The federal deficit and the states: Saving money one process at a time

In this, the first of two pieces on the federal debt and its relationship to state and local governments, Accenture’s David Wilson outlines how the debt crisis should lead to a fundamental reexamination of the way money transfers from federal to state coffers. He also argues for a government processes “Marshall Plan” that looks into “every single process area and activity to understand the most efficient way to deliver services.”

In the last months of 2010, two groups released reports aimed at addressing the federal government’s structural deficit problems. The White House-established National Commission on Fiscal Responsibility and Reform, also known simply as the Debt Commission, and the Bipartisan Policy Center’s Debt Reduction Task Force both released multi-year roadmaps replete with spending cuts and various degrees of tax reform.

Through the various suggestions in the Debt Commission’s plan, deficit spending would be reduced by about $4 trillion over the coming decade. The BPC estimates that its plan would reduce the debt to below 60 percent of the economy, while balancing the primary budget – everything other than interest payments – by 2014 if its provisions were followed.

As of January 1, 2011, the US Treasury reported that the National Debt was just above $14 trillion dollars and the projected 2010-2011 deficit is around $1.4 trillion.

So how does this compare to the states? And what affect would federal belt-tightening have on the states’ fiscal outlook?

CivSource spoke to two leading experts on what federal debt reduction means for state and local governments, one of whom sat on BPC’s Debt Reduction Task Force. In speaking with Deloitte’s Robert Campbell and Accenture’s David Wilson, both saw the federal debt crisis as an opportunity to address inefficiencies and a chance to restructure the federal-state financial relationship. But they also warned of real dangers awaiting those states that are not diligent in their fiscal management.

“In the Bipartisan Policy Center discussions there was a fair amount of consideration given to consequences of prospective recommendations on the states,” said Mr. Campbell, who is the US State Government Leader at Deloitte LLP. “There was a fairly broad recognition that we needed to be careful in addressing the federal deficit and federal debt level, not just kicking the ball down the line in a way that creates unintended consequences for state and local governments.”

Heading into Fiscal Year 2011, 41 states had to reconcile nearly $84 billion in budget gaps. The National Conference of State Legislatures (NCSL) says that fifteen states have reported new FY 2011 gaps totaling at least $26.7 billion, on top of the $84 billion already resolved. NCSL estimate more than two-thirds of states (33) project budget gaps in 2012, tallying over $72 billion.

Of course, states are not able to run deficits, so that number will have to be reconciled through more spending cuts or tax increases.

Mr. Wilson, managing director of Accenture’s Canada and US state and local government practice, pointed out that some 30 percent of state budgets are federally funded. “What will happen to this flow? A lot of money that flows down [from the federal government] has not encouraged efficiencies, in fact, it has encouraged the opposite.”

Mr. Wilson says government leaders need to figure out how federal dollars can motivate and incent collaboration, not create competitions that duplicate solutions and programs. “There are a lot of management practices that have been adopted widely in the private sector that have not been in the public sector,” he said. For example, Mr. Wilson mentioned shared services as an idea that is ubiquitous in the private sector, yet remains a novelty among government enterprise.

“We need a Marshall Plan for government that will get into every single process area and activity to understand the most efficient way to deliver services. There’s real money – 20 to 30 percent of spend – that could be saved.”

In a forthcoming study by Accenture, several business and governance strategies are highlighted to illustrate where savings can be achieved. Many practices include cross-jurisdictional collaboration and shared services, but one area where states could benefit from federal leadership and reform includes the grant management process.

One example comes from the Office of the National Coordinator for Health Information Technology’s HIT Policy & Standards Committee, which has created an “Enrollment Workgroup” as part of the national health reform law. The Enrollment Workgroup is working to help the federal and state governments align eligibility and enrollment processes so the right benefits are delivered to the right individuals in less time.

Similarly, the Office of Management and Budget has been directed by Congress to find and correct improper payments, such as federal grant payments to improper vendors or for improper purposes. OMB and many states are betting strong state ERP systems and analytics could go a long way in helping states identify and stop improper payments. There is a rationale for the federal government to help states implement such approaches, as the budget savings would be significant at the state and federal level. According to one study’s estimates, released last year, states lost $67 billion to waste, fraud and abuse in 2010, which is nearly 80 percent of all federal benefits spending at the state and local levels.

“When you see how much of our economy is consumed by government operations, you see what an efficiency drag it is on our country,” Mr. Wilson said. But he also acknowledged that making government operations more efficient is hard to because the natural competitive nature of the private sector doesn’t exist in government. “That’s the root of the problem. The only lever we have is this deficit crisis. We have to use this crisis as an opportunity to operate more efficiently and effectively.”

“We need to look at this holistically, not just at the federal level,” Wilson concluded. “[Deficit reduction] needs to be coupled with a restructuring and reform of government operations.”

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