Thursday, January 20, 2011

Early Indications January 2011: The Downsizing of the State?

Data points from all over converge to announce a time of reckoning:

-According to the Pew Center on the States, the 50 states collectively have $3.3 trillion of pension obligations, with about a third, $1 trillion, unfunded.

-Those pensions can be extremely attractive: here in Pennsylvania, one state senator with 39 years of service will be paid a lump sum of $331,000 (three times his salary) then about $139,000 annually for the rest of his life.

-In part because the recession has reduced states' revenues, 48 out of 50 states faced budget shortfalls in 2009 and 2010; 46 had gaps this year. (The exceptions were resource-intensive Alaska and Montana, along with North Dakota and Arkansas.) The 2010 state budget shortfalls totaled $191 billion.

-Illinois, which ranked dead last in pension funding in 2008, just raised individual income taxes a full 75%. The state legislature also approved the issuance of $3.7 billion in bonds to more adequately fund pension obligations.

-At UCLA, the dean of the Anderson school of business is attempting to take the school private: state budget cuts leave California's support of Anderson at about 6 cents on the dollar. By withdrawing from the state system, Anderson can set its own tuition and pay superstar faculty superstar salaries, thus enhancing its ability to attract top talent. UCLA's board has passed the proposal, which could potentially be ratified by this summer.

-The U.S. government has a statutory limit on the amount of debt it can issue. That limit is close by being reached. If Congress does not raise the limit, some government activities will shut down, as they did in 1995.

-At all levels of government in the U. S., the wage differential of the 1990s has reversed and public-sector workers earn, on average, 30% more than private-sector counterparts. In addition to being paid more, government workers' health care, vacation time, retirement, and other benefits are typically more generous than in industry.

-Underperformance is seldom addressed with meaningful action: firing either incompetent or unaffordable public workers is far more difficult than doing layoffs in the private sector when companies or whole industries face transitions in technology, customer behavior, or competition. (According to The Economist, the Los Angeles school district spent $3.5 million trying to fire 7 underperforming teachers and succeeded with only 5. As the district's entire teaching force numbers 33,000, the effort was aimed at 1/50th of 1%. By contrast, private-sector organizations routinely churn the bottom 10% of performers.)

The Inevitable Downsizing

In the private sector, the cost of unsustainable labor arrangements, defined as payroll costs out of sync with revenues, is layoffs. While Ford can claim a lot of positive news in 2011, for example, the past decade was tough: total auto industry layoffs after 2006 were estimated at 200,000 jobs, and there were tens of thousands of jobs cut at Ford earlier in the decade as well. As services comprise more of the U.S. economy, manufacturing jobs are changing, and the big labor unions that represented these workers in the steel and auto heyday shrank after 1973, from about a quarter of private sector workers to less than 10% in 2010.

According to the Bureau of Labor Statistics, however, government employees, a key component of that services workforce, increased in membership from 23% to roughly 38% in the 20 years following 1973, and that membership has stayed pretty constant. But just as the auto industry painfully discovered after 2000 that it could no longer afford the small-C contract it had agreed to with the unions in the 1950s and 1960s, governments at every level are coming face to face with deficits that derive substantially from labor costs: expensive pensions and expensive current workforces (with expensive health care) that often lack performance accountability are and will continue to be unaffordable.

In short, given a protracted employment recession (and thus a downturn in both taxable income and taxable spending for revenue generation), governments are being faced with truly hard choices. At the federal level, conservative legislators are proposing drastic cuts in the defense budget, previously an approach that ideology would not permit. As he confronts a $28 billion deficit, California governor Jerry Brown (like his counterparts elsewhere) is proposing deep, politically and humanly painful cuts in the social safety net, in education (the community college budget would be reduced by $400 million), and in public safety.

U.S. governments at every level are facing their auto industry moment. About 100 miles from where I write, the Pennsylvania city of Harrisburg teeters on the edge of bankruptcy; it would be the biggest municipal entity to enter that process since Orange County in California lost billions of dollars in pension investments in 1994. While the likelihood is higher for some European nations than in most U.S. entities, the prospect of governments in any country defaulting on their obligations is obviously disturbing to markets and individuals alike. Whether it is debt, or pensions, or current expenses, governments are being forced to cut spending in bold strokes.

Government on the technology landscape

What does that have to do with a technology newsletter? Because the world we are in and entering is not the world that existed when those budgetary assumptions were being formed. The process of resizing government thus needs to begin with a look at what governments can and need to do, as well as how they do it. Furthermore, there are tasks that at one time were essential, but technological obsolescence is slow to alter governments. Thus at least five buckets of questions need to be asked: my topics under each heading are merely suggestive.

1) What must government do, and how can other entities help deliver necessary services?

This is a big category, obviously, but maybe not as big as it once was. Funding bridges, inspecting food and oil wells, testing new drugs, defending the nation -- lots of government tasks cannot go away and some may need to get bigger. At the same time, for-profit universities and hospitals might be better ways to approach some facets of education and health. At the primary and secondary levels, the National Home Education Research Institute asserts that more than two million U.S. students are home-schooled. Both schools and homes can have their place as loci of education, but the fact is that in many locales, the schools are no longer good enough, and parents have more resources than ever to meet the need. Some churches have proven effective at delivering social services, though of course issues of evangelization and discrimination can be tricky. Prisons, several types of security services, school cafeterias, and many other functions are outsourced or even privatized; perhaps more activities should be considered as well.

2) What can government stop doing entirely?

Agricultural extension agents provided a valuable function in their day. Today, however, if a farmer sees a pest or a leaf condition, his or her first stop is likely to be the Internet. The state of California is attempting to get out of the incarceration business for low-level offenses, shifting responsibility for these to the local level. Republican legislators are asking, sensibly, about federal support for rail transportation, which is expensive, especially when the benefits are highly localized. Telecommunications regulators were a necessary counterweight to a monopolistic AT&T, but now that wireline telephony participation is dropping and all segments are intensely competitive, the market can do much of what 50 state and one federal regulator did. California, to take one example, administers a billion-dollar universal service fund, dedicated, among other things, to "ensuring basic telephone service remains available and affordable to all Californians regardless of geography, language, cultural, ethnic, physical or income differences" -- even if fewer people than at any time in more than 50 years want that service.

3) What is the right level of organization?

The size of administrative units is typically a historical accident. Whether those units are currently the right size is, or should be, open for discussion. Water, sewer, fire, police, school, and recreational districts are rarely coherent. How big should a town be? When many towns are contiguous, why does each need a school superintendent (often with only one high school, which has at least one principal), a mayor and/or town manager, a chief of police? What is the optimum size for a school district, a fire department, a state park in a given part of the country? Most important, what government entity can mandate that other units consolidate, disband, or otherwise change shape?

4) How can interested parties self-organize?

On Wikipedia's 10th birthday, it's worth asking what other efforts formerly undertaken by government might be better accomplished by interested citizens. Mash-ups are one easy example: given good clean data (the collection of which remains an essential task of government), crimes, potholes, economic opportunity, underperforming schools, and other opportunities for improvement can be identified by the people. Noise measurements (near wind farms for example) are being crowdsourced. People can also organize on the revenue side: in Mill Valley, California, a community foundation has existed for nearly 30 years to supplement tax funding. To date the organization has raised more than $14 million -- that's a lot of bake sales and charity auctions. Similar parent-run organizations exist in many towns, and the question is what will mobile coordination and payment platforms mean for the future of such efforts.

5) How can government do what it needs to do, more efficiently?

IT in government remains a sore subject. President Obama's Chief Information Officer, Vivek Kundra, recently put forth a 25-step plan to reform federal IT management.* Many of the items are broad and seemingly self-evident to anyone familiar with industry ("consolidate data centers" and "develop a strategy for shared services" for instance). The fact is, however, that industry does not follow federal acquisition or implementation practices; getting federal IT to perform at a reasonable fraction of an Amazon or FedEx would be a massive achievement. Many of the most notable IT project failures of the past decade are government implementations: systems development disasters at the U.S. Census and the FBI are prime examples of the performance gap.

Compared to customer service in travel, banking, shopping, or information businesses (iTunes, anyone?), finding even basic information on most government web sites can be painful. Transparency can be difficult to track down. Control of bills passing through legislation is a key perquisite of power, and holding up the process with committee hearings that happen very slowly and/or erratically is common, so clear, open calendars are not always the rule. Like legislatures, regulatory bodies can be opaque, in that budget and headcount information is typically difficult to obtain, unlike the information readily available in a private company's annual report.

If information can be hard to find, the state of on-line transactions is even more dismal: compare getting a fishing license or renewing other permits to checking in for an airplane flight. While efficient government looks much better to citizens on the outside than to gainfully employed government workers on the inside of slow-moving bureaucracies with no incentive to improve customer service, perhaps the current crisis can provide the impetus for real change to commence. In a sector that lags private industry by many performance metrics, a combination of new tools and more focused motivation has the promise to improve service, cut costs, increase accountability, and enhance security.