State’s Spending Limitation Is Just One Approach

March 10, 2011

Phoenix economist Alan Maguire has been watching the state budget for a long time.

As economic adviser to the state Senate in the late 1970s and early ‘80s, he was involved in any legislation that impacted the fiscal structure of state and local government.  He was chief deputy to the state treasurer from 1983 to 1987.  In his government posts and then later in running his own company, he has advised four Arizona governors, senate presidents, house speakers, state agencies, counties, cities and towns.

Throughout, Maguire has wrestled with how best to approach a budget.  And he’s still refining his views.

It was Maguire who authored the state constitutional amendment which limits the state budget to a percentage of the state’s personal income.   The measure cleverly provided the means for the budget to grow while at the same time putting a cap on how much. 

The amendment was part of a package of fiscal reforms created in a lengthy special session of the Legislature and approved by voters in a special election in 1980.   The self-imposed restrictions were intended to avoid Arizona being subjected to a Prop. 13-type initiative that just had been passed in California.  Also in the Arizona package was a stricter limitation on cities, counties, towns and community college districts than the one imposed on the state.  In that estimates of personal income weren’t available for counties or cities, their budget increases were limited to the combination of inflation and population growth.

The ceiling in the state formula has been adjusted three times, raising the cap from 7.00 to 7.41 per cent of personal income.  Otherwise, however, the spending limit has stood the test of time.  Little did the young economist realize it still would be in force 30 years later.

Three Potential Approaches

Now, with the benefit of that many years of hindsight, he is not sure he would take the same approach.  Maguire highlights three possibilities on the spectrum of budget-setting philosophies.  Though he does not label them, they could be described as:

◊ Curtail Government

Begin by putting a hard ceiling on what will be spent, then figure out what programs can be afforded and what has to be jettisoned.  

◊ Sustain Government

Assume that the budget has to increase each year by some predictable amount, based on the belief that government has to respond accordingly as the world around it changes.  This allows government to keep pace with the cost of living, population growth, modernization, and the evolution of government services.

◊ Tailor Government

Begin by methodically making conscious decisions about which programs and initiatives should be funded, then figure out how to pay for them in the most efficient manner.

The second of the choices, sustaining government, has been pretty much the practice under the constitutional spending limit.  In keeping with increases in the state’s personal income, which grew by 5.9 times from 1985 to 2008, the state budget grew by 5.7 times.  Overall state spending, which factors in federal funding and revenue from other sources, grew 7.3 times.

That’s as it should be, contends Tom Rex, of the W.P. Carey School of Business at Arizona State University, who has authored numerous analyses of the state budget.

The Cases For and Against Increases in Spending

“If public spending is limited to population growth and inflation, then the quality and quantity of public services are frozen,” he wrote in an email.  “Imagine what this would mean over a long time period. Had such a restriction been in place at statehood, then Arizona today would look much like it did 100 years ago — dirt roads, an education system that served relatively few (few Arizonans a century ago received a high school education, much less higher education), limited water delivery and sewage systems, no airports, et cetera.”

Although Maguire wrote the legislation that perpetuates just that system, albeit with limitations, he resists the notion that “human beings have an obligation to spend a certain percentage of their income on government.”

He refers to such thinking as the “cat food argument” by which the powers-that-be insist the public spend adequately for cat food.  “But I don’t have a cat,” comes the response.  “Too bad, you need to pay your fair share anyway.”

In reply, Rex argues that everyone directly uses at least some public services and gets indirect benefits from others.  ”For example, even if a couple do not have any children,” he wrote, ”they benefit from the educational attainment of the population as a whole. An educated population results in better jobs for everyone, a lower crime rate, more civic involvement, etc.”
 
Maguire, who freely admits he has become more fiscally and economically conservative over the years, would be more rigorous in deciding which services provided by government truly qualify as public goods. 

“Define what government ought to be doing.  Decide the most efficient way of doing it.  Determine how to finance it in the least economically damaging way,” he says.  “One has to be an adult and make choices.”

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