Crossing the State's Fiscal Chasm: the PSG Report
By John McClaughry

Last week Gov. Jim Douglas gave his final state of the state address, to a general assembly controlled by the opposite party - the party that produced the budget he vetoed last June, only to have his veto overridden and its budget imposed on him.

In his address the Governor confronted the state's yawning fiscal chasm: a $150 million general fund shortfall in the coming fiscal year, and $350 million more in the three years to follow.            The Governor faced up to the gloomy prospects, saying "if we want to spring out of this recession we must have the heart to reform, the wisdom to act, and the courage to stand against those who will say it cannot be done."

But his leadoff example of coming reform was claiming the $38 million that he and the legislative leadership have agreed to believe can be saved by implementing a report submitted by the Public Strategies Group. This is a Minnesota consulting organization that the legislature selected to produce ways of finding the savings and - as the Governor declared - "breaking from business-as-usual".

Based on the PSG's 32-page report (net of padding), explained at a January 6 news conference in the Governor's office, one would do well to harbor considerable skepticism about the prospects of the purported savings.

          The report, entitled "Challenges for Change", is premised on the notion that, given more administrative flexibility, government departments will be able to produce their current results for their current beneficiaries with less money.

The Governor, Secretary of Administration, or an unspecified Challenge Czar would challenge all departments of state government to voluntarily enter into a "Charter Agreement". Departments that volunteered would then devise new procedures, rules, and the like. Both the volunteers and the holdbacks would however face arbitrary percentage reductions in their budgets. As the report says, "the savings are taken" in the budget process.

There is much to be said for giving departments flexibility in finding ways to accomplish their missions. But as one reads on through the report, skepticism begins to grow.

The largest savings item in the PSG list is "purchasing [human services] results, not units of service." Assuming the Agency of Human Services volunteers for the project, the state would "invest" a million dollars to permit AHS management and staff to undertake a number of management improvement tasks.

After a year of analyzing, designing, renegotiating, streamlining, and strategizing, the Agency would achieve savings of 5% ($18 million). Add up the savings for all of the programs included in the report, and the magic $38 million in savings appears!

How are these magic percentages arrived at? There isn't a hint.

Which administrative and statutory burdens will be relaxed? Again, not a hint.

Can this approach be validated by experience in other states? The consultants say yes, but nowhere in the report is any example identified. One unnamed state is said to have reduced the time for air quality construction permits from 62 to 6 days using the "Kaizen continuous improvement approach," but the report offers no explanation of whatever that is.

The report also steers clear of any proposal that would alarm various interest groups whose constituencies are dependent on state spending. The closest it dares to come to suggesting that too many people are consuming too many benefits is a guarded observation that the state might want to "reconsider its expectations about whom it can afford to serve."

One featured idea is a "federal super-waiver" to create a giant pot of program money with minimum rules. This was the centerpiece of President Nixon's "New Federalism" in 1969. It was tried from 1972 to 1980, and then abandoned.

Paul Cillo of the liberal Public Assets Institute, a veteran of legislative policy making, rightly noted this week that the "Challenges for Change" report serves as a useful fig leaf for all parties in the budget debate. They can all embrace the highly speculative $38 million in savings, and thus show they are moving forward toward solving a crisis. (Only $112 million to go!)

The report contains some useful - though very general - ideas for improving program efficiency, that should have been put in place years ago. But balancing the general fund budget over the coming three years will also require serious rethinking of the core functions of government, asking how those functions can most efficiently be performed, confining public subsidies to the needy poor and indigent, and recognizing the danger point at which government's insatiable search for more tax revenues threatens to shrink the wealth producing private sector that pulls the state's fiscal train. Some think that that point has already been passed.

John McClaughry is Vice President of the Ethan Allen Institute.