When the new legislature convenes in 2015, it will face an old problem: a shortfall in the state’s $1.8 billion General Fund account. This time, state leaders are expecting as much as a $200 million gap between revenues available for fiscal 2016 and the appropriations needed to maintain services. Any such imbalance between revenues and expenditures must be eliminated when the Fund’s budget is adopted next spring.

This is a persistent problem.

For example, in Fiscal Year 2013 General Fund expenditures totaled over $1.7 billion, but the Fund’s continuing revenue sources brought in less than $1.5 billion, leaving a gap of $245 million that had to be supported in extraordinary ways.

On the revenue side, the FY 2013 gap was closed by enacting a law transferring $77 million of use tax revenue formerly earmarked to the Education Trust Fund, adopting temporary measures to produce another $23 million, and borrowing $146 million from the Alabama Trust Fund that will have to be repaid in later years.

These kinds of revenue strategies have been used repeatedly in recent years. For instance, in 2001 a number of sales-type taxes were transferred from the Education Trust Fund to the General Fund. The Legislative Fiscal Office counted over $1 billion of “intermittent” or temporary revenues used in balancing the General Fund from FY 2008 to FY 2013. And since FY 2010 the State has borrowed $599 million from the Alabama Trust Fund to support the General Fund budget. These borrowings must be repaid, and repayment schedules run to FY 2026.

On the spending side, the FY 2013 General Fund budget had to accommodate Medicaid and the Department of Corrections, which accounted for 56 percent of General Fund outlays. Ten years earlier, these two programs had required only 36 percent of the Fund’s expenditures.

The growth of Medicaid and Corrections has led to the crowding-out of other services that historically have been supported by the General Fund. A good example is support for the Unified Judicial System (UJS), which includes the state’s trial courts. Historically the UJS has received about 10 percent of General Fund appropriations, but by FY 2013 the percentage of the General Fund supporting the courts had been cut in half, to 5 percent.

The UJS is also a good example of how the Legislature has tried to cope with the General Fund cash shortage. In an attempt to make up for cuts from the General Fund, the Legislature increased fees charged to those who come before the courts. However, collection rates for court fees are low, in part no doubt due to the fact that the burden of paying the fees is high in some cases. This limits the effectiveness of the fee approach to increasing support for court operations.

What should be done?

There appears to be a growing consensus that something should be done to end the need for constant tinkering with the State’s General Fund. The solution is not likely to come from a top-down approach that focuses only on the total amount of the Fund’s revenues or expenditures. Rather, the General Fund must be analyzed in terms of what the state wishes to accomplish through the services that the General Fund supports.

The General Fund is an accounting entity that in most cases provides only some of the support for the programs to which it contributes. Establishing control over the General Fund’s finances requires an evaluation of the goals, strategies, and cost-effectiveness of the agencies themselves, and then providing them with stable support to achieve their purposes. Otherwise, there is no bottom line to determine what is an adequate level of General Fund revenue, and no way to measure the cost-effectiveness of General Fund spending. The General Fund can be structured to do its part only after this evaluation is done.

Alabama’s Budget Management Act calls for building the state’s budget in this way, from the bottom up. However, the Smart Budgeting System intended to implement this law was allowed to lapse a few years ago. Most other states have continued to work on tightening the connection between funding and results. Long-term, returning to the principles in the Budget Management Act is a must. Alabama’s state government cannot be successful without systematically measuring what is being accomplished with the tax dollars invested.

In the short term, the governor and the Legislature have launched efforts to think more strategically about our approach to managing the two largest and fastest-growing components of the General Fund, Medicaid and Corrections. In the Fall 2014 PARCA Quarterly, we describe those efforts.

Earlier this year, the U.S. Bureau of Economic Analysis released a new way of looking at income and prices across the United States.

Income levels vary from state to state; but so do prices paid by consumers. Consequently, an individual’s standard of living depends not only on the income he or she earns, but on the local cost of living.

Here in Alabama we’ve long known that our personal per capita income, $35,926 in 2012, trails the national average for per capita income, $43,735 in 2012. Alabama’s per capita income ranked No. 43 among U.S. states (District of Columbia also included). However, the impact of that lower income is partially offset by the lower prices we pay, according the BEA.

BEA calculates what are called “regional price parities” (RPPs), which are price levels expressed as a percentage of the overall national price level. BEA uses U.S. Census Bureau and other survey data to determine the average prices paid by consumers for a mix of goods and services consumed in each region.

When looking at the results, Alabama’s big advantage over higher-priced states is the price of housing. BEA calculated that rents in Alabama are 63 percent of the national average, a level that is equal to West Virginia’s price of housing and lower than all other states except Arkansas and Mississippi.

In contrast, housing costs in Hawaii are 159 percent of the national average. Hawaii is followed by the District of Columbia (157 percent), California (147 percent), Alaska (142 percent), New Jersey (136 percent), and New York (135 percent)

Prices also vary within the state. According to BEA calculations, prices in Huntsville’s Metropolitan Statistical Area are closest to the national average while those in smaller metros like Dothan, Anniston, Gadsden, and Florence are relatively lower.  Again, housing prices play the major role.

Table 1. Local Prices Expressed as a Percentage of National Price

Using Regional Prices Parities and also adjusting for inflation since 2008, BEA recalculated personal income levels across the states. With the adjustments for cost of living, Alabama’s rank for per capita income rose to No. 36.

Table 2. Comparison of Per Capita income : US States

Making the same adjustment on income figures within the state of Alabama produces real per capita income levels for the state’s Metropolitan Statistical Areas listed in Table 3. The Table also lists real per capita income in U.S. Metropolitan Areas and for those areas outside of MSAs for comparison.

Table 3. Per Capita Income Adjusted for Local Cost of Living

New technologies provide opportunities for people to conduct business and allow governments to provide services in more efficient ways as well. Online banking and e-commerce websites have become more prevalent, raising expectations for how similar transactions should be done by state and local governments. What is becoming clear is that the technology alone is not a solution. Applying and using new technologies requires us to rethink the way we do business and how we deliver services to the public. So, how does Alabama compare with other states in our region when it comes to online services?

Alabama Graded in 50 State Report Card on Digital Services

The Center for Digital Government has released its review of state government websites in State of the Portal: A Review of the 50 States’ Online Offerings, 2013. The report scored state websites on eight broad areas that include:

· Adaptive Leadership

· Enterprise Information and Communication Technology

· Public Safety

· Health and Human Services

· Commerce, Labor and Tax

· Finance and Administration

· Energy and Transportation

· Open Governance

Among the 73 specific functional items included, Alabama state government provided 58 (66%), which earned the state a grade of “C.” However,Alabama ranks ahead of several Southeastern states including North Carolina and Georgia when it comes to the level of transactions using online government services. According to performance data in Governing’s Innovation Nation,  Alabama processed 7.7 million transactions, or 1.64 transactions per capita, through 165 online services.

States take different approaches to providing online services. In some states, the state government and government agencies design, manage and pay for the provision of online services. Other states charge fees to the users of online services. Often, that means the online service is developed and managed in partnership with an external partner.

Alabama’s tends to use the second approach, charging user fees for online services, with those services being designed and managed through partnership between the state and an external partner. The charts above and below, not only compare per capita transactions but also identify the approach the states use: either state-supported and state-run services or user fee-supported services developed with external partners.  According to the data, the states that make use of  user fees and external partnerships tends have higher rates of utilization in the Southeast. This more open management structure, in contrast to a the state designing and managing its services by itself,  allows for more input and flexibility with design. Alabama appears to be on the right track with this approach.

Alabama is continuing to work on improvements. Among Alabama’s e-government priorities were adding vital records services, consolidating inmate banking applications, and making kiosks available to citizens for additional services. The Center noted that Alabama had received some recent recognition as well. It ranked  first in the Center for Digital Government’s 2012 Best of the Web award program and Juggle.com listed Alabama.gov as a Top Government Website. The report also notes that. “Alabama’s portal is a leader in presenting various social media platforms and options to citizens. Visitors can scroll over “Share and Follow” — and gain immediate access to the state’s Facebook, Twitter, YouTube and Flickr pages while also being connected to a comprehensive list of all state leader and agency social media accounts.” Despite these achievements, Alabama received a “C” overall. States getting an “A” included Utah and Michigan, while California, Minnesota, Ohio, Pennsylvania, Tennessee, and West Virginia were rated as “A-” in the Center’s report card.

Some of the report’s general findings are shown below (annotated with reference to Alabama).

– 100 percent of states offer some combination of online business and personal tax filing.
– 92 percent of states give automobile owners an online option for renewing license plates. (Alabama does not; this is a county function in Alabama.)
– 94 percent of states offer online business registration services, a growing number of which take an all-agency one-stop approach to collecting information one time and using it many times to meet previously  discrete licensing or registration requirements. (Alabama does multi-agency services.)
– 90 percent of states let residents make online requests for copies of birth, death, marriage, divorce and adoption certificates. (Alabama does.)
– 98 percent of states send important notifications via text message to users who sign up. (Alabama does not.)
– 70 percent of states accept payments for fines online. (Alabama does.)
– 60 percent offer interactive customer service online, including 24/7 live chat in a significant number of states. (Alabama does not.)
– 56 percent offer a mobile site for smartphone users. (Alabama does.)

The one area where Alabama missed the most opportunities was in a section called “Crowdsourcing” that allowed users to provide customer satisfaction, feedback and ideas, market research (such as a five-second test for usability), mobile apps, maps and data visualization. Other key areas for improvement were online driver’s license renewals and temporary license plates.

Planning is Key

In a recent article by Governing, entitled “Why Do Some Governments Struggle to Make Online Services Viable?” poor planning is cited as the main obstacle to making online services viable. The author, Tom Newcombe, notes that

“…some recent audits have revealed that many states and localities (along with the federal government) continue to struggle with how to build an online service that lets citizens and businesses transact with government in a simple and effective manner, and they lack a strategic plan for developing new services. The result can be confusion for many who want to interact with government online and lost opportunities for governments that are looking for new ways to deliver services at the lowest cost possible.

Strategic planning is a process that helps public officials determine the future direction for a department, agency or entire government. In practice in the public sector since the 1960s, strategic planning differs from other types of plans because it allows senior management to assess where their organization is now, what its future will be and how to get there by setting goals and objectives. As the use of information technology has surged in the face of a declining workforce, cities and states are starting to recognize the importance of including future online services in the strategic planning process. But the practice is far from universal.”

Improving State Government: Technology Officer and Planning

Governor Bentley’s Commission on Improving State Government, chaired by Lt. Gov. Kay Ivey, has provided people with a means of providing suggestions for improving government. The Commission on Improving State Government developed a number of recommendations related to using online technology to save money and improve services. Included among other recommendations were the establishment of a state technology officer and a plan for implementing modern financial and business management systems and administrative processes.  For example, among the Commission’s recommendations was to

“…implement an employee portal (portal) for all state employees to provide online access to payroll/ leave data and W-2s. Implement a pay card for employees not on direct deposit and stop printing paper payroll warrants and direct deposit advices.”

Together with an online time and attendance program, the cost savings for implementing was estimated at over $1.8 million annually. As these recommendations are implemented, Alabama will be competitive with other states in offering efficient, customer-focused services to the public.

Spreading the Message to Cities, Counties, and Changing the Way We Do Business

One of the most eagerly awaited improvements in local government was the implementation of a new car tag and registration system in Jefferson County. Several media outlets covered the long lines at the Jefferson County Courthouse, where people frequently spent hours trying to get their vehicles registered. New software has allowed the lines to be shortened and administrators report that morale among county employees has improved.

Despite losing the occupational tax and seeing dramatically declining revenues, the county was able to leverage technology to adapt to the new fiscal reality. This is one example of how cities and counties can take advantage of new ways to do business. Other ways to be more efficient are on the horizon, as digital signatures and even e-notary services are spreading.

Facilitated by a series of federal laws, some states have adopted electronic notarization. While most still require the physical presence of the parties, the ability to make the notarization available online saves time and expense in transferring documents. In all, 18 states have some sort of provision for e-notarization. The Commonwealth of Virginia is the only state known to allow signers to be in another location at the time. As better security technologies become available, that practice may spread as well.

Remembering That Not Everyone is Online: The Digital Divide is Still Alive

One of the most important things to remember is that despite great improvements in the availability of online services in both the private and public sector, there are still many people who are not online and many of those people have the greatest need for assistance. In 2013, The Pew Research Internet Project found that 15% of American adults do not use the internet at all, and another 9% of adults use the internet but not at home. Population groups that are significantly more likely to rely on internet access outside the home include blacks and Hispanics, as well as adults at lower levels of income and education.

The so-called ‘digital divide’ remains a problem for many, but the problem, like the technology, has shifted. The wide availability of smart phones has changed the profile of how people are connected. In another report, Pew found that while seven in ten American adults have a high-speed broadband connection at home, another one in ten Americans do not have broadband but do own a smartphone. Services optimized for delivery and interaction with smart phones will continue to be an ongoing endeavor for the foreseeable future. With all the changes in technology, one of the emerging issues is security and safety in the digital world.

Courthouse Fires Eliminated, but Firewalls are Still Needed

In Alabama, there have been at least 52 fires at county courthouses, with some burning multiple times. The latest fire was in Marengo County in 1965 (See map from the University of Alabama here.). In the past the ability to locate important legal documents was sometimes hampered by fires or floods. Other hazards await digital records including issues related to privacy and security. That problem is expected to grow along with the ease that online services provide. Electronic tampering with records, intercepting communications, and malicious destruction of databases and other catastrophes, such as solar storms, pose serious threats to providing many of the services that make new technologies convenient. As these technologies are more widely adopted, vulnerabilities are likely to be exposed and exploited.

The way we think about budgeting and planning for services will need to change as well. It is clear that users are willing to take advantage of the convenience and ease of online service, even when there is a marginal fee involved. Flexibility in governance, with input from outside the state government is crucial for designing functional, efficient systems. The infrastructure of vaults and locked doors of the past will not be sufficient as business hours extent to 24 hours a day, seven days a week. New technologies will require the ability to adapt, retrain, reschedule, and revise rules and procedures designed for using other technologies. Investments in technologies will also require special skills, like the ability to assess the risks of adopting new equipment and software.

Unlike the bricks and mortar investments of the past, which lasted for 30 years or more, new technologies have much shorter shelf-lives and may be obsolete much sooner. Capital budgets that assume the old infrastructure need to be questioned as well as building designs that assume large stores of paper copies or expose equipment to heat or humidity. Wherever new technologies are adopted, the knowledge and skills required to maintain, secure, and support those technologies will change as well. Planners will also need to think about what that means for the government workforce of the future.

Revenue from the gasoline tax, the money that goes into building and maintaining roads, continues to decline in Alabama. Cars are using less gas, and Alabama’s state gas tax is collected on a per gallon basis.  That means Alabama is collecting less for every mile driven.

Compounding the shortfall is the fact that that the 16 cents per gallon collected by the state (18 cents per gallon if you count the 2 cents per gallon pump inspection fee) is worth less than it was in the early 1990s, the last time the tax was raised.

The Institute on Taxation and Economic Policy counts Alabama as one of 10 states where the gasoline tax rate is at an all-time low in terms of its purchasing power.   For a further exploration of the issue, see PARCA’s 2013 report, How Alabama Roads Compare.  

At the same time, the national highway fund, fueled by the federal gas tax, is also headed toward empty. The U.S. Department of Transportation announced last week that the fund is expected to run out of money before the end of the fiscal year. In recent years, Congress has had to infuse the highway fund with general revenues on several occasions.

If the fund runs out of money, it could bring road construction projects around the country to a halt.

States around the country have made adjustments to their gasoline taxes to deal with the issue. Some have moved from the per gallon approach to a gas tax that operates more like a traditional sales tax. Others are experimenting with systems that tax drivers according to how much they drive rather than how much fuel they purchase. ITEP’s 2011 publication, Building a Better Gas Tax, explores the issue further. For a comparison of gas taxes around the country, try the American Petroleum Institute’s interactive map of gas tax rates. 

April is traditionally the month we think about taxes. National tax comparisons are published, and we were reminded again this year that Alabama has among the lowest taxes in the U.S.

In this month’s edition of The Alabama Baptist, PARCA executive director Jim Williams points out that while our state’s taxes are low, we may not be getting a great bargain.

The questions we should be asking are these:  Are we getting our money’s worth? Are the tax dollars we send to Montgomery being spent efficiently and effectively? Unfortunately, Alabama’s budgeting and management process doesn’t ask those questions.  And until it does, we won’t know the answer.

Each year, The Tax Foundation, a Washington-based think tank, calculates what it calls “Tax Freedom Day.” This is the calendar day when total personal income is sufficient to pay all taxes – federal, state, and local, freeing the balance of the year for other pursuits. This year’s Tax Freedom Day came on April 21st for the nation as a whole.

In Alabama it arrived two weeks earlier, on April 7th, due to our low tax burden. Only four other states finished paying for their taxes sooner.

The latest figures from the U.S. Census Bureau show that Alabama’s state and local governments collected $2,904 in taxes per resident for fiscal 2011, a lower amount than in any other state. South Carolina ranked second-lowest. Alabama’s taxes were $324 million lower than they would have been if collected at the same per-capita rate as in South Carolina.

However, taxes are a bargain only when taxpayers get more than their money’s worth from the services produced. This can’t happen without control over the use of revenue and budget procedures that focus on performance. The State of Alabama, which spends over 10 billion taxpayer dollars each year, has neither.

Most of that money flowing into Montgomery is earmarked. It will be spent for a specific-purpose, whether or not that purpose is determined to be an important priority or pressing need. About 88 percent of Alabama tax revenue is earmarked, a proportion far higher than in any other state. That’s a problem: guaranteed budgets provide no incentive to efficiency.

As a result, there is relatively little effort put toward measuring the performance of state agencies. Instead of being a careful examination of spending and the results of that spending, budgeting in Alabama is largely a matter of determining how much is available to spend and then spreading it out among the various agencies.  Alabama has a sound Budget Management Act that has been on the books for many years, but in current practice, Alabama has no systematic process for linking appropriations to performance measures or budgeting according to priorities.

Compare the budget documents produced in Alabama with those produced in other Southeastern states. Look at what Georgia and Tennessee do when it comes to making budgets and evaluating the performance of agencies. Compare the budget produced by South Carolina’s Governor  or by Mississippi’s executive budget and performance measures.  

As every shopper knows, low prices are only half of what makes a bargain. We also need to know why we’re spending, if we are spending wisely, and whether we are getting quality government services in return.