With the state facing more than a $1 billion budget shortfall, Governor Phil Bredesen addressed lawmakers this week, outlining his plan to balance the state budget. The plan calls for reductions in various state departments, coupled with tapping into the state’s reserve, or rainy day, fund. Certain tax increases are also included.

The current economic downturn has led to significant revenue shortages during the current fiscal year. Instead of making cuts during the last legislative session, lawmakers covered much of the budget deficit with $4.5 billion they received in federal stimulus dollars.1 While there is discussion of a second federal stimulus to alleviate states’ budget woes, the current plan does not factor in the expectation of this money. That said, it is possible that if federal money is received, it will be used in lieu of a portion of the projected cuts.

An Overview of the Proposed Budget

The proposed 2010-2011 state budget totals $28.41 billion, a 5.1 percent decline from the current fiscal year.2 However, the state portion of the budget that is not funded from federal money is $12.44 billion, a 1.9 percent increase from the current fiscal year. The top three categories of funding include TennCare, which is the state’s Medicaid program, education, and transportation. TennCare would take up nearly one-fourth of the budget, while K-12 education and higher education would account for 19 and 13 percent of the total, respectively. Six percent of the budget would be comprised of transportation spending.

Expenditure Cuts and Increased Taxes

The proposed budget cuts come in various forms: $400 million in new cuts have been proposed, including certain previously expected cuts that were delayed by the 2009 federal stimulus money; $394.2 billion will be freed up from reductions in recurring expenditures; $202 million will be pulled from the state’s reserve fund; and taxes will be increased by $72 million.

Bredesen claims that it would not be feasible to make across-the-board cuts in government programs.6 Instead, he has proposed a nine percent reduction in most departments, while others will be asked to cut less. The average department would face a six percent budget reduction. The following reductions will make up the $394.2 billion in cuts.

Program Budget Cuts
TennCare $200.7 million
Corrections $6.3 million
Children’s Services $15.9 million
Non-BEP Education $20 million
Mental Health $9.4 million
Environment & Conservation $4.9 million
Revenue $1.5 million
Health $11 million
Higher Education $64.3 million
Miscellaneous $60.2 million

The Department of Safety would face no cuts. Instead, the shortfall would be offset by increasing the driver’s license fee from $3.90 to $5.75 annually.8 Further, to reduce departmental burdens, driver’s licenses would be renewable every eight years instead of the current five.

In addition to the tax hike on driver’s licenses, the state plans to increase the tax on cable services and equipment.10 Also included is a tax increase on interstate and international telecommunications services sold to businesses. That tax would go from 7.5 percent to 9.5 percent. The governor also proposes that hotels charge guests a sales tax on items the guests receive during their stay. A final tax measure would come via a change in the law on Real Estate Investment Trusts, or REITS. Altogether, these cable and business taxes are expected to generate $50 million in revenue.

The state has approximately $900 million in its rainy day and TennCare reserve funds, which operate as savings accounts for times of budgetary constraint. The governor seeks to withdraw $202 million from the rainy day fund. Of this amount, $57.4 million would go to education, $21.2 million on health issues, $13.2 million for mental health, $24.9 million for Children’s Services, $34 million to retain 394 current state employees, and $51.2 million on other programs.

Several programs would be funded for the next two years in non-recurring dollars, meaning that they would receive no funds after two years and potentially face elimination.15 Those programs are below.

Department Program
Education Coordinated School Health Program
Career Ladder extended contracts
Family Resource Centers

Health Grants to Federally Qualified Health Centers
Diabetes Prevention Program

Mental Health Community Mental Health Recovery Services
Alcohol & Drug Services

Children’s Services Home visitation programs
Juvenile Justice Prevention Grants

Intellectual Disabilities Family Support Services Program

Human Services Human Resource Agency grants
Community Action Agency grants

The final prong of fixing the gaping budget hole is to lay off 1,363 state employees, though the governor wishes to retain more than 394 of these employees temporarily. The nearly 1,000 remaining layoffs would come from “bringing staffing ratios in line…or closing an unneeded facility” where appropriate.

Tax Increases Avoidable

The proposed budget has elements of common-sense governance in that it reduces the size of government, makes needed cuts in wasteful spending, seeks to drive down costs by improving efficiency, and relies less on the reserve fund and tax increases. Despite this, several additional measures could be taken to reduce the need to raise taxes on Tennesseans during these tough economic times.

The state could lease the 11 financially insolvent golf courses it owns. The state loses some $2.3 million annually to maintain these golf courses.17 Leasing the courses would not only eliminate this waste but bring in much needed revenue to offset ongoing budget shortfalls. The state should also suspend taxpayer funding of art programs, which reaches some $7.4 million yearly.18 The state could sell the airplanes and helicopters it owns (while retaining those that are used for universities’ aerospace programs), which have a total resale value of $11.4 million. Such a move would also free up an additional $1.5 million in annual maintenance costs.

Reforming the state employee health insurance plan could also save the state money. Currently, the state is experiencing a seven percent growth rate in its health insurance costs.20 By simply permitting state employees to opt for a high-deductible health insurance plan with a health savings account, the state could save $15.9 million a year, and that is based on just 10 percent of employees utilizing the plan.

The state continues to fund a Pre-Kindergarten program that shows no demonstrable positive impact on children that participate. The state could save more than $90.9 million a year if this program was eliminated.

The state could take these few simple steps and entirely remove the need to increase taxes on Tennesseans. In addition, these measures would bring in additional revenue that could be used in lieu of dipping as far into the state’s reserve fund as the governor proposes.

Prime Time for Privatization

Several state programs could be privatized during this time of financial turmoil. Many other states have privatized services and saved millions of dollars. During Jeb Bush's tenure as Florida governor, the state was able to save over $550 million through privatization and managed competition initiatives. In 2008, the state reviewed 551 outsourced projects and estimated that they will provide a lifetime benefit of over $8 billion to the state.

Nevada's proposed privatization of the state mail system is estimated to save the state $400,000 per year.24 Similarly, the privatization of Louisiana's electronic payments system could save $660,000 annually. In Massachusetts, privatizing 11 service plazas on the Massachusetts Turnpike has been estimated to be worth almost $300 million.

In 2009, the Tennessee Department of Human Services privatized child-support enforcement services for Shelby County in the nation's largest contract for such services. Although this is a positive first step, there are many more opportunities in Tennessee for privatization.

For instance, rather than simply seek efficiency in the driver’s license system, the state should consider privatizing the service. A study conducted by the nonprofit Cascade Policy Institute determined that mere partial privatization of the Oregon Driver and Motor Vehicle Services would save between $34 and $43 million a year, a 55 to 67 percent total cost reduction.

Based on these figures, turning over a similar portion of the Tennessee Department of Safety’s Driver License Issuance division to the private sector would save the state between $18.5 and $22.5 million annually.29

In any event, the specific programs that will be up for elimination after two years should be considered for privatization. Government involvement in the provision of goods and services to the community is often detrimental to action by the private sector. In the absence of government intervention, the private sector will meet needs efficiently without placing undue burdens on taxpayers.

The programs receiving non-recurring dollars for the next two years are no different. Each of these programs could easily be eliminated and replaced by the private sector, relieving budget woes and returning funds back to taxpayers.

The most likely candidates to take up the causes if these programs are privatized are civic groups, churches, and other nonprofit organizations. These organizations would be able to effectively and efficiently meet the needs of Tennessee communities.

For example, the Office of Coordinated School Health (OCSH) was founded with the intent to encourage healthy lifestyles while combating any health problems which could impair academic success. Besides a redundancy of goals with those of the Department of Health, the OCSH’s goals can be met by the nonprofit and business communities. A number of organizations such as the YMCA and health food and exercise companies have a clear, vested interested in equipping students for healthy lifestyles. Absent OCSH, the state of Tennessee could still enjoy the benefits of providing healthy lifestyles for our children but in a manner that does not strain the state budget.

Similar programs could also be privatized while needs still met. For example, the Department of Children’s Services Home Visitation Program sends nurses and other health care professionals to the homes of poverty-stricken expectant mothers. Several nonprofit groups share this goal of healthy pregnancies and infant care, and rather than crowd out these efforts, the state should allow these groups to step in and advance their missions.

Each of the programs that are being considered for non-recurring funding could easily be privatized through philanthropic acts, civic organizations, churches, charities, and other nonprofit groups. Whether it be the Family Support Services Program, Community Action Agencies, Alcohol and Drug Abuse Services, Community Mental Health Recovery Services, the Diabetes Prevention Program, or any other number of government programs, privatization makes since. The private sector is ready and willing to lend a helping hand. The state simply needs to remove its influence and allow groups throughout the private sector to do what they do best.

In fact, the private sector is already providing the goods and services in a number of the state’s programs. A good example is the Family Resource Center Initiative (FRCI), which is a program to help families with assistance in a variety of ways. This assistance, however, most often comes from nonprofits in the community who are connected to families through the FRCI. The FRCI merely acts as a mediator in what amounts to unnecessary bureaucracy. This is another shining example of the private sector meeting the needs of the community. It is time for the state to allow the private sector to act without unnecessary government interference.

In every matter of governance, it is important to ask whether an activity is the proper role of government or whether action can be properly carried out by those outside government. The objectives of the programs proposed to receive non-recurring funds can and will be met by the private sector. Therefore, state involvement is neither necessary or prudent.

Rolling the Dice on TennCare Cuts

A serious concern with the proposed budget is that it relies heavily on cuts in TennCare. The nearly $201 million worth of cuts cannot take place without approval from the federal Center for Medicare & Medicaid Services, which sets the rules for the TennCare program.31 So far, the Center has not approved the proposed reductions. These cuts should not be taken for granted until that approval is received. Rather, lawmakers should begin working on a contingency plan in case they are forced to find $201 million in cuts elsewhere. Privatization and outright elimination of other programs would resolve this problem.

Conclusion

Lawmakers should make additional cuts and privatize certain programs that could best be handled outside of government. This would allow them to avoid attempts later in the session to once again rely on federal stimulus dollars instead of making difficult but necessary cuts. The move would also protect the reserve funds in case future revenues remain below projections.

By making the cuts outlined above, the state would save taxpayers millions of dollars. This would prevent the need for a tax increase on Tennessee families during these tough economic times. Further, it would reduce future budgetary items in the event that revenues remain stagnant, making a balanced budget easier to achieve. Finally, it would help establish a contingency plan if the TennCare cuts are not approved by the federal government.

At a time when Tennesseans are cutting their budgets to comport with less income and higher costs, so too should state government. The governor referenced the principle of operating the state like it is a “family budget” in his final State of the State address earlier this week.32 While his proposal takes a step in the right direction, it could reflect a bigger sacrifice just like families all across Tennessee are currently making.

(Justin Owen is the Director of Policy & General Counsel at the Tennessee Center for Policy Research. Daryl Luna and Drew Clark are research associates at the Tennessee Center for Policy Research.)

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Dear Mr. Owen and the policy researchers. For all your rhetoric regarding the Tennessee budget, you obviously don't understand what cutting teachers' extended contracts involves.

In 1985, the Tennessee Legislature tacked a one-cent increase on the state sales tax to fund Governor Alexander's career ladder education improvement act. Educators who were willing to go through the process of personal evaluation would have the opportunity to earn additional salary in merit pay and one or two additional months of extended contracts for extra work.

Educators contracting to do so had the expectation of earning that money until retirement. We still have that one-cent increase and it has earned billions of dollars for the next three governors and many legislatures to spend on the multitude of programs you outlined.

No increases, however, were made in the initial funding of career ladder and extended contracts and now educators who near retirement are faced with salary cuts in the years their retirements are calculated from those salaries.

Tennessee educators have done extensive studies also, Mr. Owen, on their wallets and have found that making this cut is not just cutting an insignificant line item in a multi-billion-dollar budget.

A deal should be a deal. If you meet your part of the contract, then the state should meet their part. But alas, here were all these new and wonderful programs each governor could claim as their own and look how much money that one cent genreated over all those years. Who would miss a few old extended contracts anyway?

Ralph Miller