Zero-Base Budgeting: Trend for South Carolina?

It’s not the sexiest subject, but when you’re trying to figure out how to spend $21 billion, it can make it a big difference, supporters say.

A little-known budget proviso (90.19) in the adopted 2010-11 budget would require that the state treasurer make recommendations to implement a “zero-based budgeting process for every state agency, department, instrumentality, entity or institution.” The recommendations are due to the Legislature when it reconvenes in January.

Zero-base budgeting (ZBB) is a system that begins each budget cycle at zero, requiring a reason for everything that would be funded in the new budget. It is the opposite of how state agencies currently prepare their budgets for the following fiscal year: Agencies typically use their most recent fiscal year’s budget as a beginning base for the new budget, as do legislative budget writers.

Rep. Nikki Haley, R-Lexington, and Sen. Mick Mulvaney, R-Lancaster, last year sponsored bills that would have set up a legislative committee to begin requiring state agencies to use ZBB in preparing upcoming budgets.

Neither bill made it out of the Legislature’s budget-writing committees – the Senate Finance and House Ways and Means Committee. The budget proviso approved for the 2010-11 fiscal year that started July 1 would have to be renewed annually.

“We’d applaud the General Assembly for finally coming around to the common-sense idea of zero-based budgeting – as this administration has done it for years with our annual executive budget,” Ben Fox, spokesman for Gov. Mark Sanford, told The Nerve recently when asked about the budget proviso.

“That said,” Fox continued, “we’d encourage legislators not to simply require recommendations, but act – because next year’s billion-dollar budget challenge demands action, not more study committees and bureaucratic back and forth.”

Sanford has warned repeatedly that the state could face a billion-dollar budget hole in fiscal year 2011-12 with the expected loss of federal stimulus dollars.

The 2010-11 budget is projected to be at least $21 billion – the largest in state history – excluding more than $340 million in federal stimulus money designated for state agency operating expenses. Lawmakers last month approved about $5.1 billion in general fund spending – before Sanford’s vetoes – about $600 million less than at the start of last fiscal year.

Supporters of zero-base budgeting say it could help eliminate an ongoing problem in the Legislature of annualizations, or the funding of recurring programs with non-recurring money.

Nationally, 17 states report using ZBB in some form, though it is “not clear that any state uses ZBB as its primary budgeting technique,” according to a November 2009 report by the National Conference of State Legislatures (NCSL).

Fifteen states, including South Carolina, introduced zero-base budgeting legislation in 2009, though it didn’t pass anywhere that year, according to the NCSL, a bipartisan research organization that assists state legislatures and their staffs.

The organization in its 2009 report noted that no state has been able to implement ZBB on an annual basis mainly because of the amount of work involved.

Zero-base budgeting involves “multiple layers of activity description, analysis and recommendation, which would be unwieldy in the smallest state government, let alone a state whose annual spending reaches $50 billion, $60 billion or $70 billion a year,” the report said. “The required analysis is time-consuming for agencies, legislative staff and legislators.”

Instead of annual reviews, some states have adopted periodic reviews using zero-base budgeting, according to the report. Florida, for example, enacted an eight-year review cycle in 2000; while Oklahoma mandated a four-year cycle in 2003, and Idaho Gov. Butch Otter by executive order in 2009 created a six-year rotation.

In South Carolina, the 2009 bills by Haley and Mulvaney (H. 3640, S. 658) would have created the “Joint Zero-Base Budget and Agency Evaluation Selection Committee,” made up of five House and five Senate members.

The committee would select state agencies for evaluation, which would be done by a newly created “government review division” within the Legislative Audit Council; those agencies would be required to submit a zero-base budget to be reviewed by the governor, Office of State Budget and Senate Finance and House Ways and Means committees.

Had the bills passed, the committee initially would select four agencies for review by August of this year, with their zero-base budgets due within two months of selection. Another unspecified number of agencies would be selected for a later review.

Each evaluation would cover, among other things:

• The overall cost and manpower of the agency under review;
• The efficiency of agency programs;
• The extent to which agency programs were duplicated by other agencies;
• The economic impact that would occur without the agency programs in question;
• The extent to which agency programs have “provided service to the state’s citizens.”

The bills would have required public hearings during which the agency under review would have the “burden of demonstrating a public need for the program’s continued existence.” The Legislative Audit Council’s “government review division” would eventually present recommendations about the agency to the General Assembly, which would be required to enact the recommendations through legislation.

To pay for the reviews, the Legislative Audit Council could assess a fee to the agency under review of up to one-half of 1 percent of the agency’s budget, which would be transferred to “approved accounts of the council.”

Reach Brundrett at (803) 779-5022, ext. 106, or rick@scpolicycouncil.com.