Questions over Case Study 11.1
Identify the weaknesses in each strategy. (Hint: How do you think the bond rating agencies reacted to California’s 2003 budget?)
The first dangerous strategy identified was -Delay maintenance and replacement of assets—and rely on hope (Starling, 2011). The weakness of this strategy is, in addition to posing a physical threat to the people who can be harmed by these delays, poses a very real threat to the budget. More specifically, Osborn an Hutchison (2004a) note that “avoidance becomes addictive, and the real problems fester and grow, ultimately requiring even more painful solutions (p.29)”
The second dangerous strategy is selling assets (Starling, 2011). This is also a short-term solution with long-term financial impact, which may solve short- term budgetary deficits, but will ultimately worsen the deficit long-term through loss of revenue (Dugan, 2010).
The third dangerous strategy is to lease, rather than buy equipment. This again poses a danger over the long term, because it costs more than simply buying the equipment outright, and leaves the government with no asset to sell, or use at the end of the items usefulness, or the end of the lease agreement (Starling, 2011), United States Government Accountability Office, 2012).
Another dangerous strategy that was identified is Robbing Peter to Pay Paul (Starling, 2011). The weakness is that this may rate a new deficit in years to come, or further complicate balancing the budget over time (Osborn & Hutchison 2004b).
Another strategy is to nickel and dime employees (Starling, 2011). The weakness in this strategy is that employees may become disgruntled or burn out, ultimately resulting in a loss of productivity, and a labor deficit as a result of poor treatment (Singletary, 1991).
The weakness in the practice of making across the board, rather than targeted cuts, is that it lowers the quality of government services in a broad manner, rather than targeting waste the result is a lower performing government and a loss of quality as a whole, without truly solving the budgetary problems (Starling, 2011).
Fudging the numbers is another dangerous but highly-used strategy for improving budget health (Starling, 2011). This is dangerous, because if overly optimistic, or blatantly downplaying expenses, it can lead to a deficit in the budget which is quite different than the projected deficit, and which there is no financial plan to cover (Starling, 2011).
Borrowing is another dangerous strategy. As was recently demonstrated by the reduction in the United States credit rating, over-borrowing can reduce credibility or credit rating and make it harder to borrow needed funds later (Detrixhe, 2011).
Finally, accounting gimmicks, like fudging the numbers, simply create an overly optimistic or unrealistic budget, which cannot serve to inform spending decisions, or planning to cover expenses (Starling, 2011).
Borrowing is likely the most dangerous form of faulted governmental budget strategy, because it poses multiple risks. First, it is dangerous because it can effect both the government’s credit rating, and its ability to continue to borrow, making it hard or impossible to meet budget needs in future years. Second, it allows the federal government to interfere with or restrict the borrowing that occurs at the state level, which can damage state budgets (Langdana, 2009). This can further damage state credit ratings, resulting in poorer borrowing, a loss of investor confidence, and loss of bond accruement. Further, borrowing requires the state to eventually budget funds to be used to replay that debt, which, unless the deficit is being reduced, cannot occur (Starling, 2011).
It could also be argued, however, that Robbing Peter to Pay Paul is actually a more dangersous strategy, because it borrows from a budget that, in actuality does not yet exist. Thereby creating a deficit not only in the current fiscal year, but also in the next fiscal year (Starling, 2011). This is problematic because it insures that reducing the debt is impossible, instead, it is simply passed from budget to budget, without foresight of the total of the next years budget at the time that the borrowing occurs (Osborn & Hutchison 2004b)..
The strategy with the most mild impact on both finances and the infrastructure in Nickel and Diming employees. This does not pose a threat to the budget, financing, or the national/state infrastructure, but rather, decreases moral among workers. The resulting loss of productivity likely does not equal the money saved, and thus can still be a useful strategy for states or governments overall (Singletary, 1991).
Provide a recent example of each strategy.
Delay maintenance and replacement of assets
In 2013, the US Navy was forced to delay refueling the Lincoln as a result of budgetary uncertainly, as a result the nations physical security, and military readiness was threatened, and future maintenance costs were potentially increased (Lagrone, 2013).
Britain just experienced a historic sell of public assets, as the government moved to sell off the Eurostar Student Loan program to private entities. The government will raise more than 23 billion pounds from the sale (McTague, 2015).
Lease Rather than Buy Equipment
Congress recently leased a block of i8 fighter jets because they could not afford to buy them outright. They signed a lease so that the cost would be spaced out over many years, in smaller chunks, to make it budgetary more manageable (Presse, 2012).
Rob Peter to Pay Paul
Recently, Obama pushed for an International Climate Finance program, and multiple nations agreed to invest in it. However, in the President’s FY 2016 Budget, money is robbed from this international funding to pay for domestic concerns, like community resilience initiatives for Native Americans (Ogden & Tarsaka, 2015).
Nickel and Dime Employees
Indiana has specifically targeted energy cost through nickel and dime measures that negatively impact the atmosphere for employees while paying off at the budgetary level. For example, employees have been asked to turn off computers completely before leaving for lunch, and keep blinds closed during the day when temperatures rise above a certain level to lower AC related energy cost (Stokes, 2013).
Recently, New Hampshire’s state government made deep cuts across-the-board that effected all the stat’s employees, totaling $50million dollars in savings through pay and benefit reduction (Grossmith, 2013).
Illinois recently reported public pension that would earn 7-8 percent across the year, which was a gross over estimate, as a result, they reported that they had an “unfunded liability” of approximately $8,133 per person, when the true amount was closer to $25,740 per person (Lott, 2014) .
Two years ago, Governor of California, J. Brown, proposed that the state to borrow $ 500 million out of a special funds account. The borrowed funds were to be used to equalize the general fund budget. The money was specifically removed from the funds resulting from Carbon Cap-and-Trade (Mulkern, 2013).
In 2012, Texas delayed $2 billion worth of tax repayments by more than a month so that it could push the resulting expenses into the next fiscal year (Suderman, 2012).
Detrixhe, J. (2011, August 6). U.S. Loses AAA Rating at S&P on Concern Debt Cuts Deficient. Bloomberg Business. Retrieved from http://www.bloomberg.com/news/articles/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord
Dugan, I.J. (2010, August 23). Facing Budget Gaps, Cities Sell Parking, Airports, Zoo. Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB10001424052748703960004575427150960867176
Grossmith, P. (2013, May 31). Hassan faults NH Senate for across-the-board cuts. New Hampshire Union Leader. Retrieved from http://www.unionleader.com/apps/pbcs.dll/article?AID=2013130609994&NL=1
Langdana, F. K. (2009). Macroeconomic policy: Demystifying monetary and fiscal policy. Boston, MA: Springer-Verlag.
Lagrone, S. (2013, February 8). Navy: Lincoln Refueling Delayed, Will Hurt Carrier Readiness. USNI News. Retrieved from http://news.usni.org/2013/02/08/navy-lincoln-refueling-delayed-will-hurt-carrier-readiness.
Lott, M. (2014, November 13). Report: State budgets fudge numbers to hide massive debt. Fox News. Retrieved from http://www.foxnews.com/politics/2014/11/13/report-state-budgets-fudge-numbers-projected-debt-worse-than-reported/
McTague, T. (2015, May 20). It's the Great British Sell Off: Osborne reveals plan to raise £23BILLION from government assets. Daily Mail. Retrieved from http://www.dailymail.co.uk/news/article-3089837/George-Osborne-sell-government-assets-like-Eurostar-Student-Loans.html
Mulkern, C. A. (2013, May 15). Gov. Brown proposes to borrow $500M from cap-and-trade revenue. E&E Publishing LLC. Retrieved from http://www.eenews.net/stories/1059981189
Ogden, P. & Taraska, G. (2015, February 5). Don’t Rob Peter to Pay Paul: The Importance of International Climate Finance in the President’s FY 2016 Budget. Center for American Progress. Retrieved from https://www.americanprogress.org/issues/green/news/2015/02/05/106117/dont-rob-peter-to-pay-paul-the-importance-of-international-climate-finance-in-the-presidents-fy-2016-budget/
Osborn, D. & Hutchison, P. (2004a). The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis. New York: Basic Civitas Books.
(2004b). Budgeting for Outcomes. Governement Finance Review, Oct 2004: 11-14.
Presse, A. (2012, February 13). U.S. Air Force gives U-2 spy plane another lease on life. Rawstory. Retrieved from http://www.rawstory.com/2012/02/u-s-air-force-gives-u-2-spy-plane-another-lease-on-life/
Singletary, M., (1991).“Nickel and Dime Employees are Disgruntled”. Black Enterprise. June 1991: 246-251
Suderman, P. (2012, July 18). States Use Budget Gimmicks and Accounting Tricks to Evade Balanced Budget Requirements. Reason.Com. Retrieved from http://reason.com/blog/2012/07/18/states-use-budget-gimmicks-and-accountin
Starling, G. (2011). Managing the public sector (9th ed.). Mason, OH: Cengage Learning.
Stokes, K. (2013, April 1). 'Nickel And Dime' Energy Savings Adding Up In Cash-Strapped Indiana Districts. Indiana Public Media. Retrieved from http://reason.com/blog/2012/07/18/states-use-budget-gimmicks-and-accountin