The Basics of Baseline Budgeting (in a World of DUCKS and Cover)

By Doug Magill

One of our readers sent a note asking why baseline budgeting is such a problem.  Taking an informal poll of a few friends and relatives, I was astonished how little is understood about this federal financial legerdemain.   And how its pernicious effects are not recognized.  Baseline budgeting is one of the stubbornly stygian aspects of the federal financial system.  It has the most dramatic effect on why the federal budget continues to grow and cannot be controlled.

For the sake of discussion, let’s suppose you work in the Commerce Department.  Now let’s suppose you are in charge of the Department of Unusual Consequences of Kinetic Systems (DUCKS).   No one knows why it was originally important to evaluate kinetic systems, but over the years the department’s purview has expanded to that of any machine, system, consulting company, or patent application that involves kinetic energy, looks at kinetic energy, or just has the word kinetic in its name.

Dutifully, every year the department produces voluminous and indexed documents outlining the state of the art in the world of kinetics and all of its related applications.  Marvels of depth and comprehensiveness, these reports are forwarded to the printing offices of the Commerce Department, where they are typeset and bound before being forwarded to other federal departments, the Library of Congress, several universities, and a few companies (usually the ones covered) that have expressed interest.

This is the kind of thing that federal departments excel in.  Generating  comprehensive data and producing extraordinary compendiums of information.  The problem is, no one know if this information is valuable, used, or of any potential significance.  No one looks at the DUCKS product and determines that is necessary, useful, or a worthwhile in terms of the expenditure of our tax dollars.

And, so year after year, DUCKS waddles along, producing wonderful information, the value of which is never determined.

Annually, the Congressional Budget Office produces a budget projection for the next 10 years.  The current budget for DUCKS is considered the baseline, to which is added from 3% to 10% depending on projected inflation, and potential program changes.  The next annual budget cycle, this adjusted number is the new baseline of your budget, to which is added another set of adjustments.  Your baseline keeps increasing every year, and so your budget is bigger every year.

Following the accounting rule of 72 (divide the annual percent of increase into 72 and the result is the number of years it takes to double your original amount), if we are increasing your budget by 8% per year, then in 9 years we will have doubled your budget.  Without doing anything.

Wouldn’t you love to have automatic increases built into your budget every year?

Once in a while one of our congressional solons determines that we are going to increase overall funding for the Commerce Department, and your baseline gets an additional increase regardless of whether it is needed or not.  The challenge for you is not how to manage your costs, it’s how to keep spending money to use up the annual increases that you are constantly being given.

And this is what is so frustrating and insane about the whole process.  No federal department complains that it doesn’t need any more money – there is too much power and prestige involved – and it finds ways to spend more whenever the opportunity arises.

The truly marvelously Machiavellian twist to all of this is what is described as a cut.  Let’s say those mean Republicans manage to pass a bill that has an increase in the baseline of only 4% instead of 6%.  All of a sudden out of the woodwork come hordes of heated Democrats and special interest groups screaming about how heartless it is to cut the budget and make people starve.  I know, nothing was cut – only the rate of increase is reduced.  The CBO will score it as a cut, and the notoriously liberal media will not clarify whether anything is being cut: we are just not going to spend as fast as we originally planned to.

What if Congress woke up and realized how perilous the situation really is and decided to freeze federal spending at exactly the same level as it is today?  The wonks at the CBO would classify that as a spending cut of $9.5 trillion over the next 10 years.  Imagine the heart-rending screams and protestations of draconian indifference to the plight of all of those dependent on the government.  I know– we didn’t take a dime from any federal agency, but in the weird, twisted logic of Washington that is considered a cut in spending.

It’s the government version of that joke about a women explaining to her husband that she saved $200 by spending $500 on a dress rather than $700.  $500 still got spent.

So it is in the latest silliness over increasing the debt ceiling, which, by the way, was $6.4 trillion in 2002, and has just been increased to $16.7 trillion through 2012.  The rule of 72 at work in your federal budget.

By the way, the spending cuts touted as part of this amazing compromise are again reductions in the amount of increase.  Nobody in government is going to be spending any less money.

Other than in the hothouse world of academia, non-profit organizations giving unqualified advice, and the innumerate media, no one considers this blatant dishonesty as reflective of reality.

The alternative to baseline budgeting is called zero-based budgeting.

When I ran business organizations, we always started every year with a blank sheet of paper.  We calculated how much we needed for each employee and benefits, supplies, travel expenses, training expenses, pensions, depreciation on equipment and buildings, etc.  The entire budget was built up from scratch, and everything had to be justified.  Since we had multiple departments to manage, this had to be done for every department.

If we needed additional equipment or buildings we had to prepare a separate budget for capital, because that had to be borrowed on a long-term basis, and the resulting depreciation – depending on the applicable tax laws – was then included in our departmental budgets.

Once done and presented to management, if the increases exceeded what was deemed acceptable by the officers of the company, we then had to go back the drawing board and figure where we could reduce spending.  There was never any assumption of automatic increases in anything.

If the company didn’t meet its profit targets, we would build our budget from the ground up with the assumption that we would be spending less money the next year, and we had to find a way to spend less without losing something vital.

Complex, tedious, and difficult– yet as an executive I knew what was being spent on everything and when challenged could identify areas that really needed to be increased, or could be cut without affecting company performance.

The DUCKS manager probably has never looked at the entire budget from the ground up and justified anything.  And never will.  And yet, he is as much a dependent of the federal government as those who take advantage of the Food Stamp program.

George Bernard Shaw understood all of this when he wrote, “A government that robs Peter to pay Paul can count on the support of Paul.”

The only problem is, there are more and more Pauls every year and there aren’t enough Peters, who are getting tired of being robbed.

Doug Magill is a freelance writer, voice-over talent, and consultant.  he can be reached at doug@magillmedia.net

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