States Must Cut and Invest

It is budget season — and not just in Washington.

In Wisconsin, Ohio and Indiana, thousands of people are protesting proposed budget cuts. When the nation’s governors arrive in Washington on Friday for their winter meeting — including sessions with President Barack Obama — budget talk is expected to drive the agenda.

Wages have largely stagnated over the past three decades. There has also been a sharp slowdown in gains in educational attainment and reduced rates of public investments, and fading returns to those investments. The crisis in state budgets and the requirement that they balance budgets each year threatens to compound this — forcing cuts in critical public investment projects that determine our future prosperity, and that of our children.

In Washington, it’s easy to lose sight of the importance of state dollars and the budget challenges that governors face.

States play a crucial role in shaping the U.S. economy. Governors and local officials have broad powers over critical areas like education, infrastructure, energy, innovation and skills training.

For example, state and local governments account for 91 percent of all government spending on K-12 education, and 71 percent of government higher-education spending. More than 70 percent of all infrastructure investments originate from states. States also control the economic engines—the innovations from U.S. metropolitan areas—that drive global competitiveness.

As the governors meet this weekend to hash out the demands of taxpayers needs with longer-term investments, we offer three basic principles:

First, states must invest in the assets of the next economy, and embrace new strategies for those investments. Greater private-sector involvement can be an important part of this. Indeed, states can harness private resources to provide significant value for all involved – particularly taxpayers.

Though public-private partnerships on infrastructure projects have attracted skepticism, state and local governments have a lot to learn from the corporate world. With the right partners and parameters, public investments that are privately managed could offer large returns.

Economic research confirms that strong industry clusters—already showing up in advanced manufacturing and bioscience—can boost innovation, foster start-ups, raise workers’ incomes and productivity and create jobs. States can’t create industry clusters where none exists, but they can use inexpensive tools like data collection to identify established clusters; small, targeted grants to encourage non-profit groups to help individual businesses in clusters connect and grow, and link, leverage, and align existing state economic development programs to provide targeted support for clusters.

Innovation and industry cluster growth depends on skilled and educated workers. So states must continue reforming K-12 education and embrace policies that reward performance. Ultimately, workers’ wages are based on their skill and, in the increasingly competitive global economy, better skills are acquired through more effective education and training.

Second, states have to cut spending—but intelligently. Across-the-board cuts are politically appealing because they spread the pain, but they lack a strategic sense of which investments have the highest returns. These protests in Madison, Wis., and elsewhere show us that budget choices require broad support.

To gain support, and create more efficiency in spending, states must use cost-benefit analysis to determine the value of a project and ensure that tax dollars are invested wisely to yield the highest returns. In addition to highlighting projects with the highest economic gain for a community, cost-benefit analysis can also reflect social gains, like pollution and noise reduction, improved health or faster travel times due to reduced congestion. In other words, cost-benefit analysis can create better bang for the buck while improving the quality of life for everyone.

States could also maximize the coordination and use of existing public dollars through rigorous post-project evaluation. States could then determine which investments actually have the greatest return, and base future decisions on sound evidence about what works.

Byzantine local governments, creatures of their states, are also an area ripe for reform. School, fire, library and other administrative districts offer an array of duplicative services and are unable to take advantage of economies of scale. Opportunities for consolidation exist, and can be leveraged to enhance services while cutting costs.

While a sensitive topic, it is also crucial that government employees are rewarded fairly for their work – but in a way that is sustainable. Policymakers cannot continue to promise retirement packages, for example, that will consume budgets at the expense of other critical investments.

Third, states must raise revenues to maintain vital services, while also investing in the region’s future economic growth. Policymakers can do this by levying fees on those who use specific services, while also modifying social problems.

It is striking that we do not use price signals to help solve problems like congestion — which creates travel delay and pollution – as a way to build efficiency and raise revenues. Tolls or user fees are obvious examples of ways that state and local governments could harness market forces to better “price” the use of busy roads and bridges during peak travel times.

A small, bipartisan group of governors understands this dual approach of cutting and investing. For example, Kansas Gov. Sam Brownback proposes to eliminate up to eight state agencies and a number of government positions, while also making new investments in early childhood education and in key industry clusters, like aviation and cancer research. New York Gov. Andrew Cuomo hopes to create “right size” state and local government by rewarding mergers and consolidations, while creating new regional economic councils that align state investments to the unique assets of each region.

As our nation’s governors gather in Washington, we hope that the president and congressional leaders listen to what they have to say. States have long served as the laboratories of reform. They now have the opportunity to continue in this grand tradition — promoting broad-based growth in the coming years.