Rightsizing Public Budgets

US state and local governments have to meet significant budget challenges within a political climate that will not tolerate reduction in citizen service.

Accenture believes that, in response, government agencies will have to transform how they do things in a thorough budget rightsizing exercise. We identify the issues and suggest some answers.

Many state and local governments are facing the biggest budget challenges in their histories. According to the Center on Budget and Policy Priorities (CBPP), in fiscal 2011 46 states struggled to close budget gaps totaling $130 billion, representing approximately 20 percent of their total budgets.

Governments have already made deep, across-the-board spending cuts to address these gaps, but despite such efforts, most public budgets remain compromised. Continued demands for services from citizens affected by lingering high unemployment rates have perpetuated the problem at a time when revenue intake is down. Moreover, there is no sign of this letting up. Projected gaps totaling $113 billion have been tallied for fiscal 2012; a figure that could rise to $140 billion as more states report.

In addition, states will shortly lose a key lifeline as federal assistance provided in the 2009 American Recovery and Reinvestment Act begins to dry up. Roughly $60 billion was available for fiscal 2011, but only $6 billion for 2012.

On current trajectories, governments face continued reduction of citizen services, lower credit ratings and increased bankruptcy risk, signaling potentially dire political consequences for office holders who lack workable strategies to weather the storm.

The election of 29 new state governors in November 2010 was a compelling signal that voters seek new solutions to important issues. Many state organizations are opening up to new ideas and ways of working as they struggle with a wide variety of challenges:

• Safeguard citizen services. Some government agencies are taking a top-down approach to incentivize innovation and collaboration to find new ways to preserve citizen services under a new, lower cost model. Others are rethinking how they deliver services.
  
  
• Balance political pressures. The sheer size of government budgets allow for significant value from leveraging the economies of scale of “non-political” budget items such as procurement of goods and services and the management of physical assets such as IT, real estate and fleet.
  
  
• Develop creative financing solutions. Governments can transfer the risk of implementing change to partners through value-based contracting, which provides a proven way to meet government agency needs while focusing specifically on the delivery of agreed outcomes. In this model, no fees are paid to a vendor until it identifies a defined threshold of savings, and the agreement clearly ties the fees paid to value.

Accenture’s Budget Rightsizing approach lets government organizations attack budget gaps using an integrated, framework of practices drawn from both the public and private sectors. By leveraging economies of scale and sharing services, public managers can involve the entire enterprise and, in the process, drive sustainable cost savings and revenue increases.

Accenture proposes a three tiered approach:

• Short-term actions: Move fast and capture benefits.
• Medium-term actions: Restructure core functions.
• Long-term actions: Drive transformational change.

In Accenture’s experience, the following success factors are critical:

• Think broadly and creatively around open and collaborative service models.
• Know where you are and where to start.
• Appoint strong leadership.
• Incentivize innovation and collaboration within and across jurisdictions.

Learn more about how to rightsize your budget.

John Gamberoni leads Accenture’s Management Consulting service line for the North American State and Local Government Client Service Group. He has led large-scale technology implementations and business strategies for both government and private sector clients with a focus on cost reduction initiatives and customer solutions. He is based in Boston.

Mike Ostergard is the North American managing director for Accenture Corporate Strategy. With 18 years of strategy consulting and financial management experience, he has worked with senior executives on all aspects of value-based management, valuation, cost reduction, corporate restructuring and corporate strategy. He is based in Atlanta.

Matthew Bailey is a senior manager in Accenture Health and Public Service. He has spent more than 12 years working in and with the public sector, focusing on financial challenges facing governments and universities. He has led shared services, rapid cost reduction, strategic sourcing and service delivery transformations. He is based in Minneapolis.