Government Reform or Engineered Mediocrity?

The idea of reforming the way government operates has been a goal of both politicians and public officials alike. But like many catch phrases the idea of reforming government means different things to different people. To me the idea is simple; reforming the way an organization operates is about making the organization more effective in its efforts to carry out its mission and meet its goals. Sometimes these reforms save money and sometimes they don’t. But whether the organization is public or private, for-profit or non-profit, the idea of reform is to make the organization function more efficiently and more effectively.

In this regard, the 2011 Minnesota State Legislative session actually got off to a great start. Recall that early in the session the legislature passed and the Governor signed a landmark alternative teacher licensure bill; creating new pathways to bring experienced and educated professionals from business and industry into the classroom. Or recall the efforts of the legislature and the Governor in approving new expedited paths toward environmental permitting that shortens the review process in some cases from years to months. Whether you agree with these actions or not, there is little question that such actions fall into the category of reforming the way government operates.

But shortly after that it seemed like the agenda changed and the goal went from making government more efficient and effective to just cutting costs. Of course cutting costs are needed when you are facing a $5 billion deficit, but you should never lose sight of how such cuts will impact the effectiveness of the organization. On my campus of the University of Minnesota we just completed a very painful exercise to similarly cut costs by eliminating a number of academic programs, services and functions. Other universities across Minnesota have been similarly responding with the termination of academic programs and other services.

In these efforts we have been very careful to make what many call “vertical cuts” vs. “horizontal cuts.” Essentially the point is to understand that while the elimination of an academic program may be detrimental to the students, faculty and staff members in that program, we should work diligently to ensure that it does not adversely impact the effectiveness of other programs that are not being cut. It’s no doubt a difficult call, but in the end, you want those programs that will remain to still be strong, effective and poised for growth. Conversely, just cutting budgets across the board (or horizontally) simply weakens all programs and functions and makes the entire organization less effective. That’s not what I would call reform – that’s simply engineering organizational mediocrity.

Maybe the legislature should do the same thing. For example, if legislators no longer see the need or the priority for state government to engage in economic development, why not simply eliminate those functions from the Department of Employment and Economic Development? But to just cut the agency budget and leave all of its functions simply ensures that the agency will no longer be effective in carrying out its mission. Similarly, just cutting the budget for MinnesotaCare, leaving more than 100,000 Minnesotans uninsured is not government reform; it just makes these government programs less effective.

And that’s the bottom line. When faced with the need to make significant budget cuts to an organization we know in advance that there will be plenty of pain and disappointment to go around. But we also need look beyond the cuts themselves and understand how the organization is to function in the future. In fact I would suggest that we need to recognize that if the Governor is our CEO and the Legislature is our board of directors, then their job is to ensure that whatever functions of government remain after these painful cuts are completed, work efficiently and effectively for the citizens of the state. Substantively cutting the budget is much more than just doing the math. In fact, solving the math problem is the easy part.

Sometimes the logic of treating such budget cuts simply as a math problem reminds me of the story we often hear about how some elderly people faced with limited finances chose to cut their prescription pills in half. Or sometimes to save money they may choose to take their medication every other day instead of daily. Of course the result of lowering the prescription dosage through such actions simply renders the medication less effective or in some cases completely ineffective in treating their condition. But when asked why they would do this, many simply say that that they are just trying to “live within their means.”

The Triple Bottom Line for Higher Education

I don’t think I can ever remember a time when more expectations were being place on our institutions of higher education, while at the same time these institutions are being financially stretched and challenged as never before. To be honest, it’s not exactly what I would call a formula for success. But to successfully meet the multiple expectations placed upon them will require skilled administrators; dedicated faculty; a new level of teamwork; and a new type of open dialogue. Admittedly, as a tenured professor in one of those institutions, it could be argued that I have somewhat of a conflict of interest – no disagreement there. So if you will … take that as my personal disclosure.

The need to adequately educate the next generation of leaders, professionals and knowledge workers is undeniably obvious. As I have previously written, now that the leading edge of the baby boom generation has crossed the age 65 threshold, this highly skilled and highly educated cohort of achievers will begin exiting the workforce in waves we have never seen before. A simple example can be found amongst our public school teachers. According to a 2009 report by the Minnesota Department of Education, an average of 2.3 percent of all teachers retired each year between 2002-2007. However in 2008 the percentage of teachers retiring more than doubled to 4.8 percent. And with the average age of public school teachers currently at 41, look for that percentage to further increase as the retirement of “boomers” hits its stride. But realize that such examples can be found not just among teachers, but rather in virtually all industries be it in the public, private or nonprofit sectors. And undoubtedly, we will expect that our colleges and universities will be there to adequately prepare our future workforce to fill these essential and highly skilled jobs.

But meeting planned employment needs is only a part of our expectations. Another expectation of our colleges and universities is to adequately prepare the next generation for the jobs of the future. If you don’t fully understand the concept here, simply ask yourself what do social media strategists, fuel cell engineers, content managers, health informatics specialists, and wind farm engineers all have in common? Well the answer is quite simple; all of these jobs did not exist 10 years ago! Due to the pace of technological change approximately 14% of all jobs occupied today simply did not exist 10 years ago; and as we all know, that pace of change and innovation is accelerating. President Obama often gets chided because of his use of the phrase, “winning the future.” But in fact … that’s precisely what is at stake; and our colleges and universities feel the pressure to stay ahead of the curve to ensure that our Minnesota economy and our Minnesota workforce can successfully secure those jobs and industries of the future. This is primarily accomplished through conducting the breakthrough research that often leads to the development of these new industries, as well as through the creation of new and innovative curriculum to meet the associated workforce needs. But we also must recognize that at the very same time state budget restraints are forcing our institutions of higher education to focus more on program reductions, consolidations, increasing class sizes and putting the necessary development of those new innovative programs on the back burner.

So what’s a university to do? Well there is a concept that businesses have been using for several years called the “triple bottom line.” High performing businesses have come to learn that just focusing on the financial bottom line is no longer enough. So these high flyers have begun to pay attention and measure their social bottom line as well as their community bottom line. The social bottom line measures the social capital or the trust and relationships that employees have with each other to functionally work as a team, as well as the communication and functional relationships between labor and management. The community bottom line measures community capital, or those ties that the business has with outside suppliers, customers, industry peers, local governments and other external constituencies.

For Minnesota’s colleges and universities to successfully meet the multiple expectations placed upon them during this time of unprecedented fiscal restraint will require team work and a new level of dialogue. It will require a focus not just on the financial bottom line as legislators and other public officials demand. In fact, that may be the easy part, as we can all do the necessary math. But to truly win the future for Minnesota, its economy, and our future workforce will require a new level of dialogue and trust, both within our colleges and universities, as well as with policymakers, alumni, community leaders and other external constituents.

It’s a dialogue that Minnesota cannot afford to ignore.

An All Too Slow but Steady Recovery

The recent news that the Minnesota unemployment rate dropped again in March to a rate of 6.6% certainly was welcome news to government officials and economic developers alike. In fact, a belief that Minnesota is finally climbing out of the grasp of the “Great Recession” now seems to be common; and why not? Minnesota has now experienced three straight months of employment growth; we’ve added over 7,000 new jobs year-to-date; and at 6.6% Minnesota now has the 11^th lowest unemployment rate in the nation. And yet … in spite of all this good news, many do not necessarily feel like the recovery has truly taken hold and that good times are ahead.

So is this economic good news really something to celebrate, or is it all just statistical mumbo-jumbo? Well, like everything … it depends on how you look at it. On a positive note, a 6.6% unemployment rate is good news; and the fact that it has steadily declined over the past year is even better. With a national unemployment rate of 8.8% and with the state of Nevada now occupying the top spot at 13.6%, Minnesota’s rate of 6.6% cannot be viewed as anything but positive. Minnesota’s manufacturing sector, which had taken a particularly hard hit, has shown a great resilience with a net gain of close to 8,000 jobs in the past year. And the traditional growth sectors of health care and education continue to add jobs, although not as rapidly as we have seen in the past.

At the same time, most of Minnesota’s contiguous neighbors actually have a lower unemployment rate, with North Dakota leading the nation with a current 3.7% unemployment rate. And with South Dakota at 4.8% and Iowa at 6.1%, that leaves Wisconsin as the only contiguous state behind us at 7.4%. But is the unemployment rate really a good measure economic recovery? I would suggest that at best, the unemployment rate is a very crude measure.

One shortcoming is that the unemployment rate does not differentiate between temporary employment and permanent, full-time employment. And a recent study by the National Employment Law Project reports that more than 20% of the job growth in this recovery is comprised of temporary employment. The rate also does not differentiate between low-medium wage jobs and what I would call a “first-earner income;” you know … the type that you can raise a family on. So clearly, the types of jobs being created can have a big impact on how we view this recovery.

But in addition, there are a number of other forces that are creating headwinds for the Minnesota economy that lead me to believe that while we are certainly not going back into recession, the recovery will be steady, but slow. Allow me to cite just a few:

· First, we have to recognize that the Minnesota workforce is continually expanding. In fact, a certain amount of job growth is required just to keep the unemployment rate from rising further. So as we congratulate the current crop of high school and college students graduating this month (including my daughter) we have to realize the growth in the size of workforce actually works against the lowering of the overall unemployment rate as more jobs need to be created just to stay even.

· Second, we have tended to discount the importance of the residential construction industry and the financial services industry in their contributions to job and economic growth over the past 15-20 years. In fact a recent report by the Federal Reserve Bank of St. Louis documents the reduction of their contributions to both jobs and GDP growth, which will further slow down the prospects of a speedy economic recovery. And while we are now seeing the typical seasonal increase in construction employment in Minnesota, it will likely be a fraction of the job growth we have experienced in years past. That’s not good.

· And finally as I noted in a previous post, we must remember that the overall employment picture of our region is comprised of jobs in the private, public and nonprofit sector. And with the presence of multiple public institutions of higher education, a MnDOT regional headquarters and a large regional security hospital in St. Peter, the Mankato/North Mankato region is disproportionally dependent upon public sector jobs. As a result it is likely that the current mood at the State Capitol will create some additional headwinds for the region as reductions in the public workforce take hold.

So overall, while there are no real signs to suggest that the steady improvement in our economy will reverse, these headwinds noted above may keep the recovery from speeding up as well. In other words, be prepared for an all too slow, but steady recovery.

A Brain Gain in Rural Minnesota?

As demographers see it, much of the history of the 20^th Century in America can be described as a massive rural-to-urban migration. It was in fact this rural-to-urban migration, along with European immigration that provided the labor for the development of our great industrial economy. And after World War II as agricultural technology accelerated the displacement of labor with capital equipment, it freed up even more rural residents to move to urban locations and support the emerging service economy; and later the information economy.

Today, we seem to take it for granted that in most communities across rural Minnesota, a large percentage of the high school graduating class will leave town to go off to college or try to increase their economic life chances in more urban locations. And few places across Minnesota represent this trend more illustratively than the western tier of counties and specifically southwestern Minnesota. For it is here in southwestern Minnesota that the census documents county population decreases of up to 50 percent since 1960 (e.g., Traverse County); and where many of the counties recorded their peak census populations back in the 1930s and 1940’s. Accordingly, for the majority of their current living residents, population decline is the only demographic trend that they have ever known. And given that it is typically the young folks who migrate to urban centers, many have labeled this chronic migration of youth as “The Brain Drain.”

So my ears perked up when I read a recent report authored by University of Minnesota Extension Research Fellow Ben Winchester, who suggests that within this broad pattern of demographic decline, not all age cohorts are decreasing in size. And further, that there are some cohorts that are actually increasing in significant numbers that represent “A Brain Gain” for rural Minnesota. And yes, this pattern is even occurring in southwestern Minnesota.

Winchester’s notion and evidence of a “Brain Gain” is really rather simple to understand. He uses the case of Grant County, MN as an example, where overall population losses of 32 percent have occurred since 1960. Here he suggests that similar to patterns in the past, in Grant County young people continue to migrate out in pursuit of higher education, better jobs and the lights and excitement of urban life. And the Census data seems to strongly support that contention, with significant population losses in the cohorts between 18-30 years of age. But using the same Census data, Winchester also documents substantive population gains in cohorts between the ages of 30-44, as well as between the ages of 10-14.

By now you may be asking what exactly accounted for this sizeable population gain in some selected age cohorts. Through the use of multiple focus groups among these newcomers, Winchester suggests that there are multiple reasons, but one of the primary factors is the desire of those who left a rural community in their late teens and early 20’s to return to their home region a decade or so later. Not surprisingly, now with a spouse and children in tow, many of these former rural residents want their children to experience the good schools, as well as the safe and supportive environment that they had growing up. And it is the presence of these returning newcomers’ children that leads to the gains in the 10-14 age cohort.

Winchester also notes what he labels as “push factors” for many of these rural newcomers; these being the high cost of living in urban areas, congestion, along with the long commuting times that led them to seek a more rural lifestyle for themselves and their family. And somewhat interestingly, several of these newcomers cited their desire and the opportunity to start their own business as a reason to move to a rural community. But most interestingly, these factors were just as important for newcomers who never previously lived in a rural community as it was for the former rural residents.

In looking more closely at Winchester’s study two main thoughts come to mind. First, is that if this demographic Brain Gain is occurring in Grant County MN, it is likely occurring in your county as well. Second, while economic development professionals spend a great deal of time strategizing on how to attract new businesses, I seldom hear enough about well thought-out and focused strategies to attract and retain these newcomers that represent this Brain Gain for rural Minnesota. Winchester not only suggests some targeted strategies that rural regions may want to consider, but he even includes an abbreviated economic impact analysis of the 52 newcomers he interviewed for his study. The results may be surprising to some economic development professionals.

Interested? A copy of the results of Winchester’s focus group research can be viewed and downloaded at http://www.edacenter.org/downloads/Ben_Winchester_Report_2.pdf

The LGA Mess

In his first official veto letter, Governor Mark Dayton noted his objection to the legislature’s proposed cuts to Local Government Aid to cities and counties. Specifically, he repeated his often-mentioned comment that cuts in LGA simply force local governments to increase property taxes; a tax perceived by many as more regressive than other state-collected taxes. On the other hand, proponents of the LGA cuts accurately note that the State of Minnesota is broke and that there was nothing in the bill that requires local governments to raise property taxes. And so the debate continues … Of course the truth is that both sides are right; and like much political rhetoric, there is more interest and concern about “being right” than actually fixing the problem.

Actually, it’s too bad that many legislators today were not around at the establishment of Local Government Aid, nor do they seem interested in a history lesson. For if they were, they would see the similarities in the arguments being made today as they were 40 years ago. LGA was first established in the early 1970s as a key component of what has often been called the Minnesota Miracle of 1971. A decade in the making, the legislation was a response to a wide variety of concerns regarding state and local financing of government and educational services. But foremost in the legislators’ minds was property tax relief. For you see, by the 1960s it was obvious that Minnesota was becoming a patchwork of “property tax rich” and “property tax poor” communities. These inequities led legislators to think about ways to equalize funding to ensure that some level of basic services could be provided through means other than just local property tax revenues.

However, another factor seldom mentioned was the desire of state legislators to prohibit local governments from establishing their own local sales, income or other taxes. In fact in many states local sales and even income taxes were not at all unusual. But here in Minnesota, the perception was that if local governments established these additional taxes, the revenue inequities across communities would likely increase – not decrease. Accordingly, these and a variety of other concerns culminated in the early 70’s to establish a system of state aid that had three core components:

1. A significant increase in state-levied taxes, primarily through sales and income tax revenues;

2. The establishment of a state aid formula to local governments, which reduced inequities by augmenting local property tax revenues; and

3. A prohibition of local governments establishing their own sales and tax revenues without legislative consent. Of course today virtually all of Minnesota’s metro communities now have their own dedicated sales tax … but that’s another story.

Over the subsequent 40 years the LGA formula has been modified a few times, however the general consequence has been mostly to continually increase state aid to local communities, thereby making many communities more and more dependent upon LGA to fund city services. This was especially true in the 1990s. As a result today, for some communities LGA could comprise up to, or even more than half of their general fund budget. And while such a situation puts a community financially at great risk as they now face these proposed cuts, let’s remember that it was state officials, not city or county governments that created this system. As one city administrator from west-central Minnesota candidly questioned, “Why did the state keep giving us more and more LGA?”

So here we are today. After years of creating a dependence of local governments on state aid, the LGA cuts over the past few years, as well as the proposed cuts have quite predictably led to increased local property tax levies. After all, it’s the only consistent source of revenue the legislature allowed local governments to have.

But of course the real question is what do we do now? So here are three things I hope our legislators might consider:

1. First, legislators need to realize that there are some core services that the state needs to ensure all Minnesotans have local access to. Accordingly, LGA should not go away, but rather it should be targeted to those defined core services.

2. Second, local governments need to be slowly weaned off their dependence on LGA. However, this will need to be deliberate, strategic and take some time. Drastically cutting LGA as a way to erase a budget deficit will only lead to higher property taxes and greater fiscal inequities across Minnesota.

3. And finally, legislators need to remember that part of the deal creating LGA was the prohibition of levying local sales and income taxes. If legislators are so quick to cut off LGA, are they equally prepared to unshackle local governments on the types of tax revenues they can collect? It’s time to look before you leap.