Rahm Emanuel took a lot of heat for that statement because some people didn’t like the policies the Obama administration tried to use the crisis to implement, but it’s absolutely dead on. We know there have been all sorts of things in our state and local governments that have needed to be addressed for years. But special interests and politics have kept us from doing a lot of them. Now that we’re facing fiscal Armageddon at the state and local level a lot of previously unthinkable things have gotten, well, a lot more thinkable.
This is the opportunity and imperative that are before us. The cities and states that step up and take this opportunity for reform are the ones that will put themselves at a competitive advantage for the long term. Those who simply try to muddle through may end up wandering in the wilderness longer than they think. It’s not just about jobs and balancing budgets in the here and now. It’s about setting the stage for the future.
That to me is the disappointing thing about the Illinois income tax increase. Rhetoric aside, even the business community there realizes that a tax increase had to be part of the equation for the righting the fiscal ship. The structural problems are so vast – a $15 billion structural deficit in the state’s budget and a $160 billion unfunded long term pension liability – that there’s no way to bring things back in balance through cuts alone. But the cuts and reforms have to be made anyway, and the state didn’t make them. In fairness, it did change pension rules for future hires, and did some minor tweaks to things like free rides for seniors, but this is no where close to what is needed. Now that the tax rate was increased as a first option, reform just got a lot more difficult.
It all starts with pensions. This is the root of the fiscal mess in many places. Defined benefit pensions are indefensible in an era of such long life spans, and when future medical technology means it is physically impossible to predict how long people might live. Also, the notion that you spend your entire career with one employer, even a government one, is an anachronism. Today, once you’ve got X number of years in, you are almost handcuffed to your government job for the duration even if you hate it because the value of that pension is so high. That’s why you always face a battalion of surly employees when you go to renew your driver’s license. Also, it creates a recruitment issue. Lots of people might want to spend some time in public service without making it a career, but it can be hard to do. In many places (though by no means everywhere), government pay is below market on a cash basis, with the balance made up (often more than made up) by generous pensions. So for someone who might want to spend say 3-7 years in government, that’s a huge disincentive. They would be paid below market and not get the pension. If they were paid market and had a 401(k) they could take with them, that’s a lot more attractive option. So this reform is critical to recruiting the skills we need in public service from the marketplace. Also, the scenario I described right now is why elected officials simply can’t be trusted to manage pensions for the long term. They are able to both pay less in cash now and make big promises to employees that someone else will have to deal with down the line. And even if pension reform gets implemented, it is way too easy to retroactively sweeten the pot down the road. Only a defined contribution plan enforces real truth in budgeting and real funding of the liabilities.
Alas, few places seem likely to really go this route. Even Indiana isn’t looking at it, despite their huge unfunded pension liability and a reform minded governor. It would likely mean a politically unpalatable raising of the bare bones public sector pay there. But the places that are able to do this will reap an enormous gain over the long term, both fiscally, and from a government talent management perspective.
Beyond that, there are a whole host of other areas where reform can be put through. Indiana Gov. Mitch Daniels, for example, unveiled an ambitious reform agenda in his state of the state address. Among these:
- Local government restructuring/mergers. This includes completely eliminating over 1,000 township units of government. I don’t think merging general purpose governments saves money – arguably the opposite. But lots of states have tons of special purpose entities like Indiana townships. These are often cesspools of cronyism (in Indiana’s case rampant nepotism) and maladministration. There’s enormous opportunity here. For example, Brookings laid out a number of consolidation proposals in their report on restoring prosperity in Ohio.
- Criminal Justice Reform. It’s no secret that we vastly over-incarcerate people in US. Indiana also has a criminal justice revamp on the table that would see many non-violent drug offenders sentenced to treatment instead of prison, among other reforms. This would incidentally save a billion too. In a world where no politicians ever lost votes by being “tough on crime”, it’s a amazing that the sheer cost of incarceration is forcing many states to reconsider their approach to sentencing.
- Education Reform. Possibly nothing is more important to our long term competitiveness than education. Daniels proposals are of the conservative variety so many folks won’t agree with them. But increasingly education is no longer a Democrat/Republican issue and there are a variety of serious proposals from across the political spectrum looking to address the issue of education.
These initiative all face headwinds. In particular, townships may survive because the political class sees township organizations as their “farm team.” But at least Daniels is pushing hard. Even if you don’t agree with what he’s doing, he’s at least trying. And he’s not the only one. Jerry Brown is already making people mad with his proposals such as eliminating local redevelopment authorities in California. Andrew Cuomo in New York is starting to talk about new ways of doing business in Albany. Again, there’s no guarantee of success – Ed Rendell failed in his quest to lease the Pennsylvania Turnpike, for example – but at least these places are swinging the bat.
That’s the key. Every state and local government needs to be taking advantage of this (hopefully) once in a lifetime opportunity caused by the fiscal meltdown to pursue and implement reforms with a long term benefit. This includes of course creating fiscal sustainability, but also positioning them economically and from a service delivery standpoint. The places that pull it off will be among the ones to watch in the future.