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States’ Red Ink Demands Tough New Economies

Neal Peirce / Feb 01 2010

For Release Sunday, January 31, 2010
© 2010 Washington Post Writers Group

Neal Peirce Swimming in red ink, deficits rolling in as far as the eye can see, what are America’s state governments to do?

The “realists,” notes government reform expert Ted Kolderie, “tell us the only options are to cut and to tax.” Their clear message, he suggests: “With more we can do more; with less we have to do less. We don’t do ‘different.'”

But they’re bitter consequences, especially in a recession. Budget cuts reduce vital services. Increased taxes just take money out of peoples’ pockets, perversely making economic recovery all the tougher.

Raymond Scheppach, executive director of the National Governors Association, hears lots about the monstrous budget dilemmas the 50 state governors face. The time’s at hand, he believes to “to look at new and different governance models for the delivery of services.”

I asked him for examples and he didn’t hesitate.

A top idea: Curb our states’ “endless incarceration” practices — failed logic in a nation that already imprisons more people than any other on the planet. At a January meeting, Scheppach relates, one governor proclaimed: “I’m not going to build any more prisons from now on. We have to find a different way.”

Ask criminal justice specialists, and big majorities cite reasonable solutions running from residential programs to electronic monitoring, drug decriminalization to community service.
Next on Scheppach’s list: higher education. “States have to stop putting money into new buildings and campuses. We need to move to a high degree of undergraduate education online.”

A top example: Western Governors University, an online institution created by 11 Western governors 13 years ago and administered from Salt Lake City. It now has 17,000 students from 50 states and is the nation’s largest supplier of urban math and science teachers.

Says David Osborne, coauthor of “Reinventing Government” and “The Price of Government in an Age of Permanent Fiscal Crisis”: “We should quit paying for higher education except for research, and give the money to the students, letting them choose the universities that meet their needs.”

As for public schools, Osborne would transform local school boards into “chartering boards” that would contract with independent groups, like charter schools, to run schools, regularly renewing or discontinuing contracts based on their performance in educating children. Teacher unions are adamantly opposed. But cities such as Washington, D.C., Milwaukee and Houston, aiming for better student achievement for public dollars invested, are moving toward the new model.

But the biggest fiscal savings, says Osborne, can be won on health care. Medical bills are already 35 to 40 percent of states’ budgets and rising rapidly. Yet studies by experts at Dartmouth College show the more doctors and hospital beds per capita in a region, the higher the cost and, amazingly, often lower average health outcomes.

So what should states do? Decree a shift, says Osborne, from fee-per-service to a competitively determined total flat fees for a given procedure — a knee replacement for example. Typical expense-compounding billing for each separate step, from diagnosis to X-ray to anaesthesia to recovery care, would be ruled out. Likewise, primary care physicians would get flat fees for caring for a person of any given age for a year — again discouraging unnecessary procedures. There would be coordinated statewide electronic record keeping and a new system of health courts set up to contain malpractice costs.

Longer-term, Osborne adds, states need to save health dollars by curbing the obesity epidemic — “Americans eating themselves to death.” Fiscal sanity demands curbing highly expensive long-term care for diabetes and heart conditions. How? Tax junk food. Champion exercise and sound diets. And then, with increasingly older populations consuming some 25 percent of health care dollars in their last year of life, institute more end-of-life care — avoiding, for example, heart bypasses for weakened 89-year-olds.
So what about the hundreds of billions of dollars that state governments owe in unfunded pension obligations and retiree health care? Scheppach has one answer: the so-called “defined benefits” system, with its lifetime guarantees, “just has to go.” State workers — at least new ones — would have to manage their own 401-k or comparable plans.

Perhaps, says Scheppach, states should “hire private sector people willing to come into government for three to five years.” They’d be paid competitive salaries, bring in fresh blood and ideas, and provide a clear alternative to the prevalent pattern of retaining state workers for 25 years or more and then owing them high lifetime defined benefits.

Put another way, state workers would be job-mobile (like most of us), and not receive retirement benefits superior to the taxpayers who support them.

Are all these ideas practicable? Maybe not all. Each would trigger political battles. But if we can’t pass imaginative reforms in today’s fiscal storm, then when? Inaction means prolonged fiscal misery, deep deficits, and a less competitive United States.

Neal Peirce’s e-mail is

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  1. Posted February 2, 2010 at 5:26 am | Permalink

    Excellent road map for the future. WTG.

    RE: the prisons vs money for education…when parents have a choice to either tax Michael Phelps and Willie Nelson or lose the AP teacher for their teen, they will choose to tax Willie. California will have such a vote this fall. Marijuana is a no-brainer.

  2. Posted February 2, 2010 at 6:10 am | Permalink

    Thank you for your article. I would add two things to the list. To qualify for a high school diploma, every student must pass two courses: one on ethics (to include ethics in business) and the other on personal financial literacy — covering credit cards, mortgages, budgeting and so on.

  3. Jeff Perlman
    Posted February 2, 2010 at 8:07 am | Permalink

    Another in a long line of provocative columns. The truth is these reforms are not even being talked about in most places never mind voted on or implemented. The old adage of never waste a good crisis is being squandered by leaders desperately clinging to a status quo that has long left the building.
    Americans are ready for straight talk and to make tough decisions but we are never called on to do so. The biggest problem in our cities, counties, states and nation’s is not the fiscal challenges we face (as admittedly big and ominous as they are) but the deficit in leadership and our ability to work together to solve problems. Future generations will look back in anger and astonishment if we don’t at least begin to fix these huge problems we’ve created.

  4. Posted February 2, 2010 at 10:18 am | Permalink

    Neal, Thank you for this thoughtful post. I agree that we need to think and act differently. And, state and local government can pave the way for this important reinvention.

  5. Neal Peirce
    Posted February 2, 2010 at 10:45 am | Permalink

    An Idea exchange – I received a challenging comment on this column from Jamaal Green of the Department of City and Regional Planning at the University of North Carolina –Chapel Hill. Here’s his comment followed by my response:

    From Jamaal Green:

    I consistently find the your columns and others on Citistates to not only be fascinating and engaging, but generally, right on and well thought out. It is with dismay that I read your recent column on ideas for strapped state budgets that focused heavily upon cutting government services and continuing privatization schemes in key public sectors. While I recognize the dire straits that are state governments are in, how does it help them to cut out those services that it already does well.

    While shifting more students to online education may be laudable, not investing in sound university infrastructure and,”…only paying for research” would destroy what we know of as the American university system. It not only has the potential to kill off already weak humanities and arts departments but it would severely bite into social science programs and eliminate the physical environment of the university that helps to spur innovation. In addition, it discounts the cultural effect of having thousands of young people living in a new environment, being exposed to new ideas, and meeting new people. Not to disparage online education, but it is next to impossible for students to gain such an enriching experience if they remain at home working on a computer. For a columnist who prizes the importance of public space and social capital, it is disappointing that you would echo an idea that would weaken one of the most innovative spaces in American society, its colleges and universities.

    Also, while some charter schools have shown success, their effectiveness across the board has been mixed. I’m from Washington DC and while there are some very good charter schools, there are many that perform as poorly as the public schools they were designed to replace. While we must do more to reform and change our system, simply shifting more resources to the private sector is not the way. That money could be better spent on improving our existing schools instead of calling the entire system a wash.

    Finally, while bringing in private sector workers into state government for extended contracts could bring in fresh blood and new ideas, I believe it is harmful in the long term to make government work as contingent as the private sector is already becoming. The contingent worker phenomenon has helped to gut middle management positions throughout the private sector and has eliminated traditional ideas of job security and firm loyalty. We already see too many promising government-led initiatives abandoned because there is a change in leadership. You would only accelerate these tendencies by having a revolving door of private sector workers brought in for a few projects or fixed time period. Government is in the business of governance. And governance is not a 3-5 year commitment, as much as we want to believe it. Let’s bring in qualified people but making a mass shift to such a system is harmful in the long run. Yes, we do need to do more to reign in pension costs but shifting employees over to a 401-k plan is a cruel way to go about it. The private sector has largely abandoned the pension but why? Because it was better for managers and their shareholders and not their employees. This ongoing economic and financial crisis has shown us how incredibly vulnerable workers are where the majority of their possible retirement funds are tied up within the equity markets. The 401-k exists purely to offload employee pension payments from management and it is a poor system for guaranteeing retirement funds.

    Even disagreeing with you on these areas I still found the column fascinating and I definitely agreed with the suggestions on imprisonment and treatment and I hope more governors are taking a hard look at it. I felt the need to write you because I respect your opinion and I felt the need to voice my disagreement with some of the policy prescriptions given. I pray you have a good day.

    And my response to Jamaal:

    I appreciate your kind reference to most of my columns. And it’s true — the latest one does seem to diverge from my normal humanistic approaches (supposedly reinforced in a lifetime of scholarly interests, sparked by four years at Princeton in a “Special Program on the Humanities” in the 1950s). I do believe a lot less university-based building is necessary– but still the personal interchange of students, professors, etc., is very important. Yet I’m torn — If states can’t or won’t finance higher learning as they used to, how do we find ways to open advance skills learning to the masses of a growing country (including many lower-income folks who are lucky to make it into a community college, not a UNC-Chapel Hill or Princeton).

    On the workers in government issue, I think the ideal would be a balance — a coterie of professionals for institutional memory, but constantly refreshed by folks coming in from the private sector to reinvigorates thinking, new approaches, etc. … Thanks again for your input!

  6. Posted February 10, 2010 at 8:36 pm | Permalink

    These exchanges have been worth the price of admissions!

    Keep up the good work — and that’s an order!