematically assess cutback choices
observe a set of decisions that look somewhat incoherent and arbitrary (Bartle 1996).
While scholars repeatedly observe distortionary cuts that avoid conflict, policy-makers
themselves appear to profess a preference for rational cuts grounded in some form of cost-benefit
2
assessment,1 and the conflict created by program eliminations or significant cuts to existing
programs are often what makes the news. Almost no research has examined a particular type of
cut within the universe of cutback strategies deployed in a particular budget to assess the extent
to which one particular strategy dominates others both in its terms of prevalence as a choice-type
or its terms of its centrality in achieving budgetary balance.
This research attempts to gain more traction on the choices surrounding cutback decisionmaking. Drawing on theories of political economy as well as behavioral economics, this analysis
develops a theoretical framework to provide an initial set of predictions about when a particular
choice will generate conflict and why it generates conflict. These theories incorporate aspects of
interest group politics as well as incrementalism, but provide some additional insights into voter
preferences that may help explain common cutback budgeting strategies. A list of commonly
observed cutback budgeting strategies can then be mapped onto this theoretical framework to
build a typology of budgetary choices.
The analysis then examines the actual fiscal choices made by policy-makers in Georgia in
the FY2009 mid-year budget and the FY2010 general budget to determine whether and to what
extent they map back onto the theoretical framework described. Then, given that the theory
predicts certain choices are “low conflict” and others are “high conflict” do we see: 1) that the
low conflict choices are more popular with policy-makers and the high conflict less popular? 2)
in so far as policy-makers do opt for “high conflict” choices, can we see evidence that they are
actually “high conflict,” measured as the likelihood of the choices being reversed during the
political process?
1
For a snapshot of policy-makers professed strategies for cutting the budget, one can examine Governors’ state of
the state addresses. For instance see (Governor Robert Bentley 2011, Governor Chris Christie 2011, Governor
Nikki Haley 2011).
3
Theories of Cutback Budgeting Choices
The early cutback management literature was divided into two camps: those who
theorized cutback budgeting would reflect the inverse of incremental decision-making or
“decremental” processes, and those who theorized policy-makers would adopt a more systematic
process organized around avoiding or mitigating political pressures from interest group politics.
Interestingly, neither camp suggested that policy-makers would rationally assess what was best
for their jurisdiction through a strategic planning process and then make choices accordingly.
Ultimately, the limited amount of testing of these ideas produced no clear consensus.
Decrementalism
In several pieces of research in the 1970s and 1980s, “decrementalism,” or small across
the board type cuts, was posited to be the counterpart to incremental strategies during times of
growth (Lewis 1984, Lambright and Sapolsky 1976). A key aspect of incrementalist theory was
built on the observation that budget processes were more about satisficing, consensus-building
and norms of “fairness” than rational-analytic choices (Wildavsky 1988, 1992, 1969). As a
result, one might theorize that during periods of fiscal stress, policy-makers would continue this
pattern making small, across the board cuts. Such cuts would be less likely to undermine
consensus or draw charges that policy-makers were singling out a particular policy for an undue
share of cuts.
Early case study research showed that policy-makers did use “across the board cuts”
(Levine, Rubin, and Wolohojian 1981, Wolman 1980) although the prevalence of this strategy
was not clear, and some limited broad based research provided evidence that cuts by state and
local governments during periods of fiscal stress were made decrementally (Lewis 1984, Braun,
Johnson, and Ley 1993). Similarly, recent surveys by the National Association of State Budget
4
Officers (NASBO) and the National League of Cities (NLC) show that this strategy is used
widely. Although again, the extent to which this is a dominant strategy is not clear(National
Association of State Budget Officers 2009, 2010, Hoene and Pagano 2009). Additionally, the
extent to which these types of cuts truly represent across the board cuts is not clear. Some
evidence suggests that governments make broad percentage based cuts but they differentiate
between different types of services (Conant 2003, Lewis 1988).
Interest Group Politics and Political Conflict Avoidance
The more popular theories of cutback budgeting explicitly rejected “decrementalism” in
favor of an interest group politics model of cutback budgeting. Here the key idea was that
cutback choices would be heavily influenced by the power dynamics and level of politicization
of governmental bodies during budgetary decision-making. Woven into this model was the
observation that policy-makers would try to avoid political conflict in the first place, and cuts
might focus on trading short term benefits for long term costs through the use of debt to finance
current operations or failing to invest in maintenance or capital spending. Cuts might also focus
on “back office” operations rather than line agency activities, on personnel attrition, on layoffs to
new employees rather than more senior ones, and on across the board cuts that “spread the pain.”
Such cuts would also focus on areas where constituency groups were weaker – such as social
services – rather than government services that supported businesses (Wolman 1980, Glassberg
1978, Levine 1979, Levine 1978). Because these fiscal choices were more heavily grounded in
political considerations than in strategic planning, they were likely to have a distortionary impact
on public services over time.
While most of this literature is anecdotal and observational in nature, one of the most
complete formulations of these ideas as well as one of the most comprehensive empirical
5
analyses was developed by Levine, Rubin and Wolojian (1981). They hypothesized that policymakers would first delay or ignore the fiscal problems; second they would ration or stretch
resources; and finally they would make deep selective cuts and try to smooth operations.
However, their analysis of cutback strategies in five large cities did not find that policy-makers
followed such a pattern. The authors did find some evidence that politicized jurisdictions would
be more likely to avoid direct cuts or adopt across the board cuts, while local governments with
more professional management appeared to focus on a more strategic process for cutting the
budget and also one more prone to political conflict. Unfortunately, the period of fiscal stress
ended before these more “strategic” plans could be put to the test.
Other broader surveys across jurisdictions found almost no consistent pattern across local
governments in how policy-makers made cuts (Bartle 1996, Downs and Rocke 1984). For
instance, Bartle concluded that municipal retrenchment was “confused and unstructured” neither
following a decremental framework nor a sequential cutback process of prioritization of
municipal services. Consistent with a more idiosyncratic set of decisions emerging from a
cutback process, Rubin (2003) examined nine federal agencies managing through a period of
fiscal stress and found that some agency managers tried to make more strategic choices (others
just tried to stall), but efforts to make strategic cuts were often overwhelmed by the duration of
cutback budgeting as well as various external pressures such as arbitrary budget caps coming
from Congress and interest group pressures exerted through legislative and executive policymakers.
Surveys by NASBO and NLC support the idea that researchers are likely to see a range of
strategies deployed although the relative prevalence of a particular strategy is unclear. These
surveys simply ask their members to indicate whether a particular strategy has been used at some
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time. Interestingly though, the NASBO survey records that targeted cuts are a relatively
prominent strategy with 66 percent of states making “targeted cuts” in FY2009 and 2010,
suggesting that state governments may be making more strategic cuts than would be indicated by
the literature.
A few other studies have attempted a broad based look at governmental cutback
strategies. Lewis (1988) examined local employment patterns in 154 large cities and found that
policy-makers did appear to discriminate across service areas in terms of the general level of cuts
– with administration, parks and recreation, and streets and highways receiving larger cuts during
periods of fiscal stress, but also growing more during good times. Police and fire services on the
other hand experienced less variation in funding (Lewis 1988). This research did not explicitly
examine cutback strategies internal to the agencies (for instance, these differential cuts might be
achieved through attrition or even generic percentage cuts), but the results do suggest a general
overarching strategy of focusing on key services. Although concluding that local government
did not have a consistent strategy for making cuts, Bartle (1996) and Downs and Rocke (1984)
found some evidence that local governments were consistent in their preference for selected
policy areas: fire and police seemed to face smaller cuts, while public works departments (often
associated with capital outlay) faced larger cuts (Bartle 1996, Downs and Rocke 1984). None of
this research links these strategic choices to an interest group per se but rather suggested services
such as public safety are widely understood to be a fundamental function of local government.
Finally, the interest group politics theories indicated that social services would be some
of the first services to be cut, but ultimately, little empirical evidence has supported this theory
(Wolman 1980, Hoene and Pagano 2009). Researchers speculate that this may in part be a result
of federal matching or maintenance of effort provisions, rather than any particular affinity for
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these services on the part of state or local governments (Leachman, Williams, and Johnson 2011,
Wolman 1980).
In the end, both decrementalism and the interest group politics models have not provided
much traction on the problem of how policy-makers are making cutback decisions. In part the
difficulty of the research stems from not having a systematic approach to analyzing budgets – the
researchers do not have a common set of budgetary strategies that can be examined with some
consistency across organizations. Because there is no initial typology, there is no way to
comprehensively match the theoretical ideas to hypothesized empirical results. Further, since the
development of these initial theories, scholarship about individual decision-making has provided
new insights on individual preference formation that can be usefully applied to a cutback
budgeting process.
Towards A Theory of Cutback Budgeting Choices
The insights of behavioral economics about how people make individual consumption
decisions can be mapped onto a political economy framework to gain some traction on the types
of budgetary choices that are more likely to generate conflict and thus the choices that policymakers might prefer to avoid in a cutback environment. These ideas in turn can be used to
develop a typology of budgetary choices.
Political Economy of Elected Officials and Voter Preferences
The basic insights of political economy suggest that people “pay” for the receipt of a
share of the political pie through political engagement such as through voting, organizing, or
contributing funds (Mueller 2003, 259). In this model, preferences originate with the electorate
and elected officials craft policies to satisfy the preferences of the electorate in order to be re-
8
elected (Downs 1957). In turn, voters deploy political resources to influence elected officials to
craft policies in their direction. In some cases, the marginal benefit-to-cost ratio for political
engagement is quite small, and voters will be “rationally disinterested” in engaging the political
process over a particular issue. In other cases, such as “not in my back yard” type environmental
fights, certain voters will have a very high benefit-to-cost ratio and will actively engage the
political process. The key in this model is how voter preferences affect the marginal costs to
benefits ratio and elected official assessments of both how to craft policies that ensure votes and
more importantly, how to avoid policies that induce voters to invest significant resources in the
political process in opposition to the policy choices picked by the elected official.
Different theories posit different ideas about which voter preferences matter, for instance
median voter or organized interest groups (Mueller 2003). For purposes of an initial
examination of cutback budgeting choices in Georgia, this analysis assumes that every program
is tied to a key constituency group that is of concern to elected officials. In the analysis of
Georgia fiscal choices in FY2009 and FY2010, this assumption is less problematic since the state
went through a process of budget cutting in the early 2000s, which coincided with a switch in the
Governor’s office and legislature from Democrat to Republican control. Since there had been no
regime change in the intervening years, there is no reason to believe that there were
constituencies whose programs were no longer supported by the governing coalition. Future
elaborations on this theory might incorporate a more refined analysis of key constituency groups
that support the governing regime and who are concerned about particular cuts to favored
programs. Additionally, further research might examine whose preferences really matter: do
elected officials really respond to constituency groups, voters at large, or are many of their policy
preferences formulated internally and then “sold” to constituent groups.
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The Impact of Loss Aversion on the Political Economy of Cuts
Assuming a basic political economy model as an initial step in theory development, there
are several relevant observations from behavioral economics that can be added to this model to
provide some insight into the way elected officials might expect voters or key constituency
groups to behave in a cutback budgeting environment. One of the fundamental observations is
that people have preferences which reflect a stronger sensitivity to loss than to an economically
equivalent gain, and further, perceptions of loss vary depending on context. This theory contrasts
with classic economic models of preference formulation which assume that preferences are
stable and cannot be manipulated by contextual features such as initial endowment or
presentation of options (Camerer and Lowenstein 2004).
The construct of “loss aversion” has been documented in a number of experimental and
policy settings. In one key experiment, researchers “gave” certain subjects a mug and asked at
what price they were willing to sell the mug, while those without a mug were asked at what price
they were willing to buy the mug. Presumably, on average, these should be the same – an
important concept for establishing market clearing prices. However, consistently, those initially
endowed with the mug wanted a higher price for it than those who were purchasing a mug. This
study has been repeated with the same results using a series of variations, including controlling
for potential wealth effects of owning a mug. The problem appears to be that sellers perceive the
sale of a good that is in their current endowment as a “loss” and therefore overvalue the good
relative to potential buyers (or even relative to the way that the sellers themselves would value
the good prior to actually owning it). Or put another way, the marginal utility associated with
10
ownership and the subsequent disutility of loss is higher than the marginal utility of purchase and
the subsequent utility of the gain (Kahneman, Knetsch, and Thaler 2004, 1991).
This trade off has implications for a political economy model. Given that people value a
good in their current endowment more than that same good when they do not own it, this
suggests that people are going to deploy more resources towards political engagement to prevent
a loss than they would deploy for a gain of similar value. As many of the original cutback
budgeting scholars observed, the contestation over resources will be fiercer in a cutback
environment than in an environment of growth (Bardach 1976, Levine 1979, Wolman 1980).
The Impact of Context on Perceptions of Loss
Further examining the issue of loss aversion, researchers have found that the perception
of loss depends on context, and context may vary either by the accident of circumstance or by
intentional manipulation. For instance, people “anchor” onto a particular reference point when
they assess loss. Current endowment is one form of anchor, and the idea that a gain foregone is
of less value than a comparable loss of current endowment is widely recognized in public policy
and the law – even though from an economic perspective the value may be exactly equivalent
(Kahneman, Knetsch, and Thaler 2004). Similarly, people anchor onto nominal wages rather
than real wages and therefore will strongly resist a pay cut in a deflationary market but will not
even notice the failure to raise wages in an inflationary labor market (Shafir, Diamond, and
Tversky 1997).
Given that voters preferences are colored by loss aversion and elected officials are
concerned about the conflict that might be generated by visiting loss upon the voters, elected
officials are therefore likely to make choices that avoid voter loss or importantly, voter
11
perception of loss. Thus one might theorize that when policy-makers survey the list of cutback
options, they might first make choices that are less likely to be perceived as a loss. If a gain
foregone is perceived differently from a loss of current endowment, then policy-makers might
first choose to pull back on all new initiatives or any benefits not yet distributed before they will
make targeted cuts to the base budget. Similarly, implicit cuts made through inflationary erosion
of salaries or operating budgets are likely to be popular strategies.
Manipulation of Context and Perceptions of Loss
A further key observation in the behavioral economics literature is that the anchor over
which people perceive loss may not always be fixed exogenously but can be manipulated.
Famously, in stores that charge more for goods paid for with credit cards than with cash, the
credit card price is presented as the base price and the cash price is a “discount.” Credit card
companies lobbied hard for this particular presentation knowing that people would be more
resistant to paying with a credit card if the credit card price were considered a “penalty” or
increase over the baseline, rather than the cash price being considered a gain or a “discount”
(Thaler and Sunstein 2009).
In budgeting, policy-makers intuitively understand the manipulation of context and
perceptions of loss. For instance, most who have worked in budgeting know the importance of
establishing the “baseline” over which budgetary decisions are made. States vary in terms of the
extent to which policies are “annualized” into the base (for instance, a policy that was funded for
half a year the prior year is then automatically adjusted to include full year funding in the
upcoming year) and the extent to which the base includes growth in inflation, salaries, and
service demand. Some states such as Maryland, Minnesota, and New York, use a current services
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baseline, others such as Georgia use the prior year’s budget as a baseline. Once this “baseline” is
established, cuts to the base may then be perceived as a loss by key constituencies. This would
imply that a cut equivalent to inflationary growth would be resisted more strongly in a state that
builds inflation into the baseline than in a state where the baseline is simply the prior year’s
budget and inflation is a “gain” on top of this baseline (Crain and Crain 1998). Ironically, states,
such as Maryland and Delaware that build in automatic inflationary adjustments into budgetary
baseline calculations appear to have actually eliminated or adjusted these indices downward
during the recession {Deschenaux, 2015 #671}.
A somewhat similar effect might explain the cutback strategy of withholding all funding
for new initiatives – often a first line strategy when facing fiscal stress and may be one of the
reasons that capital outlay gets caught in the dragnet of a cutback budgeting process (another
may be time discounting). The loss of new funding like inflationary funding is a “gain forgone”
rather than a loss over a current endowment.
Another baseline effect may help explain the prevalence of “across the board cuts” or
“prorations.” From a rational standpoint, these cuts are often profoundly unfair. They reward
agencies that have significant slack or which have been the beneficiaries of large increases in the
immediately preceding years and penalize agencies that are lean and efficient (Levine 1980).
However, during a fiscal crisis, once policy-makers establish that a particular percentage cut is
the average agency cut, this, in a sense, becomes a “baseline.” Agencies and associated
constituent groups may perceive a cut that is less than this amount as a “gain” and cuts that are
greater than this amount as an unfair “loss.” Furloughs, salary cuts or other cutback measures
13
may be more palatable if established as part of a statewide baseline, rather than parceled out
differentially among agencies or programs.2
Time Discounting and Perceptions of Loss
Another insight which has been explored in several policy contexts is that people do not
appropriately discount current gains/losses relative to future gains and losses. There is a
propensity towards immediate gratification. According to the basic theory of discounted utility,
the value of a good in the future is discounted by 1/(1+r)t where r is a discount rate for some
point in time t. In a rational model, “r” is constant regardless of time. Actual human behavior,
however, shows a different pattern where the discount rate declines over time, creating a
discounting effect that grows “hyperbolically” over time rather than at an exponential rate.
Additionally, this hyperbolic effect occurs mainly in the very near future – there is an immediacy
effect – if multiple choices are presented at some time in the future rather than immediately,
people discount gains exponentially rather than hyperbolically. This preference set has been
documented in numerous experiments (Frederick, Loewenstein, and O'Donoghue 2002).
Empirical research has also repeatedly documented this general pattern of a propensity
towards immediate gratification and in particular a desire to avoid costs and consume benefits in
the near term while discounting future costs/benefits more than a normal discount rate would
predict. This effect is exacerbated by loss aversion. If the present-future trade off involves
sacrifice now over a current baseline (or loss) in return for a gain (or reduced cost) in the future,
people are more likely to favor present consumption than if the present-future trade off involves
2
In an interesting conversation during the furlough process, the Director of the Governor’s budget office called to
ask me about whether we should cut federal worker salaries during furloughs. I argued that we should not because
this will just be a loss to the state in terms of grant money, and also tax revenues, but because the agency staff would
perceive this as being so unfair, the Director decided to cut federal salaries anyway.
14
gain now in return for a cost in the future. Again, the effect of a perceived loss over a baseline
has a disproportionate impact on decision-making.
The implications for budgeting are fairly straight forward and would explain the
commonly observed tactic in budget cutting of pushing costs into the future in order to avoid
present day cuts in service, even though this often creates significant out-year fiscal problems.
Strategies that have this effect include issuance of debt to cover current operating costs,
accounting shifts to push costs into the future and delaying payments into a governmental
pension system. All of these allow consumption to continue at current levels, while pushing
costs into the future. More subtle strategies with similar implications include delaying
maintenance, capital investment, and professional development.
In sum, a political economy model that incorporates behavioral economics into voter
preference formation suggests that many of the commonly observed behaviors in cutback
budgeting may be associated with policy-maker efforts to manipulate or mitigate voter
perceptions of loss. Further, in so far as policy-makers do not deploy such strategies, they may
run into intense political conflict as constituency groups mobilize vigorously to protect
themselves (in fact, more vigorously than they would if advocating for a similar gain). Many of
the strategies commonly observed in cutting budgets could then be re-classified based on the
extent to which they manipulate voter perception of loss and thereby mitigate political conflict.
Other Models: Incrementalism and Fiscal Illusion
Several other theories associated with conflict and fiscal decision-making may help
explain cutback budgeting phenomena. Traditional incrementalist theory to some degree mirrors
the behavioral economists’ observations about perceptions relative to a common baseline.
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Wildavsky observed both that budget cuts will tend to be small and incremental and that
budgeting decisions are organized around ideas of fairness, consensus building, and satisficing
rather than rational-analytic choices (Wildavsky 1988). This observation overlaps with the idea
that cutback budgeting is colored by an effort to avoid conflict by obscuring public perception of
cuts and by building consensus through “sharing the pain” with across the board cuts that create
a common “baseline.”
Another set of theoretical ideas not yet discussed are those associated with fiscal illusion.
Fiscal illusion has been used to explain “time discounting” problems. Here people do not
appropriately assess the costs of strategies that push costs into the future or push decisionmaking to other levels of an organization or to another governmental entity. People assess the
cost of government by looking at their tax bill. As “rationally ignorant” voters in the face of an
information asymmetry, elected official can make the costs of gaining information outweigh the
value of the information itself. Or more prosaically, it is difficult and expensive for voters to
figure out the long term costs of a particular policy. This theory is often applied to governmental
debt and deficits (Buchanan 1964, Alesina and Perotti 1995) but the same argument can be made
about governmental failures to invest sufficiently in maintenance or capital spending, and
government failures to reserve sufficient funds to cover long term liabilities such as pensions. In
contrast, the behavioral economists’ findings though suggest that even if voters knew about the
long term costs, they would still opt for immediate gratification. Given the prevalence of
empirical research on individual behaviors and time discounting, it suggests that public policy
choices that push costs into the future are more likely reflecting actual voter preferences than
deception of voters per se.
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Another commonly observed budget cutting tactic is not particularly well captured by
behavioral economics but is described by fiscal illusion are efforts to shift responsibility from
one level of government to another (Bennett and DiLorenzo 1983), or shifts of responsibility
from an elected body to an agency (Fiorina 1986). Here the idea is that voters do not follow the
political legerdemain of who is actually making a particular policy decision and elected official
are able to avoid responsibility by making other entities bear the blame for the final decision.
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A Model of Cutback Budgeting Choices
Table 1 provides a list of cutback budgeting choices described in National Association of
State Budget Officers, the National League of Cities, and also National Conference of State
Legislatures surveys and supplemented by an array of case study and anecdotal observations.
[Table 1, here]
Based on the theories just described, this list of budget cutting strategies can be classified
based on two dimensions: the extent to which the strategies represent actual cuts to the budget
and the extent to which the perception of loss to voters or key constituency groups is mitigated
by the nature of the cut.
[Table 2 here]
Quadrant I strategies are ones where there is no cut and no perceived loss. In effect, the
state can get away with reducing funding without any impact on agency operations. Most
obvious are situations where the state can simply draw on reserves, slack, or funds such as the
federal American Recovery and Reinvestment Act of 2009 (ARRA) to simply avoid a cut.
Importantly, the state reserves and surpluses are either budget reserves or “rainy day funds”
intentionally set aside to cover future shortfalls or unanticipated surpluses where funds have been
over-budgeted. Examples in Georgia’s budget include use of the state’s rainy day fund and the
use of unanticipated surpluses that occurred in Medicaid where enrollment growth was not as
high as predicted. These types of surpluses are distinct from surpluses that are laid aside to cover
18
the costs of current liabilities that will come due in the future. Examples of these types of
surpluses include pension and health benefit liabilities for state employees when they retire.
Another example is “incurred but not reported” Medicaid liabilities, where the state creates a
buffer in its Medicaid plan for estimated Medicaid services that have occurred in a particular
fiscal year but have not yet been billed to the state.
A more complicated Quadrant I strategy is finding a pure efficiency gain. Although this
is often the holy grail in political discourse since politicians and citizens view efficiency gain as
an available cut without any form of “loss,” many efficiency gains are often paired with the need
to make a real cut elsewhere in the organization. So for instance, by switching from paper to
electronic processing of forms, an agency might then utilize fewer staff. How then to reduce
staffing? The agency must turn to strategies in Quadrant II and IV – such as attrition or layoffs.
Alternatively, such efficiencies may just allow the agency to handle growth without bringing on
new staff avoiding a cut while service delivery remains constant. At other times, an efficiency
gain may simply create “slack” that can be cut from the budget.
Quadrant II strategies are often the ones most vilified in the public finance literature, but
are also the ones that this theory suggests policy-makers will be most likely to choose after or in
tandem with the Quadrant I options. Voters or concerned constituencies will be less likely to
perceive a loss if costs are pushed into the future. This suggests a range of strategies including
using debt to pay for operating costs, accounting shifts to push costs into the future or to
recognize revenues sooner and expenses later, as well as cuts to capital outlay, maintenance, and
professional development. People will perceive loss relative to a baseline, which in many state
budgets, including Georgia, is the prior year funding. A gain foregone is less likely to be
perceived as a loss. So failure to provide funding for new initiatives, growth in service demand,
19
or inflation, or a salary and promotions freeze or a hiring freeze allowing recapture of funds as
positions become vacant (i.e., through attrition), might not be perceived as actual cuts or might
be at least a lesser loss than a clear programmatic cut, even though these cuts are potentially just
as real and can significantly affect the operational capacity of an organization.
An additional variation on the idea of a “baseline” is that once a statewide policy has
been established such as an “across the board cut” target, a statewide salary cut, or even a
statewide furlough target, this may come to be perceived as a form of baseline, and any cuts
made over this amount are perceived as a real “cut,” while those below this target range are not
or are at least less controversial. The idea of a “fair cut” is also reflected in incrementalist
insights. Finally, although not supported by behavioral economics per se, an often observed
phenomena that some have attributed to “fiscal illusion” is a shift in responsibility for making
cuts to other levels of government or to agencies.
In sum, Quadrant II cuts may not really be perceived as cuts or are perceived as “fair
cuts.” Few may question their impact on services, and in turn, they may meet with less political
resistance than a targeted cut or program elimination. Importantly, many of these strategies are
associated with policy distortions. For instance, cutting personnel budgets through a hiring
freeze and attrition can mean that programs with staff who can easily find jobs outside
government or programs with staff ready for retirement may be unduly affected by the policy.
Across the board cuts, or even across the board pullbacks on previously planned increases, can
disadvantage more efficient programs.
Although not the focus of this particular research, Quadrant III strategies are ones where
there is not a real cut that will affect service provision but voters or key constituencies perceive a
cut. One of the simplest examples is a situation where funding formulas or cost of living
20
adjustments (COLAs) might decline when service demand or inflation declines. Because of the
conflict around these potential policy choices, it is rare for employees or retirees to receive a
negative COLA even though in theory the purchasing power of their salary or benefits is the
same. Similarly, funding formulas may have hold harmless provisions to protect those who
might see a decline in actual dollars.
Finally, Quadrant IV strategies are cuts that are fully perceived as cuts. These include
elimination of programs, cuts to the base/targeted cuts to specific policies or programs, layoffs,
and salary cuts. Based on the theory described above, one would expect that Quadrant IV
strategies would generally be avoided by policy-makers but to the extent that they are selected,
they will draw the most controversy and be the most difficult to sustain through a political
process. These types of cuts, however, are often perceived as the most desirable to make from a
purely reasoned policy perspective and go in tandem with notions of cutting programs that are
not producing desired results or scaling back government operations in less essential areas.
Propositions
The basic propositions that emerge from the theoretical ideas discussed above are:
Proposition 1: Policy-makers will be more likely to select cutback strategies
where there is no real cut to services or where the perception of a cut to services is
mitigated or obscured (i.e., they will have a preference for options in Quadrant I
and II and avoid options in Quadrant III and IV).
Proposition 2: In so far as policy-makers choose options in Quadrants III and IV,
these can be expected to generate more political conflict and will be more difficult
to sustain across the political process.
Context and Methodology
Context
These propositions are tested against Georgia’s FY2009 Amended and FY2010 General
budget deliberations, a period of significant fiscal stress for the state. During FY2009, which
21
stretched from July 2008 through June 2009, revenues dropped by 10 percent. The budget
process studied in this analysis centers around the 2009 legislative session, where the Governor
and state legislature had to cover a $2.7 billion shortfall from the current year 2009 budget (a 13
percent gap) and had to cover a $3.7 billion shortfall for the upcoming FY2010 fiscal year (a 17
percent gap from current services projections).3
Georgia has an executive budget process. The Governor issues budget instructions to the
agencies during the summer for two budgets: changes or corrections to the current year budget
(the Amended Budget) and the budget for the upcoming fiscal year (the General Budget).
During the FY2009 Amended budget cycle and the FY2010 General budget cycle, these
instructions consisted of a request for agency cut proposals of 6, 8, and 10 percent, with lesser
percentages for Medicaid (at 5 percent) and the state education funding formulas (at 3 percent).
Drawing on the agency submissions, the Governor then introduces his proposed budget at the
beginning of the legislative session in January. The legislature – a part time, “citizen” legislature
– deliberates on the budget for a 40 day legislative session, typically running from January
through the end of March; however, the session can be extended and during the years of fiscal
crisis deliberations in 2009 through 2011, the session stretched to the end of April and early
May. Once the budget has passed, the Governor has line item veto authority.
Identifying Budgetary Decisions
During budget deliberations, the state records a series of sequential choices that begin
with the “agency request” to the Governor and end with the Governor’s veto decisions, the
3
The shortfalls are calculated as “current services” shortfalls, which means that they are the difference between
revenues and expenditures if expenditures were to grow normally to meet current services needs. This affects the
FY2010 projection. By way of contrast, Georgia simply uses the prior year as its base amount. So Georgia budget
staff calculated the FY2010 shortfall from the original FY2009 general budget not from the FY2009 general budget
plus growth from inflation and population (the current services calculation). The current services base is from
projections in (Bourdeaux and Sjoquist 2010).
22
budget items on the table for consideration are presented as “change items” or a series of
decisions that typically revolve around a single budgetary choice. These change items include a
sentence or two explaining the budgetary choice and an amount, and they can be coded based on
the typology described in Table 2 based on the type of budgetary choice that they represent. For
purposes of this analysis the results of the coding are presented across three phases: the Agency
Request (at the 10 percent cut level), the Governor’s proposal, and the final Conference
Committee report. These are the phases where the most variation is visible. The Governor
typically makes a number of changes and additions to the Agency Request. The Conference
Committee report captures the legislative alterations to the Governor’s proposed budget. The
Governor’s veto decisions were minor in the FY2009 and FY2010 debates.
In the FY2009 Amended budget process, the budget included 2,420 “change items”
representing $2.3 billion in net cuts. The remaining shortfall was made up through strategies that
increased revenues, including use of state fund reserves. The FY 2010 budget process included
3,131 “change items” representing $2.6 billion in cuts. The remaining shortfall was made up of
strategies that increased revenues, including the use of state fund reserves, and is a function of
using a budgetary base that does not include inflation or population adjustments to the budget.
The analysis adds back $624 million in growth not recognized.4 Including this is important since
allowing the erosion of funding due to inflation as well as failing to provide funding to cover
increases in service demand is an important Quadrant II low conflict budgetary strategy.
Coding the Change Items
The analysis draws on data extracts from the Senate Budget and Evaluation Office
(SBEO). In the SBEO budget system, the change items are linked so they can be compared
4
This amount is based on a report analyzing the fiscal gaps in the Georgia budget(Bourdeaux and Sjoquist 2010).
23
across the phases within a budget cycle: from Agency, to Governor, to House, to Senate, to
Conference Committee and ultimately to the Governor’s veto. The language for the change
items is based on language initially developed by the agencies and then refined by the
Governor’s staff. The House and Senate and Governor produce different budget documents with
somewhat different descriptions of the budget cuts. The House, in its budget documents, almost
exclusively adopts the Governor’s change item language; however, SBEO staff were instructed
to 1) break up change items that included more than one budgetary choice; 2) provide more
descriptive detail where available and appropriate. As a result, the analysis uses the SBEO
language and data as the primary basis for the analysis, but adds in comparisons of House
language to supplement the understanding of what each change item meant. In a few cases,
SBEO staff did not break up change items into their component parts and a change item includes
multiple types of cuts – for instance a targeted cut to a program as well as a cut based on vacant
staff positions; however, this only occurred in 19 out of the over 3,000 change items in FY2010
for amounts below $500,000. There are up to three codes allowed for each change item but to
simplify the analysis, the first code only is used and the first code reflects the most potentially
controversial type of cut included in the change item.
The change item text is the primary source of information for most policy-makers as well
as external constituencies about what the change items mean; however, change items may be
supplemented by executive, legislative and agency staff briefings about the cuts. Because SBEO
staff were instructed to add important details about the nature of the cuts, this analysis does take
the change items at face value – so if a change item is vague, such as “cut agency operations,”
then it is assumed that the agency was being instructed to manage through the cut as it saw fit –
as opposed to there being a specific cut underlying the vague instructions. The Governor and
24
House language is often vaguer than the Senate language; however, this vagueness is more
commonly associated with “high conflict” cuts such as targeted cuts. Using the House or
Governor’s language might undercount the high conflict cuts.
A significant number of decision rules had to be adopted with respect to coding the
different items. During the analysis, detailed notes about the choices were maintained. Since the
hypotheses above propose that policy-makers will be less likely to choose more controversial
cuts, such as layoffs, program eliminations, or targeted cuts, the coding process generally
reflected a conservative bias towards these types of cuts. The most ambiguous were situations
where an agency subprogram was cut by an amount with indeterminate impact. The problem
here is that if the cut had been made at the budgetary program level, it might have language
saying “cut funds from operations,” a cut that is coded as a “vague cut” or “across the board” cut.
However, if a similar cut is taken at the subprogram level, then the language will specifically
reference the subprogram being cut even though the cut would be classified as “across the board”
or “vague” if it had been at the programmatic level (in other words the specificity of the cut
depends on the agencies’ budgetary program structure). In these cases, the cut is counted as a
targeted cut even though it may really be more appropriately a “vague cut.” This was a particular
problem with the coding for the Department of Education and to some degree with the
Department of Human Services where the agency proposed a series of across the board cuts to all
subprograms within a budgetary program.
The one area where coding was less conservative was when deciding between layoffs and
attrition. In general, in either the House version of the bill or the Senate version, analysts noted
whether cuts to positions represented cuts to vacancies, temporary positions or hourly labor
versus layoffs or cuts to filled positions. Analysts were concerned to warn elected officials about
25
when an agency was proposing layoffs. However, in 9 cases out of 127 in FY2010, totaling $1.9
million in choices overall, there was no notation about whether the positions were filled or
vacant. In these cases, the cut was coded as one due to attrition, reductions to temporary labor, or
hourly labor rather than a layoff since most agencies highly preferred this strategy to actual
layoffs and presumably, analysts had some incentive to make a notation that this cut was a
layoff. Again, the impact is small if this coding should prove to be incorrect.
Coding the change items is used to capture two items: the counts of change items that
reflect a particular strategy and the overall dollar value of the types of cuts. Both are important
because both contribute to telling the full story. The counts of the “change items” generally
capture the number of items referencing a particular type of strategy, while the dollar amounts
reflect the extent to which the state relied on a particular strategy.
In the count totals, statewide changes which may be spread across the entire budget are
not reflected in the counts since they would artificially repeat a change that was adopted
wholesale. The statewide changes were primarily a statewide reduction in the employer
contribution to the State Health Benefit Plan. This cut forced the plan to use a surplus accrued
over prior years. Other statewide cuts included the “across the board cut,” a one percent cut to
all agencies that the Governor proposed mid-session and deferred pay raises. As a result, the
totals for change items used in the analysis do not match the total number of change items
actually coded. Similarly, for purposes of space, change items that reflect policy-neutral
transfers of funds from one program to another, budgetary increases not otherwise netted out
(which were rare), or change items that had no fiscal impact are not reported in this analysis.
26
Results
[Table 3 here]
FY2009 Amended Analysis
Table 3 shows the results from the coding for FY2009 Amended Budget grouped by the
different Quadrants described in Table 2. The Table includes the counts of each type of cut as
well as the total value. The final grey shaded column shows the number of cuts made in the
Governor’s budget that were reversed by the General Assembly.
The Amended budget was adopted around the end of February 2009, so much of the
fiscal year had already passed. As a result, one would not expect to see the General Assembly
making substantial changes to the Governor’s budget simply because many of the cuts had
already been implemented and absorbed by the time the budget was proposed. Meanwhile, the
Agency ten percent reductions were proposed in September, a time when the financial crisis was
perceived to be substantially less serious. Also, the use of reserves or federal stimulus funds was
not an option available to agencies. The Governor and Conference Committee phases are more
comparable; however, the Agency Request phase does provide some interesting points of
comparison keeping in mind the limitations on the choices available to agency managers.
In general, neither the agency, nor Governor, nor General Assembly use the high conflict
cuts as their dominant strategy in the FY2009 mid-year budget. The Governor’s and General
Assembly’s proposals show a significant reliance on reserves, surpluses, and slack (at 57 and 62
percent of their overall strategy), a secondary reliance on Quadrant II strategies (at 37 and 32
percent respectively) and a very minor reliance on Quadrant IV strategies at 6 percent for both.
Given that the FY2009 budget represented a crisis where revenues plummeted faster than
the state could respond, in part the reliance on reserves reflects the problem that there simply was
27
not time to propose or absorb cuts of the magnitude needed. However, tellingly, looking across
the agencies’ budget proposals through the proposal adopted by the General Assembly, one sees
a declining interest in making the high conflict cuts, even though the agencies were making their
proposals in a period of lessened perception of crisis. Although the agencies are proposing fewer
cuts overall, on a percentage basis and on a total dollar basis, they appear to be far more willing
to make targeted cuts and to propose program eliminations or facility closures. The agencies
propose $142 million in targeted cuts or 11 percent of their total. Their “high conflict” Quadrant
IV cuts make up 24 percent of their overall proposals as compared to 6 percent in the Governor’s
budget and 6 percent in the General Assembly’s final adopted budget. Even though the
Governor and General Assembly faced a greater shortfall, in actual dollar amounts, their
proposal for high conflict cuts is smaller than those proposed by the agencies. Agency
gamesmanship cannot be ruled out in this analysis. Agencies could simply be putting up difficult
targeted cuts as a way of attempting to create political conflict around cuts to their programs and
thus avoid cuts. Further analysis of the agencies proposed targeted cuts is required. However, a
similar pattern is visible in FY2010 with a more pronounced difference between the Governor
and General Assembly.
Even if the agencies are trying to game the cuts, in general, the distribution of cuts
supports Proposition I above. Policy-makers, even the agencies themselves, are much less likely
to focus on targeted cuts or program eliminations than they are to try to make cuts that mitigate
controversy.
Proposition II suggests that Quadrant IV cuts are more likely to be reversed. In FY2009,
the evidence is somewhat contingent. Not many cuts were reversed based on the counts in Table
5. However, given the mid-year nature of budget, not many cuts overall were changed to begin
28
with – only 102 out of 1014 non-statewide cuts proposed by the Governor and as will be
discussed, this is probably more properly represented as 54 reversals. 24 of the high conflict cuts
were reversed, while 75 of the low conflict cuts were reversed. Of the 75 low conflict reversals,
48 were from the across the board cut which was imposed mid-year during the legislative
session. The General Assembly was adjusting a formulaic across the board cut proposed by the
Governor for those agencies where such a cut did not make sense or was not appropriate. These
reversals are included for purposes of full disclosure but arguably do not represent a true
accounting of reversals made because of conflict or controversy. A better accounting is to drop
these changes, which essentially makes the reversals roughly half (27) in Quadrant II choices and
half (24) in Quadrant IV.
The other reversal of note is associated with the cuts to local assistance, which may
reflect a flaw in the underlying theory. Theories of fiscal illusion, which are different from the
behavioral economics theories, suggest that voters are not able to follow cuts that are devolved to
agencies or to lower levels of government, i.e., vague cuts or devolution of cuts are Quadrant II
cuts. Why voters do not follow the cuts, particularly those to local governments, is not entirely
clear, and may depend on the type of grants cut as well as the capacity of lower levels of
government to raise awareness. The cuts to local assistance in this case are almost entirely cuts to
education formula funds for school districts. This area appears to be one of significant sensitivity
for legislators. Not only were 10 of the change item reversals in this area, but the General
Assembly reversed $150 million in cuts. Looking in more detail at the actual proposals behind
these reversals, the General Assembly used more federal stimulus funds than the Governor in
order to reduce cuts to school districts. In other words, they shifted from a Quadrant II strategy
to Quadrant I.
29
Also interesting, is the reliance on “vague cuts” rather than across the board cuts per se.
These types of cuts are little discussed in the literature, but were a significant strategy in Georgia
in FY2009 and in FY2010. In the change item text, these cuts are simply described as “cuts to
operations” or “reduce funds.” No phase of the budget provides any additional information, and
based on the author’s personal experience working for the budget office, in many cases, they
were highly idiosyncratic and arbitrary. Vague cuts might be amounts needed to move an
agency to an expected percentage cut level once more targeted cuts were taken into account. In
other cases, they were percentages that generally reflected policy-makers’ general prioritization
of a particular service. Given that the average agency cut was 8 percent, a more valued agency
or program might be cut at a lesser amount - say 3 or 4 percent while a less valued agency or one
thought to have slack might be cut 10 percent. The expectation was that the agency would
manage through the cuts through non-controversial reductions in operations and again based on
the author’s experience, it appeared that these cuts did not result in any controversial targeted
reductions in operations at least in the near term. As this research is extended over time there
may be evidence of a substantial degradation in administrative capacity in some organizations
which eventually had a serious impact on operations.
FY2010 General Budget Analysis
[Table 4 here]
Table 4 shows the pattern of cuts for the FY2010 General Budget. Again, the high
conflict Quadrant IV cuts make up a substantially smaller percentage of the overall strategy,
particularly for the Governor and the General Assembly at 20 percent and 15 percent. By way of
30
contrast, using reserves, surplus and intergovernmental funds makes up 42 and 46 percent of
their proposals respectively, and Quadrant II cuts make up 38 and 39 percent of their proposals.
Again, the agency cuts were proposed in the fall of 2008, in a period where the Governor
was projecting revenue growth in FY2010. By the time the Governor proposed his budget in
January of 2009, and then revised his budget again in February, the outlook was considerably
more negative. The analysis in Table 4 accounts for $1 billion in cuts in the Agency Request
phase, but $4.6 billion in the Governor and General Assembly’s budget. The agencies’ proposed
high conflict cuts almost exactly mirror those in FY2009. The bulk of both the Governor’s and
General Assembly’s proposed increase in this category comes from the inclusion of the HTRG
grant. HTRG makes up 47 percent of the total cuts in the Quadrant IV category under the
Governor’s proposal and 62 percent of the General Assembly’s cuts in this category. The
Governor’s proposal does include around $140 million more in targeted cuts, and about $83
million more in program eliminations and facility closures than the agencies proposed. Both of
these areas are reversed significantly by the General Assembly, which drops the dollar value of
these cuts back to levels closer to the agency cuts, and in the case of the targeted cuts, actually
below the agencies’ proposed cuts (even though the agencies only needed to find around $1
billion in cuts and the legislature had to find $4.7 billion). The pattern of cuts again supports
Proposition I.
Additionally, in FY2010 the pattern of reversals more clearly supports Proposition II that
Quadrant IV cuts are more likely to create conflict and to be reversed during the political
process. There are 128 reversals out of around 1058 non-statewide change items, of these 69 or
over half were made in Quadrant IV, 53 in Quadrant II choices and 6 in Quadrant I. Again,
Quadrant II changes are heavily influenced by the late addition of across the board cuts by the
31
Governor which were adjusted by the General Assembly. Dropping out these 30 changes, leaves
only 23 reversals in the Quadrant II category and 70 percent of the reversals in Quadrant IV.
On a qualitative level, the debate also appeared to center around the Quadrant IV choices.
Major areas of conflict were a proposal by the Governor to cut Medicaid hospital and physician
reimbursement rates by 10 percent, a proposal to eliminate state funding for school nurses, and a
proposal to eliminate a salary enhancement for teachers who became National Board Certified.
These three proposals account for most of the dollar value drop in “targeted cuts” from the
Governor’s proposal to the final Conference Committee report. The General Assembly turned to
Quadrant I and II strategies to cover these cuts, primarily using new information about ways that
federal stimulus funds could be leveraged in the budget to swap out state funds for federal funds.
Finally, a further area that bears discussion is the dominant Quadrant II strategy of
ignoring inflationary increases and increases in service demand. Because Georgia begins with a
base of the prior year budget, discussions about regular growth in expenditures because of
population growth or inflation were not even on the table. In effect, around 14 percent of the
cuts made in FY2010 were cuts that no one even thought to debate.
Conclusion
Previous research on cutback budgeting has suggested that policy-makers adopt a host of
tactics to avoid conflict and further that these tactics tend to create distortions in funding that
may affect service delivery or organizational capacity. Analysts, scholars, and policy-makers
themselves tend to avow budgeting cutting tactics that have a strategic purpose – such as paring
back less essential programs or services, examining non-performing programs or pursuing
efficiency. However, these tactics often lead to budget cuts that create greater conflict.
32
This analysis proposes a typology of budgetary choices, grounded first in the host of
tactics observed through surveys and anecdotal observation, and then organized based on the
extent to which a cut is likely to be properly perceived as a loss to voters or key constituency
groups involved in the political process. The premise is that elected officials recognize that
certain budget cutting choices may be less likely to be perceived as a true loss and therefore will
be less likely to generate political conflict. As a result, they have a propensity to pick these
strategies. When they choose cuts that are likely to be perceived as a true loss, they are often
rewarded with intense political conflict and the potential reversal of their choices in the political
process.
For the most part, the Georgia case study of the agency, Governor, and legislative branch
choices during the FY2009 Amended and FY2010 General budgets supports this theoretical
framework. Overall, all three groups tended to pick strategies that were less likely to raise
concerns about “loss,” i.e., Quadrant I or II strategies and tended to avoid Quadrant IV strategies
that were direct cuts. Further, the more politically sensitive the entity – with the legislature being
most sensitive to constituency concerns – the more likely they were to move away from
Quadrant IV strategies or reverse previously proposed Quadrant IV strategies. The implication
of this finding is that the incentive structures around cutback choices may significantly distort
operations in the public sector.
Of interest for future research is whether policy-makers were forced to make more
strategic or targeted cuts as the fiscal crisis continued, and the easier Quadrant I and II choice
became increasingly distortionary. Also, were states where there was a “regime change” better
able to make targeted cuts, since the key constituencies supporting the governing coalition would
have shifted. Notably, current debates over public pension reforms are occurring largely in states
33
with recent regime changes (often from Democratic control to Republican control). However,
these cuts are not without conflict and a more complete analysis would be needed to assess how
serious these cuts are as well as their durability. As with the targeted cuts in Georgia, often
policy-makers perceive these targeted cuts as a dominant strategy because they create so much
conflict and stress; a more careful analysis might reveal that they are essentially side shows to
the major strategies adopted to balance the budget – or although these items were proposed, they
could not be sustained politically.
Additionally of interest is the extent to which distortionary choices actually do undermine
effective agency operations and whether policy-makers redress these distortions as the economic
condition of the state improves. One case study of the long term consequences of the 1970s
fiscal crisis in New York City suggests that certain choices, such as investment in maintenance
and capital outlay, may never fully recover (Berne and Stiefel 1993). A final area of interest is
whether perceptions of loss can be manipulated to put Quadrant II cuts on a more equal footing
with those in Quadrant IV – so that voters more appropriately perceive the implications of
reductions that may have a substantial distortionary impact on operations over time.
34
Tables
Table 1
Budget Cutting Strategies
Cuts that Make Use of Reserves/Surpluses
Use of Budget Stabilization Funds (BSRs)
Use of Program Surpluses/Fund Sweeps
Programmatic Cuts Across the Board Cuts
Vague cuts (often percentage based)
Targeted Cuts Program Termination
Defer new projects/initiatives
Personnel Based Cuts
Hiring Freeze/Attrition
Furlough Salary Cut Layoffs Cuts to Employee Benefits (Health or Pension)
Cut to Travel Budget
Cut to Professional Development
Early Retirement
Shifting Costs to the Future Renegotiate Debt
Use of Debt to Cover Operating Expenses
Accounting Changes Securitize Assets/Sales of Assets
Delay Payments for Long Term Liabilities
Cut Maintenance/Capital Outlay
Intergovernmental Strategies
Devolving responsibilities to lower level of government
Leverage resources from upper level of government
Improving Efficiency Reorganize Agencies
Privatization Other (technology, volunteer labor, etc.)
Sources for this table include: (National Association of State Budget Officers 2010, National Conference of State Legislatures
2010, Hoene and Pagano 2010, Behn 1978, Bifulco and Duncombe 2010, Bunch 2010, Petersen 2003, Pew Center on the States
2011, Coughlin and Zuckerman 2002, Jimenez 2009, Reschovsky 2004, Levine, Rubin, and Wolohojian 1981)
35
Non-Mitigated Perception of
Loss/Perceived Loss
(Which constituency perceives
loss may be important here.)
Mitigated Perception of
Loss/No Perceived Loss
36
Cut to salary in deflationary environment below
the rate of deflation.
III. No Cut but Perception of Loss
Cut Employee Compensation
Layoffs
Furloughs
Selected programmatic “cuts to the base” (targeted cuts)/selected
programmatic cuts over “equity” baseline
E. Program eliminations
A.
B.
C.
D.
(Fiscal Illusion)
P. Vague cuts (pass decision along to agencies)
Q. Cuts to intergovernmental assistance
IV. Cut with Non-Mitigated Perception of Loss
(Cuts Less Than a Baseline/Equitable Cuts as “Baseline”)
M. Across the board cuts
N. Across the board state furloughs
O. Across the board salary cuts
(Cuts to Funds from Hiring Freeze/Attrition)
K. Reduce funding with hiring freeze/cuts through attrition
L. Early retirement incentives
(Cuts to Funds not Yet in Current Endowment (Gain Foregone))
H. Reduce money budgeted for new initiatives
I. Reduce funding budgeted for growth in service demand/ inflation or
fail to budget for inflation/growth in service demand
J. Reduce funding budgeted for salary growth
(Hyperbolic Time Discounting)
A. Shift from cash to debt financing
B. Use of debt to cover operating expenses
C. Renegotiate debt (to free up cash for current operations)
D. Reduce contribution to pension/other long term liabilities
E. Make accounting shifts in timing of payments
F. Maintenance cuts and cuts to capital outlay
G. Cuts to professional development
A.
B.
C.
D.
Use of Rainy Day Funds
Other surpluses
Underutilized funds (slack)
Pure efficiency gain
Cut
II. Cut with Mitigated Perception of Loss
Table 2: Matrix of Cutback Budgeting Options
No Cut
I. No Cut with No Perceived Loss
0
0
0
0
0
54
18
0%
0%
0%
0%
0%
5%
2%
$
$
$
$
$
$
$
$
(Cuts to Funds not yet in Current Endowment (Gain Foregone))
H. Reduce Funds for Growth/New Initiatives
79
8%
$
I. Inflationary Growth not Budgeted
2
0%
$
Quadrant II: Cut with Mitigated Perception of Loss
(Hyperbolic Time Discounting)
A. Shift from Cash to Debt Financing
B. Use of Debt to Cover Operating Expenses
C. Renegotiate Debt
D. Raid Pensions/Other Long Term Liabilities
E. Timing of Payments/Accounting Changes
F. Maintenance/Capital Outlay
G. Cut to Professional Development
0%
0%
0%
0%
0%
2%
0%
37
125,332,999 10%
- 0%
19,204,761
2,106,861
110 11%
- 0%
0%
0%
0%
0%
0%
5%
1%
- 0%
2 0%
29 3%
0%
0%
1%
1
55
15
34 3%
8 1%
25 2%
9%
0%
1%
464,824,640 37%
26 3%
- 0%
295,242 0%
12,834,608 0%
123,175,860 4%
3,085,015 0%
486,336,684 16%
$
$
$
$
$
$
$
$
$
0%
0%
0%
3%
0%
1%
0%
138,008,278 5%
- 0%
97,702,695
14,820,314
23,164,669
1,546,997
$ 1,100,557,162 37%
$
$
$
$
$
$
20,780,632
605,066,767
43,414,187
25,800,243
$
$
$
$
1%
20%
1%
1%
200,000,000 7%
187,278,126 6%
$
$
Governor's Rec.
%
Total Value
%
$ 1,708,067,364 57%
2%
26%
#
Table 3: FY2009 Amended Strategies
Agency Request (10% Cut Level)
#
%
Total Value
%
$ 490,485,235 39%
Quadrant I: No Cut with No Perceived Loss
A. Use of Rainy Day Funds
Revenue Shortfall Reserve (Regular)
Revenue Shortfall Reserve (K-12)
B. Other Surpluses
Tobacco Reserve
Lottery Reserve
Public Authority Reserves
State Health Benefit Plan Reserves
$
319,691,712
One Georgia Reserves
Other
170 16% $
25,283,429
C. Underutilized Funds (Slack)
Over-Budgeted Funds
21
2%
$
107,555,357
One Time Funds Targeted for Elimination
2
0%
$
5,275,015
D. Intergovernmental Assistance
12
1%
$
17,718,105
E. Improving Efficiency (w/ no corresponding Quadrant II or III cut)
Reorganize Agencies
0
0%
$
Privatization
5
0%
$
1,648,777
Other Efficiency Measures
25
2%
$
13,312,840
Strategy
1
0%
0%
0%
0%
0%
5%
1%
114 11%
- 0%
1
56
15
-
-
0%
2 0%
30 3%
-
36 3%
8 1%
32 3%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1%
20%
2%
1%
0%
0%
0%
3%
0%
1%
0%
136,257,433 5%
0%
10,781,741
97,702,695
14,820,314
23,564,669
1,546,997
951,160,570 32%
0%
295,242 0%
14,234,608 0%
111,970,793 4%
3,144,581 0%
651,833,053 22%
20,780,632
603,992,476
47,123,333
32,747,210
200,000,000 7%
187,278,126 6%
FY2009A Conf.Committee
%
Total Value
%
$ 1,873,400,054 62%
35 3%
#
2
1
-
-
9
75
-
-
NA
-
3
R
3
$
$
$
$
$
$
$
$
22,888
16,822,040
34,832,925
142,756,135
97,594
99,774,385
0%
0%
1%
3%
11%
0%
8%
294,305,967 24%
279,384,099 22%
(52,943,677) -4%
31,234,981 2%
55,232,731 4%
- 0%
4,864,545 0%
407,340 0%
15
19
48
205
12
53
0%
1%
2%
5%
20%
1%
5%
190 19%
19 2%
144 14%
- 0%
4 0%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
818,366
5,082,458
11,064,868
114,449,903
159,991
59,029,698
0%
0%
0%
0%
4%
0%
2%
190,605,284 6%
436,540,699 15%
195,782,334 7%
62,324,143 2%
64,235,624 2%
- 0%
65,925,779 2%
505,630 0%
15
19
47
220
12
50
0%
1%
2%
4%
21%
1%
5%
198 19%
17 2%
147 14%
- 0%
4 0%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
818,366
4,969,333
9,655,518
114,550,188
159,991
57,797,229
0%
0%
0%
0%
4%
0%
2%
187,950,625 6%
432,845,128 14%
48,503,130 2%
56,216,448 2%
62,490,606 2%
0%
65,925,779 2%
505,630 0%
38
Total Cuts/Use of Reserves/IGR*
1044
$ 1,249,615,842
1014
$ 2,999,229,810
1059
$ 3,012,511,249
*Note that this won't match to cuts described in paper because selected enhancements or increases are removed. Enhancements are usually included in net amounts when
impact the same programs. Most of the enhancements excluded are cuts to one program to transfer funds to another. Change item counts eliminate most state-wide changes as
well as transfers, enhancements, and other technical changes.
0%
0%
2%
6%
21%
0%
7%
Quadrant IV: Cut with Non-Mitigated Perception of Loss
A. Cut to Employee Compensation
Salary Cut
0
Cuts to Employee Benefits (Health or Pension)*
1
B. Layoffs
24
C. Furlough
64
D. Targeted Cuts
218
Cut to Travel Budget
5
E. Program Elimination/Facility Closure
77
$
$
11%
2%
114
20
(Fiscal Illusion)
P. Vague Cuts
Q. Cuts to Local Assistance
$
$
$
$
$
12%
0%
0%
(Cuts Less than Baseline/Equitable Cuts as "Baseline")
M. Across the board cuts
(Cuts to Funds through Hiring Freeze/Attrition)
K. Hiring Freeze/Attrition
130
L. Early Retirement
0
J. Reduce Funds for Salary Growth
Deferred Pay Raises
Promotion Freeze with Salary Freeze
1
102
1
2
16
5
-
24
7
10
48
-
-
0
0
0
0
27
15
0%
0%
0%
0%
3%
2%
$
$
$
$
$
$
$
(Cuts to Funds not yet in Current Endowment (Gain Foregone))
H. Reduce Funds for Growth/New Initiatives
68 8%
$
I. Inflationary Growth not Budgeted
$
Quadrant II: Cut with Mitigated Perception of Loss
(Hyperbolic Time Discounting)
A. Shift from Cash to Debt Financing
B. Use of Debt to Cover Operating Expenses
C. Renegotiate Debt
D. Raid Pensions/Other Long Term Liabilities
E. Timing of Payments/Accounting Changes
F. Maintenance/Capital Outlay
G. Cut to Professional Development
-
- 0%
263,760 0%
18,661,200 2%
0%
0%
0%
0%
1%
0%
39
79,904,634 7%
- 0%
8,105,805
776,091
594,864,349 56%
20 2%
25 3%
45 5%
27,644,391 3%
13,399,298 1%
13,613,223 1%
89 9%
0%
1 0%
- 0%
- 0%
53 5%
12 1%
-
0%
1 0%
36 4%
25 3%
65,890,146
78,518,894
47,123,333
127,795,901
$
$
$
$
- 0%
269,107 0%
27,035,872 1%
32,012,258 1%
16,307,861 0%
1,135,752,683 25%
$
$
$
$
$
$
$
$
0%
0%
3%
0%
0%
0%
149,462,371 3%
624,314,984 14%
7,258,501
117,820,437
19,299,780
733,921
$ 1,740,456,595 38%
$
$
$
$
$
$
161,312,697 3%
$
1%
2%
1%
3%
258,597,684 6%
$
Governor's Rec.
%
Total Value
%
$ 1,950,616,436 42%
96,145,851 9%
- 0%
8,154,544 1%
#
Table 4: FY2010 General Strategies
Agency Request (10% Cut Level)
#
%
Total Value
%
$ 177,882,267 17%
Quadrant I: No Cut with No Perceived Loss
A. Use of Rainy Day Funds
Revenue Shortfall Reserve (Regular)
Revenue Shortfall Reserve (K-12)
B. Other Surpluses
Tobacco Reserve
Lottery Reserve
Public Authority Reserves
State Health Benefit Plan Reserves
$
One Georgia Reserves
$
Other
10 1%
$
C. Underutilized Funds (Slack)
Over-Budgeted Funds
15 2%
$
One Time Funds Targeted for Elimination
20 2%
$
D. Intergovernmental Assistance
18 2%
$
E. Improving Efficiency (w/ no corresponding Quadrant II or III cut)
Reorganize Agencies
0
0%
$
Privatization
1
0%
$
Other Efficiency Measures
25 3%
$
Strategy
92 9%
0%
1 0%
0%
0%
53 5%
13 1%
-
0%
1 0%
38 4%
-
20 2%
30 3%
49 5%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1%
1%
1%
3%
0%
0%
3%
0%
0%
0%
148,184,701 3%
624,314,984 13%
7,258,501
117,820,437
19,924,780
933,921
1,813,190,123 39%
0%
269,107 0%
43,336,531 1%
32,271,512 1%
22,905,212 0%
1,311,650,179 28%
65,890,146
48,827,544
47,123,333
135,435,756
161,312,697 3%
258,597,684 6%
1
2
2
1
10
-
-
53
-
-
1
FY2010G Conf.Committee
R
%
Total Value
%
$
2,127,619,701 46%
6
35 3%
#
$
$
$
$
$
(Cuts to Funds through Hiring Freeze/Attrition)
K. Hiring Freeze/Attrition
102 13%
L. Early Retirement
(Cuts Less than Baseline/Equitable Cuts as "Baseline")
Across the board cuts
(Fiscal Illusion)
P. Vague Cuts
Q. Cuts to Local Assistance
390,269,986 36%
15,388,236 1%
33,980 0%
42,718,150 4%
- 0%
57,667,467 5%
- 0%
184 19%
4 0%
127 13%
1 0%
$
$
$
$
$
$
$
364,471,301 8%
243,114,107 5%
73,582,919 2%
73,596,041 2%
- 0%
66,571,331 1%
230,902 0%
251 24%
5 0%
128 12%
1 0%
$
$
$
$
$
$
$
423,061,362 9%
245,678,253 5%
81,581,835 2%
76,688,074 2%
0%
67,512,373 1%
230,902 0%
1
11
-
30
-
-
40
Quadrant IV: Cut with Non-Mitigated Perception of Loss
$ 297,887,262 28%
$ 920,809,354 20%
$
694,625,985 15% 69
A. Cut to Employee Compensation
Salary Cut
2
0%
$
123,106 0%
1 0%
$
83,106 0%
1 0%
$
83,106 0%
Cuts to Employee Benefits (Health or Pension)*
1
0%
$
22,888 0%
14 1%
$
1,233,330 0%
14 1%
$
1,233,330 0%
B. Layoffs
24 3%
$
12,770,010 1%
18 2%
$
5,858,107 0%
16 2%
$
5,256,926 0%
C. Furlough
33 4%
$
24,245,236 2%
1 0%
$
4,859 0%
1 0%
$
4,859 0%
D. Targeted Cuts
233 29% $
131,771,825 12%
222 23% $
272,830,087 6%
215 20% $
114,609,941 2%
49
3
0%
$
35,960 0%
4 0%
$
58,425 0%
4 0%
$
58,425 0%
Cut to Travel Budget
E. Program Elimination/Facility Closure
Program Elim./Facility Closure (not HTRG)
94 12% $
128,918,237 12%
96 10% $
212,450,939 5%
90 9%
$
145,088,897 3%
20
Homeowners Tax Relief Grant
$
428,290,501 9%
$
428,290,501 9%
Total Cuts/Use of Reserves/IGR*
813
$ 1,070,633,878
979
$ 4,611,882,385
1058
$
4,635,435,809
128
*Note that this won't match to cuts described in paper because selected enhancements or increases are removed. Enhancements are usually included in net amounts when impact
the same programs. Most of the enhancements excluded are cuts to one program to transfer funds to another. Change item counts eliminate most state-wide changes as well as
transfers, enhancements, and other technical changes.
117 14%
5
1%
$
$
0
0%
J. Reduce Funds for Salary Growth
Deferred Pay Raises
Promotion Freeze with Salary Freeze
References
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