How States Can Respond to their Continuing Economic Challenges

For many state governments, the slight gains in economic recovery seen at the national level will not be shared down the municipal line for months to come, argues Deloitte’s Robert Campbell. But in his latest commentary from The Gallery, Mr. Campbell says that continued stress on budgets in 2011 may compel lagging states to enact fundamental changes to the way they use technology and structure business processes.

While we are starting to see signs of overall recovery in the U.S. economy, this is one of the longest and deepest recessions since the Great Depression.

Unfortunately, just as states lag the commercial sectors going into a downturn, states clearly lag in the recovery as well. The reason for this is fairly obvious; the states’ budgeting process is prospective in nature and state revenue collections follow actual economic improvement.

Fiscal Year 2011 could be the states’ most challenging in recent years. The Center on Budget and Policy Priorities just reported that the states’ cumulative budget shortfall could reach $140 billion this year – and that’s after the various budget adjustments many states made over the last several years.

Why is this happening?

Unfortunately, a large number of states failed to use the economic downturn as an opportunity to fundamentally transform the operation of state government. In addition, funding from the American Recovery and Reinvestment Act (ARRA) made it easy for many state legislatures to use ARRA funds to temporarily plug budget gaps, rather than to change expenditure patterns. When ARRA funding dries up, those states that failed to act aggressively will be looking at deep shortfalls.

The growing federal debt and the likelihood of significant federal action to address it could have further negative consequences on state deficits.

As we all know, fiscal responsibility and constraint in good times make it easier to deal with economic downturns. A recent Deloitte analysis of annual expenditure trends across the 50 states found that states that spent beyond their peers earlier in the decade faced the deepest financial holes after the recession began in 2007.

In contrast, states that have been willing to act aggressively with promising transformational initiatives have done better. These include:

• States like Minnesota that used a commercially-proven shared services approach to drive down administrative costs while driving best practices across state enterprises.
• States like Texas and Michigan that continued to invest in technology to improve the integration of human service programs and save costs.
• States like Florida that adopted enterprise technologies to drive a single technology approach to tax collection and enforcement across the state.
• States like Texas that used commercially-available technology honed in the private sector to improve online access to government services.

The imperative for states to transform their governments’ structure and business processes, adopt advanced technology and challenge long established policies is clear. The forecast for Fiscal Year 2011 shortfalls will likely create additional urgency for states, especially those that have been hesitant to enact fundamental enterprise change.

Mr. Robert N. Campbell III is Vice Chairman, Principal, Deloitte LLP and is the U.S. State Government Leader, based in Austin.

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