Toward a more efficient government

By Susan J. Demas

Gov.-elect Rick Snyder has already fired off the first salvo in next year’s state budget negotiations, declaring last month at the Republican Governors Association meeting that cutting state employee compensation is “one of the toughest things I need to do as the next governor.”

That’s certainly not the easiest government reform to kick off Snyder’s term. And it certainly won’t be the last one debated at the Capitol.

There’s little doubt that “government efficiency” is all the rage in Lansing, as Michigan faces another budget hole of roughly $1.6 billion. Snyder’s version is “value for money” budgeting, in which state government functions are evaluated for efficacy before they receive funding. Keep in mind that if he succeeds in eliminating the Michigan Business Tax (MBT), that shoots the deficit north of $3 billion. And the new governor said he won’t raise taxes.

So that means a lot of efficiencies are going to have to be found in the state’s discretionary spending, the $8 billion General Fund and the $12 billion School Aid Fund.

This debate isn’t a new one. In 2007, Gov. Jennifer Granholm appointed a bipartisan, 12-member Emergency Financial Advisory Panel to identify long-term fixes for the state budget. That year, the Legislative Commission on Government Efficiency also was born.

Almost two years ago, the Center for Michigan surveyed the work of those groups and several others to identify more than $1.5 billion in cost saving ideas, including reducing incarceration rates to match those of neighboring states, reducing judges’ health care benefits, capping school superintendent pay and reducing prison guard overtime.

Thus far, the state has gone back to the well of budget cuts and accounting gimmicks to patch deficits year after year, rather than implement structural reforms.

“With process changes, they take time to implement,” notes Doug Drake, senior policy adviser with Lansing-based Public Policy Associates. “Often times, they take more than one budget year to do and see savings.”

But as Michigan wrestles with its 10th straight year of budget deficits, there’s certainly a greater sense of urgency today to unearth government efficiencies.

Other states have gotten in on the act, as well. The National Conference of State Legislatures (NCSL) reports Iowa, New Mexico, New York, Texas and North Carolina have formed efficiency panels. But NCSL Fiscal Analyst Arturo Perez cautions that state budgets are vastly different and comparisons are difficult. What works in one state might not translate in another.

For instance, Snyder has said he’d like to follow the model of Indiana Gov. Mitch Daniels, who’s successfully cut budgets and employee compensation. But Jack McHugh, senior legislative analyst for the free-market Mackinac Center for Public Policy, notes that Daniels had more flexibility than Snyder will.

“When he got into office, he told government employee unions, ‘I’m not going to do collective bargaining anymore,’” McHugh said. “You can’t do that in Michigan with the Civil Service Commission.”

So Michigan will have to chart its own course. The Mackinac Center has identified four reforms to watch next year: employee compensation, retiree costs, local service sharing and Corrections reform.

There also are some reforms that Michiganders shouldn’t hold their breath waiting for. Sentence guideline reform is a longshot with strong Republican majorities taking control of the Legislature, as that’s seen as an affront to their law-and-order campaign message.

Granholm saved a few million dollars by trimming state departments, such as eliminating the one for History, Arts and Libraries and combining the departments of Environmental Quality and Natural Resources. But Snyder has signaled those days are over, as he’s splitting the newly formed Department of Natural Resources and Environment just a year later.

And rooting out hundreds of millions in waste and fraud in social service programs like food assistance and Medicaid has proven elusive, although there is now a Medicaid inspector general in place.

“It would be nice if there was a waste, fraud and abuse line in state government we could veto,” quipped Jeff Guilfoyle, president of the nonpartisan Citizens Research Council. “But it unfortunately doesn’t work that way.”

Defining Efficiency

But before we break those reforms down, there’s a basic question: How exactly do we define “government efficiency?”

Guilfoyle provides this definition: Whatever level of public service we’re going to have is provided at the lowest cost available.

That can get tricky. It could mean eliminating programs or whole departments.

“We have a hard time coming up with a list of things we don’t want state government to do anymore,” Guilfoyle notes. “There are no easy things to point to and say, ‘That’s where the savings are.’”

He adds that the state has shown increases in productivity, which “implies a certain level of efficiency.” The state workforce peaked at 68,105 in the 1978-79, was down to 60,066 in 1998-99 and is at 51,699 employees as of 2008-09, according to the Michigan Civil Service annual Workforce Report.

Early retirement incentives were offered to state employees in 1996, helping to downsize the workforce. Another round passed this year for both school and state employees, which has left thousands of openings. Most state departments are only replacing two of every three employees, and in some cases, only one of every two retirees.

“But the workload isn’t decreasing,” Guilfoyle notes. “In fact, in many cases, it’s increasing with the economy.”

Michigan State University economist Charles Ballard notes that there’s a paradox: The state has rid itself of its most experienced workers, which often is at odds with improving efficiency in delivering services.

“We’re asking the state workforce to do more with less,” he said. “The question is: How far can we go?”

Ballard also points out that state and local tax revenue in Michigan is down $10 billion over the last decade, putting the state $9 billion below the Headlee limit. The General Fund budget has been pared down 40 percent, adjusting for inflation. Although incomes have decreased with the recession, they’re not down that much, he said. The real issue is that Michigan’s tax structure is flawed in every respect — including sales, income, property and business taxes.

Although he favors looking for efficiencies in government, Ballard said that the emphasis on rooting out reforms and slashing budgets in tough times often ignores the reality that our tax system has “been infested by termites.” He argues that it would be unwise to chop another $3 billion from the General Fund.

“To some degree, this isn’t a debate about government efficiency,” Ballard said. “It’s about whether we provide these services at all. … The push for cutting may not be about offering efficiency. It’s based on the belief that what the public sector does is not valuable.”

Here’s an even trickier question: How do we know when we’ve achieved government efficiency?

“The problem of government is that you can’t measure that,” said the Mackinac Center’s McHugh. “In the private sector, you can look at the bottom line: Either you make money or you lose money. So much in government is ambiguous. You never know. It is a never-ending struggle.”

Perhaps public sector efficiency is like pornography. You know it when you see it.

Robert Daddow, Oakland County deputy executive, provides a first-hand example. The county has put several services out to bid, and found it could save money by outsourcing its print shop, but not its motor pool. That’s a good litmus test for government efficiency, Daddow notes.

“By testing the waters, we found we had a pretty efficient operation,” he said.

“I don’t see why these things can’t be done at a state level, as well,” Daddow adds. “We’re constantly looking at ways to restructure our operation.”

So what’s stopping the state or other local governments from making tough choices? Daddow said that often times the political will is lacking. He also notes that the state is in rougher shape than Oakland County with its big budget deficit and Snyder will have to address that first.

“You can’t restructure if you’re in a crisis,” Daddow said. “Think of the Titanic. You can’t very well restructure the Titanic after it hits the iceberg.”

Employee Compensation

It’s not easy to tell government employees – many of whom are doing two or three jobs, thanks to cutbacks – that they’re getting paid too much.

But that’s happening more and more as dozens of municipalities and school districts teeter at the edge of insolvency. Guilfoyle points out that there’s been a staggering decrease in property values, which fund local governments, as well as revenue sharing from the state. On average, 80 percent of municipalities’ costs are in employee pay and benefits.

“They have no choice but to cut employee compensation,” Guilfoyle said.

State employees could be the next to feel the squeeze, if Snyder gets his way. He has not yet said what kind of pay cut he might take. Granholm gave back 5 percent of her salary most years.

Guilfoyle cautions that the savings may not be as large at the state level, however, where employee compensation is only about 10 percent of the state budget. But McHugh disagrees.

“There’s the old story of Willie Sutton, the bank robber,” McHugh said. “He said he robbed banks because that was where the money is. Why go after employee benefits? That’s where the money is.”

The argument is often made that public sector compensation should match that of the private sector, but Guilfoyle and Ballard caution about comparisons.

Some studies have shown that public employees have higher salaries than those in the business world, but they don’t control for education and other factors. According to a 2008 House Fiscal Agency report, 54.8 percent of state employees in Michigan hold college degrees, which is double the rate for the state (26.9 percent). Guilfoyle notes that lawyers in the Attorney General’s office and doctors in the Department of Community Health make less than they would in the private sector.

In the education industry, Michigan teachers were the 11th best paid in the nation in 2008, according to the National Center for Education Statistics, down from fourth in 2002 to 2003. Indiana ranks 23rd, Ohio is 14th and Illinois in 7th. In Michigan, these salaries are decided on a district-by-district basis and will likely be part of contract negotiations in the coming years.

In tough times, a pay cut is likely on the table for state workers, likely ranging from 3 to 10 percent. That means opening up collective bargaining agreements with employee unions, which is a long and complicated process. But lawmakers and state elected officials can argue they’re leading by example, as they’ll be taking a 10 percent cut themselves starting in 2011.

However, Ballard questions if docking employee pay will help government run any smoother. And he said there is a point when you slash salaries enough so qualified workers will no longer apply.

“If you cut teachers’ salaries by 20 percent, that could solve a lot of problems fiscally,” Ballard said. “But it’s not clear that will lead to much better outcomes for students.”

Public employee benefits are generally superior to those in the private sector, particularly in terms of health care and retirement. There also are fringe benefits, with more time off and less risk of layoff, Guilfoyle points out. Thousands of school and state employees have pensions, which have gone extinct in the business world. The Mackinac Center has found that 300 school districts in Michigan don’t require their employees to pay any health care costs.

“No one in the private sector is getting that kind of deal,” McHugh said.

But it’s not fair to say that state workers haven’t made concessions. According to a report Ballard compiled in 2009 for employee unions, concessions between 2001 and 2008 have saved the state more than $3.7 billion — $3.3 billion in wages, $143 million in pension expenditures and $300 million in health expenditures.

Nonetheless, more concessions seem certain in the future. State employees will almost certainly be asked to kick in more of their health care costs. That could come in the form of a health care pooling plan proposed by House Speaker Andy Dillon (D-Redford Township), who’s taking over as state treasurer under Snyder. State workers also could be required to pay a bigger chunk of the premium. Legislation in the Senate this term would have upped the amount to 20 percent, which they say matches the level in the private sector.

Other ways to cut compensation costs include instituting furlough days, as the state did in 2009. There also can be layoffs, like when the Department of State Police axed 100 troopers that year, although staffing levels were later restored. This time, state workers might not be so lucky.

In Oakland County, Daddow said, officials didn’t wait for a financial crisis and have a balanced budget through fiscal 2014. One reason is that the county has been restructuring compensation for employees for 24 years. That’s meant some tough union negotiations. The county has been able to restructure co-pays for insurance, bid out prescription drug coverage and institute wellness programs.

As a result, Oakland County;s health care costs have dipped, Daddow said, while other municipalities are grappling with big increases. Oakland County also has chopped employee pay by 4 percent in two years – 2.5 percent in 2009 and another 1.5 percent in 2010.

Retiree Costs

Legacy costs are a big burden for the state and local governments, Guilfoyle said – and they’re rising at a faster rate than revenues.

“There’s no real silver bullet there,” he said.

The state is a little ahead of the game, switching in 1997 from a pension or defined benefit retirement plan to a 401(k) or defined contribution plan. McHugh calls this the “gift from (John) Engler that keeps on giving.” Employees used to be vested for retiree health care benefits after 10 years, Guilfoyle said. Now they’re 30 percent vested after a decade and gain 3 percent more for each additional year. And this year, Gov. Jennifer Granholm signed a law that requires employees to pay 3 percent annually into retiree health care, although this sunsets in 2013.

The Michigan Public School Employee Retirement System (MPSERS), which the state also administers, still has a defined benefit plan. But school employees also now have to kick in 3 percent per year for their retiree health care and this law has no sunset.

The state has a $13.5 billion liability for retiree health care. And MPSERS has a $26 billion liability.

Oakland County has found savings by switching from a defined benefit retirement plan to a defined contribution plan and closing off retirement health care to any new hires. Other locals could follow suit, Daddow said, although much of the savings aren’t realized up front.

Service Sharing

Michigan is not wanting for layers of bureaucracy. We have 83 counties, 1,242 townships, 274 cities of less than 10,000 population, 259 villages, 552 local school districts, 230 charter schools and 57 intermediate school districts.

With tough economic times, local governments and school districts have little choice but to band together to provide services. Many municipalities across the state have set up fire and 911 authorities. School districts are sharing administrative staff.

Perhaps the clearest example of municipal synergy is Urban Metro Mayors and Managers, a partnership between Kent County and six cities — Grand Rapids, Wyoming, Grandville, Kentwood, Walker and East Grand Rapids. They work together on everything from transportation to wastewater in the region.

But not everyone has jumped aboard the collaborative train. Snyder and the Legislature could try a version of what Granholm did in 2007, when she unsuccessfully dangled an additional $25 million to $30 million in revenue sharing to encourage more intergovernmental collaboration. During the campaign, Snyder endorsed withholding revenue sharing to locals that didn’t share services.

Leaders could go further by reforming two laws that throw up roadblocks to intergovernmental collaboration, something McHugh calls a “no-brainer.” The Urban Cooperation Act interferes if two municipalities want to combine their police departments. The act dictates that they will have to pay workers the highest wages and benefits offered, which negates any cost savings. Public Act 312 of 1969 mandates binding arbitration for labor disputes between communities and public safety officers. The Legislature attempted to modify P.A. 312 this year, but Senate Bill 1072 died in lame duck because it would have actually expanded the act to include other entities like public safety authorities.

But these changes alone won’t be enough to save many municipalities, Guilfoyle warns. Some locals have had a 30 percent drop in revenues, and they’re not going to be able to find enough efficiencies to fill the gap.

“The budget situation is so bad that we’re looking at unpleasant options like big cuts and tax increases,” he said.

There are proposals to eliminate townships and shift to county-based local government to save even more money, but that’s always been the third rail in Michigan politics. There’s a long tradition of local control in the state, so no one expects this idea to get traction next year. And the Michigan Township Association (MTA) will fight to keep it that way.

School districts aren’t affected by P.A. 312 or the Urban Cooperation Act. Ballard said more efficiencies could probably be found among schools, but much has already been done in that regard. As for putting districts on the chopping block, he notes than Michigan had 5,000 school districts in 1950 and “most of the low-hanging fruit is gone.”

The real savings comes in pink-slipping teachers, Ballard said, but “unless you increase class sizes, the savings will be pretty modest.”

Corrections Reform

Corrections spending has skyrocketed 538 percent in the last 34 years, according to the Detroit Regional Chamber of Commerce’s task force. Michigan spends more than $30,000 per year housing each prisoner.

The good news is that Corrections costs in Michigan have been held down in recent years, mostly because the prison population has shrunk. After hitting an all-time high of 51,554 prisoners in March 2007, Michigan’s prison population has been cut by more than 6,000, according to a 2009 Pew Center on the States report. The bad news is the Corrections budget is still around $2 billion, almost one-quarter of the General Fund.

If Michigan were to relax incarceration rates to that of neighboring states, we could save $400 million, according to studies by both Lansing-based Citizens Research Council and the former Detroit Renaissance. However, this is incumbent on reducing the prison population through a variety of methods, like beefing up alternative incarceration methods such as tethers and alternative court systems for nonviolent drug offenders and the mentally ill. Some of the biggest savings come from lessening sentence guidelines so they match nearby states, but that doesn’t appear politically viable right now. Granholm this year proposed letting out prisoners for “good time,” something that’s been done in the past, but Republicans vocally opposed the idea.

Michigan has closed prisons, including four in fiscal 2010. That meant shedding the 1,500 full-time equivalent positions, a 9 percent cut. But once again, it seems unlikely that Republicans will push for more.

Other reforms that have been implemented include boot camps and the Michigan Prisoner Reentry Initiative, which help reduce recidivism. These have had bipartisan support and could be expanded next year.

The Department of Corrections has faced pressure to reduce its administrative costs. A 20 percent reduction would yield $380 million in savings, according to a 2007 report from the Senate Subcommittee on Prison Reform and Public Safety. This is a likely target in the fiscal 2012 budget, as well.

There have been proposals from Republicans in the Legislature to privatize some prison services, like food and transportation, but they haven’t gone anywhere. A 2008 Auditor General report found that bidding out food services alone would save $25 million. With strong GOP majorities in both houses in 2011, look for these ideas to get new life.

But McHugh argues the state needs to go further and privatize at least one prison to achieve real savings. He said money can be saved there, but there’s also a ripple effect in that other prisons will be motivated to look for efficiencies and cut compensation.

“It gets all the other employees and managers looking over their shoulder and saying, ‘Boy, we could be next. We better sharpen our pencils,’” McHugh said. “The beauty is that it doesn’t sacrifice services.”

Susan J. Demas is a 2006 Knight Foundation Fellow in nonprofits journalism and a political analyst for Michigan Information & Research Service.