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Budget redirection was introduced into the Georgia budget process in the 1997 fiscal year (FY). The purpose of this article is to describe this budget innovation, locate it among budget reforms, identify the circumstances leading to its introduction, and provide a preliminary assessment of its accomplishments. In an era which has been devoid of a dominant type of budget reform, budget redirection represents a pragmatic budget innovation. It may have applicability beyond Georgia for states facing similar fiscal and political circumstances.

Redirection is an approach to budget preparation intended to (1) fund ongoing agency services and enhancements using the current level of resources, (2) fund for- mula and entitlement-related services in a way that minimizes the need for additional resources, and (3) increase fund availability for priority areas within state government as a whole.' Its purpose is to encourage agencies to identify activities or programs that no longer are necessary, or of high priority and eliminate or downsize them. Funds realized through this process become available for redirection to activities or programs which have a higher priority for the agency or to other sectors of state government which have a high priority for the governor.

Henry M. Huckaby is Director of the Carl Vinson Institute of Government. The University of Georgia.

Thomas P. Lauth is Professor and Head, Department of Political Science, The University of Georgia. E- mail address: [email protected] Public Budgeting & Finance / Winter 1998 State agencies are required to identify a minimum of 5 percent of their current year's (FY) budget which then becomes the primary means for funding new programs and services in the coming fiscal year (FY+1). In addition, a limit based on revenue projections is set by the Office of Planning and Budget (OPB) on the amount an agency may request above the current year's budget. This feature is intended to force agencies to recognize that revenues are limited and the governor's priorities in addition to those of agencies must be accommodated within revenue limitations.

Redirection is a process to more efficiently and effectively use existing funds to provide government services, patticularly in priority areas. It is not primarily a mecha- nism to effect budget cuts. In fact, some services may require funding in FY+1 above the FY level. Agencies which operate formula or entitlement programs may not be able to completely meet their needs through redirected funds; some additional funding from revenue growth may be needed.^ Nevertheless, redirection aims at keeping ongo- ing expenditures as lean as possible and eliminating or downsizing activities that are no longer useful or important.

Redirection as Budget Reform In the middle decades of this century there were several notable efforts to make govetTiment budgeting more "rational and comprehensive." In the years after World War II, the performance budgeting movement sought to structure budget categories according to activities performed, rather than things purchased, and to focus manage- rial attention on the operational efficiency of government agencies. In 1961, the Plan- ning-Programming-Budgeting-System (PPBS), a prototype of program budgeting, was introduced in the U.S. Department of Defense and was extended to domestic agencies of the federal government in 1965. Budget debates about alternative policy goals and means for achieving those goals were to be informed by quantitative analysis. PPBS subsequently was adopted by a number of state governments. Zero-base budgeting (ZBB), adapted from Texas Instruments and introduced in Georgia for the 1973 fiscal year, was adopted in varying forms by approximately half the states and a number of local governments before the end of the decade.^ President Jimmy Carter, who had introduced zero-base budgeting as Governor of Georgia, made it the budgeting system of the federal government, 1977-81.

In the 1990s, performance-based program budget- ing was introduced in several states, including California, Florida, Minnesota, Oregon, Texas, and Virginia. As distinguished from performance budgeting of the 1950s, the new performance budgeting aims at linking resource allocation decisions to measure- ments of program accomplishments.'^ The common feature of all of these budget reforms was systematic analysis of how available resources can best be spent.

Redirection is "rational" in that it requires agencies to establish spending priorities.

However, unlike the budget reforms noted above, it is not "comprehensive" in that it focuses only on low priority items to be made available for redirection, and it does not presctibe a specific process or analytic procedure for identifying priorities. Agencies Lauth, Huckaby / Budget Redirection in Georgia State Government 37 retain much discretion, within the limits of the redirection level and the cap on re- quests, to establish their priorities and make trade-offs among line-items and programs through procedures deemed appropriate for the agency. For these reasons, budget redirection is somewhat similar to target-based budgeting—the essential feature of which is the setting of limits at the beginning of the budget cycle on the amount agencies may request.^ Impetus for Redirection Budget redirection in Georgia was conceived of managerial objectives, but bom of fiscal conditions and policy priorities. Jeffrey Straussman has pointed out that a budget reform aimed only at improving agency performance will not succeed in an unre- stricted fiscal environment.*^ He argues that if reform is to be taken seriously by participants in the process, there must be extemal reasons that make reform appealing.

In Georgia the extemal conditions were a slowing revenue growth rate and the policy priorities of the govemor. Agency requesting practices were seen to be impediments to achieving the governor's policy priorities in a restricted fiscal environment and there- fore became the focus of reform.

Managerial Objectives. In a June 1, 1995, letter initiating the FY 1997 budget cycle, Henry M. Huckaby, OPB Director, informed state agencies that "... fundamental changes have been made to the budget development process." These changes would be known as budget redirection and would encompass far more than the usual tinkering with the format of budget forms or definitional modifications.

As part of the redirection initiative, agencies were asked to establish their priorities through a strategic planning process and to shift resources from lower to higher priori- ties.

An underlying premise for this initiative is that over time agencies tend to develop programmatic slack. Therefore, they were asked to identify activities, programs or services which: (1) once may have been valuable and worked well, but had accom- plished their objectives and no longer were needed; (2) had not been efficient or effective, or otherwise not worked well; (3) might better be provided by the private sector and need not be a part of govemment; or (4) did not fit with the agency strategic plan. Such activities, programs, or services would be prime candidates for budget redirection.

Governor's Priorities and Revenue Availability. Govemor Zell Miller had several policy priorities for his second term in office (1995-98). First, he intended to increase the salaries of teachers in the public schools of Georgia and of faculty at institutions in the University System of Georgia by 6 percent per year for four consecutive years. The objectives were to raise the average salary of public school teachers to the national average and to raise university system faculty salaries to at least number two in the southeast region. Second, he intended to reduce state taxes by removing the sales tax from food over a three-year period beginning October 1, 1996. During FY 1997 the sales tax on food would be reduced from 4 percent to 2 percent; it would be reduced by 38 Public Budgeting & Finance / Winter 1998 an additional 1 percent in each of the following two years. Third, he intended to fiind the operating costs associated with the opening of new state prisons. In addition to these policy priorities, population growth in the state required additional funds to meet the obligations of the state's K-12 public education formula and Medicaid entitle- ments. Increasing teachers salaries, opening prisons, Medicaid payments, and funding the public education formula would exert an upward push on state expenditures and removing the sales tax on food would exert a downward push on revenues.

In addition to the projected revenue loss associated with removal of the sales tax from the purchase of food items, revenue forecasts for I^ 1997-99 were not encour- aging. Georgia's revenue collections since the early 1980s have been robust with the exception of FY 1991 and IT 1992.^ However, the governor's economist, Henry Thomassen, was projecting less growth for FY 1997-99 than the rate of growth in the years immediately following the recovery from the FY 1992 shortfall, and less by comparison with the 1980s. From FY 1983 to FY 1989 the average annual increase in revenue collections was 10.4 percent; after FY 1992 the average annual increase was between 6 and 8 percent. Despite a sales tax increase in 1989 and fee enhancements in 1993, revenues per capita and revenues per dollar of per capita income were less than those prevailing in 1990, which suggested a structural change in the state's revenue growth pattern.^ Projections for FY 1997-99 were for increases of only 5.5 to 6.5 percent. This was not a crisis, but the numbers did not add up to being able to achieve the governor's priorities while continuing what the state ah-eady was doing.

Another source of fiscal concem emanated from Washington where the 104th Con- gress appeared committed to dealing with the federal budget deficit in part through the merging of many categorical grant programs and some entitlements into state block grants. Although the prospects of increased flexibility in the management of these federal resources potentially offered opportunities for enhanced efficiency and effec- tiveness, the block grants also raised budgetary and financial management concerns.

Without clearly identified program goals and policies it would be difficult for the state to resist pressure to supplant reduced federal funds with state funds. It seemed clear to OPB that significant changes to the budget process would be required to deal with federal block grants even if there were not a reduction in the growth rate of state revenues.

Further, public attitudes were problematical. New taxes or increased tax rates were thought to be out of the question as a way of offsetting the changing rate of revenue growth. There also was a perception that state government was too big and inefficient.^ In this connection. Governor Miller at a meeting with state agency heads said, "Let me state three facts, three truisms, three givens: (1) Our citizens want better service from state government. (2) They are not willing to pay more to get those services, because (3) they are not convinced that they have been getting value for their tax dollars."'^ Governor Miller expressed his concem to OPB senior staff that without proper fiscal planning over the next several years the top policy priorities of his administra- tion could not be met. Equally important, it was obvious that if actions were not taken Lauth, Huckaby / Budget Redirection in Georgia State Government 39 to curb expenditure patterns to match the revenue forecasts, Georgia could face a structure budget imbalance. Neither prospect was acceptable to the govemor. There- fore, he directed OPB to begin identifying options for curbing growth in the budget base.

This was the context in which managerial objectives, policy priorities, and fiscal reality converged and led to the adoption of budget redirection. Speaking of the timing of this initiative, the OPB director stated, "We did it for fiscal reasons, but we also should be doing it for management reasons."" In a memorandum to state agency heads inviting them to a meeting where plans for budget redirection would be revealed, Govemor Miller wrote, "There are compelling economic and governmental efficiency issues that confront the state today as never before.'^ Therefore, I am convening meetings with you and other state agency heads to discuss the 1997 budget and economic issues that will be driving our fiscal and management decisions in the next three years." He stressed that because of slower revenue growth, there must be a measured reordering of priorities if the top needs of state government were to be met. Failure to achieve these objectives would jeopardize the state's ability to manage the next downturn in the economy as well as increase the public's growing dissatisfaction with the efficiency and size of state government. In a subsequent meeting with agency heads and top legislators on the House and Senate Appropriations Committees, he affirmed his commitment to budget redirection when he said:

Our long-term fiscal situation simply does not support a budget approach that continually adds more money while ignoring the ongoing review of existing programs. Il is not an initiative just to "get by" until better times arrive. The purpose of budget redirection is not even to keep our ongoing expenditures as lean as possible, although that is absolutely essential to do. The purpose of budget redirection is to completely rethink how we do business, rethink our expenditures, and then eliminate or downsize those activities that are no longer useful, or as important as some others may be.'^ Redirection: Five Percent of the Adjusted Base Georgia state agencies were required to identify a minimum of 5 percent of their FY 1996 budget base as the primary means for funding new programs and services in FY 1997.

This requirement goes to the philosophical core of redirection—the use of exist- ing resources to meet the highest priorities and most pressing needs of the agency. In specifying the base from which the 5 percent redirection would be calculated, agencies were not permitted to factor in a rate of inflation. The adjusted base was calculated from the FY 1996 annual operating budget, less non-recurring expenditures, and in- cluding the annualized cost of pay increases and the annualized cost of partially funded improvements in the current fiscal year's budget.''* Agencies were asked how they would use the 5 percent if they were allowed to keep it for improvements and/or new initiatives. At the same time, some of the redirection funds would go to achieving the 40 Public Budgeting & Finance / Winter 1998 governor's priorities. Some funds would be shifted to other agencies; there would be winners and losers. Existing state govemment programs would be downsized in order to initiate or enhance other programs based upon the governor's priorities.

The 5 percent level was selected for two reasons. First, it was calculated as the amount necessary to assure sufficient funds for the governor's policy priorities taking into account existing budget growth requirements and anticipated revenue collections.

Second, some of the individuals in OPB who developed redirection remembered ef- forts to implement ZBB under Govemor Jimmy Carter as unrealistic. They regarded a 5 percent level as large enough to produce the intended results, yet small enough to be reasonable and manageable for agencies over a three-year period.

Redirection: Cap on Agency Request Levels The cap on permissible agency requests is intended to alter agency "requesting" be- havior. Previous research has demonstrated that acquisitiveness tends to be rewarded in state budgeting.'^ Agencies asking for the largest increases tend to sustain the largest gubernatorial reductions, but nevertheless also receive the largest appropria- tions increases. Agencies do not receive all they request, but neither do they receive what they do not ask for.

State agencies now must submit their budget requests in the context of state revenue forecasts. The permissible level of agency requests for FY 1997 was 6.5 percent, which coincided with the revenue forecast for that period; FY 1998 and FY 1999 requests were capped at 4.5 percent.^^ Georgia agencies had a long tradition of asking for increases over their FY budget of approximately 25-45 percent for FY+l.'"^ His- torically, such agency acquisitiveness has been common across the nation,'^ but in- creasingly budget guidance from governors specifies exact dollar level ceilings for agency budget requests.^^ State agencies could ask for up to 106.5 percent of the adjusted budget base. Including 5 percent from redirection, they potentially had 11.5 percent for funding new initiatives or expanding existing priority programs or services.

From a fiscal perspective, the cap on the level of agency requests curbed the ac- quisitive tendencies of agencies and alleviated some of the pressure to expand the overall size of the state budget. From a managerial perspective, it encouraged agencies to manage and innovate; to rethink their activities and programs and to eliminate or downsize those that are no longer useful or less useful than some others in order to redirect resources to higher priority activities. From a political perspective, the cap shifted some of the political heat from the govemor to agencies. Agencies no longer were able to tell clients or constituents, "We asked for it, but OPB and the govemor cut funding for your program out of our budget." Now agencies would be forced to make difficult choices, and their priorities would be apparent to clients and constitu- ents.

Lauth, Huckaby / Budget Redirection in Georgia State Government 41 CONCLUSION: THE EFFECT AND SIGNIFICANCE OF REDIRECTION In FY 1997 budget redirection "put into play"20 $627 niilHon,2> Of that amount, $412 million (66 percent) stayed in agencies, including funds shifted from lower to higher agency priorities; $215 million (34 percent) was redirected out of agencies. In FY 1998, redirection put "in play" $349 million.22 Of that amount, $308 million (88 percent) stayed in agencies; $41 million (12 percent) was redirected out of agencies.

A relatively large surplus from FY 1996 and a slower than projected rate of growth in Medicaid enabled the governor to fund his priorities with less redirection of funds out of agencies than had been necessary in the previous year. For FY 1999, $269 million was identified for redirection.^3 Of that amount, $236 million (88 percent) stayed in agencies with some internal shifts from lower to higher agency priorities; $33 million (12 percent) was redirected out of agencies. Because of Governor Miller's commit- ment to education and salary adjustments for teachers, the Department of Education and the Board of Regents of the University System were winners in the first three years of budget redirection}* Other agencies did not benefit as much from redirection, and some agency budgets were reduced. However, even those agencies which experi- enced a net reduction (redirection cuts exceeded redirection adds) benefitted by hav- ing increased flexibility to internally redirect funds. Some were able to achieve redi- rection of funds away from activities or programs that otherwise might have been politically difficult. Some were able to achieve redirection of funds to new activities or programs which otherwise might not have been able to compete successfully outside the agency for new funding.

Based upon three years experience, state agencies have come to realize that redirec- tion is not just about budget cuts, or even primarily about cuts. Redirection allows agencies to retain funds, especially if they have been redirected internally from low to high priority activities and programs. The message to state agencies has been that they cannot count on keeping their base budget intact and expect revenue growth to fund new activities and programs. Current rates of revenue growth are sufficient only to fund the top priorities of the govemor; everything else that must be done for the rest of state government has to be financed through redirection of existing funds from low to high agency priorities,^^ The General Assembly seems to have accepted the philosophy and practice of redirection. The language of redirection makes it easy for legislators to characterize their acceptance of this initiative as support for government reform, efficiency, and fiscal responsibility.

From an operational viewpoint, the budget review process has become more effi- cient by focusing analysis and discussion on major priorities. By limiting the level of requests for new funds, "wish-lists" have been virtually eliminated from agency bud- get requests.

Will redirection continue? It is difficult to answer that question in an unqualified manner. It has operated successfully for three years, enabling the govemor to realize 42 Public Budgeting & Finance / Winter 1998 his policy priorities and according agencies flexibility to reassess their priorities as a means of retaining funds that might otherwise be redirected out of the agency. Redi- rection procedures have been integrated into budget preparation and review operations and redirection principles for the most part have become part of the way participants think about the budget process. However, a new govemor was elected in 1998. To the extent that redirection has become ingrained in state budgeting operations it may continue under the new administration.^^ However, its perceived value to the next govemor as a policy and management tool will likely determine its staying power.

Budget redirection in Georgia state government may not qualify as a rational, comprehensive budget reform of the kinds which captured our attention in the 1960s and 1970s. However, its significance should not be minimized. The concept budget redirection represents a change from the expectation of continuous budget growth to an expectation that budget expansion will be accompanied by compensating budget reductions through an ongoing process of priority assessment. As such, it is a budget reform befitting the fiscal conditions of the 1990s in state governments.

NOTES 1.

State of Georgia, Office of Planning and Budget, General Budget Preparation Procedures. Fiscal Year 1998, p. 2.

2.

For example, the Department of Education is obligated by the state's Quality Basic Education program to fund local school systems according to a student enrollment formula, and the Department of Medical Assistance is required by federal statute to meet state medicaid obligations.

3.

Lauth, Thomas P., "Zero Base Budgeting in Georgia State Government: Myth and Reality." Public Administration Review, Vol. 38 (September/October 1978): 420-430.- and Thomas P. Lauth and Stephen C. Rieck, "Modifications in Georgia Zero-Base Budgeting Procedures: 1973—80," Midwest Review of Public Administration. Vol. 13 (December 1979): 225-235.

4.

Mikesell, John L., Fiscal Administration: Analysis and Applications for the Public Sector. Fourth Edition. Belmont, Galifornia: Wadsworth Publishing Gompany, 1995, pp. 186-89.

5.

Wenz, Thomas W., and Ann P. Nolan, "Budgeting for the Future: Target Base Budgeting," Public Budgeting and Finance, Vol. 2 (Summer 1982):

88-91; and Rubin, Irene S., "Budgeting for Our T\mts:JdxztXhs&t%ud%Q\.

g" Public Budgeting and Finance. Vol. II (Fall 1991): 5-14.

6. Straussman, Jeffrey D., "A Typology of Budgetary Environments: Notes on the Prospects for 'Re- form," Administration and Society. Vo\, 11 (August 1979): 216-226.

7.

Lauth. Thomas P. "Reductions in the FY 1992 Georgia Budget: Responses to a Revenue Shortfall," in Aman Kahn and W. Bartley Hildreth. eds. Case Studies in Public Budgeting and Financial Management. Dubuque, Iowa: Kendall/Hunt Publishing Gompany, 1994, pp. 221-248.

8. The state sales tax rate was increased from 3 percent to 4 percent in April 1989.

9. State of Georgia. Governor's Gommission on Effectiveness and Economy in Government. Final Report, January 8, 1992.

10.

Remarks by Govemor Zell Miller, Department Heads Meeting. October 20, 1995.

11.

Interview with Tim Burgess, Director, Office of Planning and Budget, Atlanta, Georgia, August 8, 1996.

12.

Memorandum, Govemor Zell Miller to Department Heads. April 13, 1995.

13.

Address by Govemor Zell Miller to Department Heads and Legislative Leaders, November I, 1995.

14.

Reductions were from the base, not baseline projections.

Lauth, Huckaby / Budget Redirection in Georgia State Government 43 15.

Sharkansky. Ira, "Agency Requests, Gubematorial Support, and Budget Success in State Legisla- tures," American Political Science Review. Vol. 62 (December 1968): 1220-1231; and Joel A.

Thompson, "Agency Requests, Gubematorial Support, and Budget Success in State Legislatures Revisited," The Journal of Politics, Vol. 49 (August 1987): 756-779.

16.

Tbe cap applies to operating expenses but not capital expenses, which accounts for some agency requests exceeding the cap.

17.

Lauth, Thomas P., "Method of Agency Head Selection and Gubemalorial Influence Over Agency Appropriations," Public Adminisiranon Quarterly. Vol. 7 (Winter 1984): 396-409.

18.

Sharkansky, Ira, The Politics of Taxing and Spending. Indianapolis, Indiana: Bobbs-Merrill, 1969.

19.

Lee, Robert D., "The Use of Executive Guidance in State Budget Preparation," PiAlic Budgeting and Finance, Vol. 12 (Fall 1992): 23.

20.

Interview with Tim Burgess, Director, Office of Planning and Budget, Atlanta, Georgia, August, 8, 1996.

21.

FY 1997 base budget was $10.3 billion.

22.

FY 1998 base budget was $10.7 billion.

23.

FY 1999 base budget was $11.2 billion.

24.

The two education agencies. Department of Education and the Board of Regents of the University System of Georgia, generally are successful in the state appropriations process because elementary and secondary education and the university system are funded through formulae driven by enroll- ment growth, but the overriding reason for the success of education agencies was the govemor's commitment to salary increases for public school teachers and university system faculty.

25.

This paragraph is based upon infonnation provided by Tim Burgess, Director, Office of Planning and Budget, April 8,1997.

26.

Redirection was continued in tbe transition budget prepared by outgoing govemor Zell Miller and incoming govemor Roy Bames. For FY 2000, about $293 million was identified for redirection.

Approximately $208 million (71 percent) stayed in agencies; $85 million (29 percent) was redirected out of agencies. FY 2000 base budget was $12.1 billion.

44 Public Budgeting & Finance / Winter 1998