Foreword

The normal business cycle downturn that was impacting state revenue worsened after the September 11^th terrorist attack on our country. The budget “short fall” in the state budget will require true leadership by our state officials. It also opens up opportunities to take creative budget management actions that can reduce costs but not necessarily reduce services.

Our new Governor, Mark Warner, and key Senate and House members could be the leaders of an effort to make government work better and work smarter as they strive to balance the state’s budget without undue hardships.

With state revenue significantly dropping at this time, it is critical that better budget management takes center stage. This makes a lot more sense than across-the-board budget cuts that many are advocating.

Businesses have successfully downsized, finding they can operate successfully with fewer employees and, in many cases, contracting out work that was previously done in-house. Many state and local governments across our country have taken the object lesson from business and brought better budget management and increased productivity to their agencies and offices. The federal government has openly moved to save money through contracting out those activities that can be handled more efficiently by the private sector.

This new Thomas Jefferson Institute study, “Competitive State Government in a Time of Uncertainty,” is a road map to closing the current budget deficit and saving a huge amount of money in our future state budgets while maintaining desired services. These savings can also be used to fill the “gap” in the budget that our state now faces and in future years the burden of government on our people would be kept in check.

The ideas presented in this study deserve careful consideration by those in leadership positions who must determine how our state’s spending is best allocated These ideas open the discussion and will hopefully bring all parties to the realization that there are more efficient ways to manage this state’s budget than are being used today.

Some in our government will say, “Oh, this can’t be done.” These experts almost seem afraid of opening serious discussion on how to make our state government run more efficiently. But there are other experts here in Virginia and all over this country who have participated in this type of “better practices” analysis and implementation. Business leaders and key government managers could be brought together with these experts to totally review our state government’s operations.

The ideas in this study on combining agencies, contracting out work, doing the job more efficiently and at reduced cost should be seriously considered by those in leadership positions in our state. Some of the ideas presented in this study – those calling

for the outright abolition of specific offices – may not fly for political reasons. But the discussion of the proper role of government needs to be raised, especially in times such as this.

Our state’s budget is chocked full of examples where significant savings could take place. These savings can usually be found without adversely affecting those who are being served through government programs. And those who rely on government services would likely be better served with more efficiently run programs.

Savings Possibilities Are Not Hard to Find

A good example of the budget savings available is if the state contracted out the jobs that state agencies have already identified as being available in the private sector.

Such efforts save about 30% according to a series of various studies. And the state agencies themselves have identified hundreds of positions that can be contracted to the private sector. Using a simple formula that allocates each state job as paying $30,000 a year and taking a reasonable savings of 30%, the state could save as much as $676 million over a two year period. This savings is worth a very careful analysis by our state legislature. See Appendix I.

Budget Savings Outlined in the Study

Our next Governor and our General Assembly leaders should work together to make current spending more efficient. These actions could bring the Executive Branch and the Legislative Branch into a closer working relationship and avoid the acrimonious debate of the last session.

This study by the Thomas Jefferson Institute, “A Competitive Government in the Time of Uncertainty,” outlines where hundreds of millions of dollars each year can be saved through reasonable budget management. The projected savings in this report are most likely less than what will actually be the case. The author used conservative savings figures in order to keep the total savings numbers at a reachable level.

Two budget saving methods are outlined in this study.

First, the author shows what the current biennial budget would have been in each department analyzed if that budget had only increased by the rate of inflation and population growth using the last two-year budget totals (1998-2000) as the base. This formula keeps the burden of government on our citizens at a constant level. The formula used was to take the 1998-2000 biennial total budget, multiply it by 7.744% (the two year increase in population and inflation), and determine the difference between this calculated number and the approved budget for the 2000-2002 budget. The 2000-2002 budget is $1.7 billion in excess of this formula.

This budget management concept, limiting the growth of state spending to a formula that combines population and inflation increases, has been promoted by State

Senator Warren Barry, Delegates Dave Albo and Bob Marshall. Had The Virginia Investment Act been law when the 1998-2000 budget was approved, the current budget crisis could have been avoided. Looking at the chart on page 7, of this study the reader will see that using this budget control formula would have saved $1.7 billion And if all education “savings” had been left in that department, there still would have been enough money to cover the current shortfall.

Second, the author shows what the current state budget would have been had the management reforms she outlines in this study been put into place. These actions would have “saved” at least $2.7 billion. Again, the current budget crisis could have been avoided through better budget management.

The entire budget for the departments analyzed is the focus of this study: both the General Fund and the non-General Fund. This is because efficiencies in the way government programs are run should not be limited to only the General Fund

This study shows the reader how much money could have been saved in the current budget and gives a good idea of what could be saved in the next two-year budget.

If the savings at the state level through the budget management ideas outlined in this study are combined with the spending limitation formula used to limit the growth of future budgets, the combination could provide even larger long-term savings that could be used for the betterment of our state.

Limiting state budget increases to some pre-determined formula is not something new. Indeed, several states have placed limits on the growth of their state budgets and Virginia should consider doing the same. Those states include: Arizona, California, Colorado, Delaware, Hawaii, Idaho, Louisiana, Massachusetts, Michigan, Missouri, Montana, Oklahoma, South Carolina, Tennessee, Texas, Utah and Washington. Each of these state’s spending limitations vary, but they have placed some restrictions on their budget growth. Virginia should consider doing the same.

The “extra” money that would be created from these budget management techniques could be used in the current economic climate to “close” the budget shortfall. When our economy begins to grow again, the available budget savings can be earmarked for those significant needs facing our commonwealth such as transportation and school construction and the purchase of open space.

The author did not review the Department of Information Technology. That is because the results of contracting out this service in other jurisdictions is mixed But the pending results in Pennsylvania and in San Diego will give Virginia the opportunity to look at the results and determined if this department can be significantly contracted out to the private sector.

in

Nationally Recognized Computer Program Available

The state sits on a most valuable resource that it does not take full advantage of in its efforts to reduce the cost of government. This is the legislature-created Commonwealth Competition Council and its “nifty” software program that is ready for use by all state agencies and local governments

The Commonwealth Competition Council has developed a software program that allows state agencies to analyze their true costs when compared to doing the same job in the private sector, This software package, called COMPETE, is available to state agencies and to our local governments. It has received national awards and localities around the country are using it to determine if they should seriously consider contracting out various services or how they can improve government performance.

Our own Auditor of Public Accounts has recommended that our state agencies use this COMPETE software to determine the efficiencies of their operations. And if they don’t use COMPETE they have been encouraged to develop their own program for clear and proper comparisons with the private sector (a silly alternative when an awardwinning software package exists right here in our state government).

Our new Governor should require all agencies to run this program and to coordinate this effort with the Commonwealth Competition Council.

Selling State Surplus Assets

In taking a look at the recommended savings proposed by the author of this study, it is interesting to note that her savings total $2.7 billion in the current biennial budget and only $134 million of this is from closing specifically identified agencies and $479 million from selling the state-owned liquor stores.

Even if no offices were closed, and the ABC stores continued as they are today, there could still be a savings of more than $2 billion over a two-year period. If the new Governor and the General Assembly only saved half this amount, it w ould be a most significant savings in the cost of state government.

And these budget savings do not include the one-time income that could be received by our state by selling various assets that are currently on the books For instance, if the mental health hospitals are combined as suggested by the author, and if half the properties were sold, tens of millions of dollars could be generated.

Collection of Accounts Receivables

Accounts receivable due our state that are more than 90 days old have more than doubled in the past six years. Additional income can be generated if the state’s accounts receivable were turned over to the private sector for collection after they become 180 days past due. Some estimates indicate that the state could generate an additional $ 170-

$200 million a year by taking this seemingly logical step. One way to accomplish this is to allow the various agencies who are owed these funds to have 90-180 days to collect them or the receivables will be turned over to private collection agencies and the net money generated would go into the General Fund. See Appendix II.

Summary

The budget shortfall in the next two-year budget, estimated at $1.2 billion, could be covered through the sale of the excess assets owned by the state and the sale of the ABC stores. In addition, the more efficient collection of accounts receivable would generate an additional $170-$200 million and an annual increase in collections could be realized compared to past years. Since our budget shortfall will be short-lived, the sale of assets to cover the shortfall makes sense. And that would give the General Assembly the time to carefully and fully consider the better management ideas brought forward in this study on the state budget.

The Thomas Jefferson Institute provides this budget analysis in an effort to bring better budget management to the forefront of our fiscal debate. There are experts all over the country who are willing to help Virginia craft these budget management techniques. The General Assembly’s own creation, the Commonwealth Competition Council, is a huge resource for this purpose.

Our new Governor should appoint a Blue Ribbon Commission to take a serious look at all departments, agencies, and commissions. A Democratic Governor appointing a “Virginia Grace Commission” could have a huge impact on producing a more efficient and less costly state government.

This study is provided to the leadership in Virginia – political, business, community and media leadership – in order to generate serious discussion. This study does not necessarily represent the views of the Thomas Jefferson Institute or its Board of Directors. Nothing in this report is meant to influence pending legislation.

Michael W. Thompson

Chairman and President

Thomas Jefferson Institute for Public Policy

December 2001

Introduction

by

Paul Brubaker

(President, Commerce One, eGovernment Solutions Inc. and former Republican Staff Director of the U.S. Senate Subcommittee on Oversight of Government Management)

The next governor and General Assembly of the Commonwealth of Virginia will be faced with a difficult financial situation. Due to the national economic downturn, Virginia will realize a significant reduction in tax receipts as well as other revenue. Consequently, the pressure to reduce the cost or government will be enormous. Some will advocate increased taxes as a way to make up for the shortfall – a practice that will likely exacerbate the very problem the government is trying to address.

Winston Churchill once defined a pessimist as one who sees danger in every opportunity and an optimist as one who sees opportunity in every danger. Those who choose to see it will find considerable opportunity in the coming financial challenges facing the Commonwealth of Virginia. There will be an opportunity to lead Virginia by challenging assumptions regarding how the Commonwealth delivers public service, as well as an opportunity to restore confidence and dollars to the taxpayers of Virginia by replacing an antiquated and inefficient 20^th century government paradigm with an agile and responsive 21 * century government.

The study you are about to read is an important first step is realizing the promise of changing the way the Commonwealth governs. First, it demonstrates how the Commonwealth can save money to address its looming fiscal crisis. Second, it questions underlying assumptions regarding the way we approach the delivery of public service. Finally, and perhaps most importantly, it makes some subtle, and not so subtle suggestions that could result in dramatic management improvements in Virginia’s government.

Financially speaking, the Commonwealth has always been well managed in the context that revenues exceed expenditures. The state is not excessively burdened by debt and it has a history of using low taxes to ensure a large and healthy tax base. Given this tradition, there has been little to no incentive to undertake a critical examination of the expenses or for that matter, to even ask some fundamental questions regarding the missions and service delivery strategies to achieve public objectives. Some efforts during the last two administrations have attempted to address management issues but have fallen

short or backed off when either unintended consequence, or worse, when unanticipated opposition developed.

Although we can disagree on what is the proper structure for conducting budget reviews the game almost always boils down to a struggle for money with little or no critical examination being conducted on the underlying assumption on how to best perform the mission. The struggle, or process, begins when a well-meaning bureaucrat asks for an increase over their last budget based on increased cost and perhaps some expansion of service. An analyst, working for the executive branch “scrubs” the numbers to arbitrarily get them to fit into some budget limitation – the result goes into the executive branch budget submission to the legislative branch.

Sometime after the budget submission, an analyst working for the legislative branch fits the executive branch requests into its budget construct that reflects legislative branch priorities. Often this results in a budget that bears little to no resemblance to the executive branch submission. Once both sides have staked out their budget positions, a debate ensues between the branches that focus on the differences between what are essentially the two proposals until a compromise is struck. The troubling issue is that the budget review and debate is conducted in the context of the original submissions – rarely, if ever, are underlying questions appropriateness of mission or specific performance measurements ever addressed. It’s a process designed to produce a budget. It is not a process designed to ensure good management.

Good public management requires that we revisit what we do and why and how we do it. Most, if not all of Virginia’s departments and agencies grew extensively during the 20^th century and are now struggling to face information age challenges with stovepiped, inflexible, industrial age bureaucracies. The Commonwealth needs a comprehensive review of all state department, agency board and commission missions to ensure that they are clear, concise and relevant to the challenges and requirements of the 21^st century. Responding to the new needs and requirements as well as creating a service delivery mechanism with the speed and agility to handle emerging problems will require a fundamental change and restructuring of what we do today.

Changing the way that government does business is not for the weak of heart.

The great Italian philosopher Niccolo Machiavelli accurately observed “there is nothing more difficult to take in hand, more perilous to conduct, or more certain in its success, than to take the lead in the introduction of a new order of things.” These words are as true today in the Commonwealth of Virginia as they were in 16^lh century Florence.

Native Virginian and President Woodrow Wilson summed it up even more succinctly: “if you want to make enemies, change something.” Yet we must change if we expect to provide for our citizens in the future.

Change is precisely what this report is about. It is about questioning the assumptions that the baseline budget really reflects the priorities of Virginians. Many of the departments, institutions, boards and commissions funded by the Commonwealth may have outlived their usefulness. Many boards and commissions were created for no real reason other than political patronage while others have outlived any useful purpose or are redundant, irrelevant or otherwise unnecessary. Yet we continue to pour money into inefficient, ineffective and outmoded means of delivering public service because threats to the status quo generate a hostile and hyperbolic reaction on the part of those dependent on the spending, Now more than ever we must heed the warning posed in the early 19^th

century by Alexis deToqueville when he said that, “democracy itself is threatened when the constituents can vote themselves the largess of the public treasury.”

It is against this backdrop that it is necessary, indeed critical, to undertake a comprehensive review of how we are managing Virginia’s government. Specifically, we must challenge old assumptions of need and effectiveness. Simply because an approach worked in the 1950’s and 1960’s does not mean it will work today We must also take advantage of expertise that exists in the private sector to help solve public sector challenges. Specifically, we must outsource non-core back office support work to firms that perform these functions as a core competency and use performance based contracts to hold these firms accountable for results. Additionally, we should also explore outsourcing of some core functions such as road maintenance and correctional facilities.

Many of the recommendations in this review result from considering three basic questions: 1) does this program meet a necessary and critical need; 2) is the public sector the best means for performing this function or should it be privatized or left to other private entities to perform; and 3) if the public sector is indeed an appropriate place to perform this function, can it be more effectively be performed by the private sector⁰ These questions should be required of every publicly funded program throughout the Commonwealth to ensure the most efficient and effective use of public funds.

The results contained in this report are a good start at understanding the benefits of questioning the underlying assumptions regarding government programs. We need more, not less, of these critical examinations to determine if we are spending the public treasury in the most efficient and effective manner. This exercise is not just about cutting unnecessary or ineffective spending, it will also enable us to identify sources of funds to put against higher priority and presumably higher value programs. In the future, it would be desirable to see the state sponsor a comprehensive review of all state department, agency board and commission missions to ensure that they are clear, concise and relevant to the challenges and requirements of the 21^s1 century.

Over almost four hundred years, Virginians have maintained a strong tradition of leading by example. From Jamestown to Williamsburg to Richmond we have maintained this leadership role by willingly and rapidly accepting and adapting to changing physical and political environments. As we enter the new century, we will need to draw on this tradition by creating new and innovative approaches to addressing our public challenges. The next Governor and General Assembly will need to jointly explore new ways and new ideas to successfully meet the challenges of the new century.

Executive Summary

Virginia’s next governor, along with state senators and newly elected state officials in the General Assembly, have an enormous opportunity to rethink government. By reassessing the role of state government, reforming inadequate programs and services that fail recipients and taxpayers, eliminating programs that duplicate other programs, and allowing for competition in the provision of many services, the Commonwealth can

solve the state’s current budget dilemma and still meet the goal of eliminating the state’s car tax.

One way to address the current budget quagmire is to put the breaks on the spending of the last four years and start taking firmer fiscal control of the state budget. During the economic boom of the last few years, spending in the state dramatically increased; specifically, total expenditures rose from $17 billion in fiscal 1997 to $23.7 billion for fiscal 2002, an increase of $6.7 billion, or 39 percent.¹ According to economist Stephen Moore, this is the fastest growth rate for all but four states.² Over this period, spending growth has also far outpaced the state’s population growth, personal income growth, and inflation, as the following graph shows:

Virginia Budget Growth Vs. Population Growth, Personal Income Growth, & Inflation

1997    1998    1999    2000    2001    2002Source: Virginia Department of Planning and Budget, Virginia s Budget Database; U S. Census Bureau, Statistical Abstract of the United States: 2000, p 23, 487; U S Bureau of Labor Statistics, Consumer Price Index, and the U S. Bureau of Economic Analysis, Regional Accounts Data: Annual State Personal Income

The fastest growing areas of the budget are Higher Education, K-12 Education, Corrections, Mental Disability Programs, and Medicaid. The following shows percentage growth for each of these items from 1995 to 2000:

Budget’s Fastest Growing Items, 1995-

2000

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Source: Virginia, Final Report of the Governor’s Blue Ribbon Commission on Higher Education, February 3, 2000.

This report, an update to the 1997 Thomas Jefferson Institute report. Downsizing State Government: Doing Better with Less, shows how lawmakers can bring the budget under control without sacrificing needed programs, through one of the following two options:

1) Limit budget growth to the rate of population growth plus the inflation rate, as numerous states have done. If lawmakers believe any agencies or programs need to grow beyond this level, they would need to make corresponding cuts in other programs. Applying a growth rate of 7.74 percent to the FY 2001 and 2002 biennial budget,³ including both operating dollars and capital projects, would

yield a biennial savings of $2 billion. This concept has been incorporated in the Virginia Investment Act that has been sponsored in the State Senate by Warren Barry and the House of Delegates by David Albo.

2) Rightsize government programs. In this report, rightsizing refers to one of the

following:

•    Outsource various services, including commercial activities, that can be better handled through the private sector. This can be done either by contracting the service directly to a private contractor, or having the state compete with the private sector for the contract. Virginia’s Commonwealth Competition Council has made an inventory of all state government commercial activities, based on a statewide survey circulated to all state agencies.¹ Applying an average state salary of $30,000, which includes all government employee benefits, and a conservative savings rate of 30 percent,^4 5 Virginia potentially would save $675,994,213 for the 2000-2 biennial budget by outsourcing these activities.⁶ Assuming only a 20 percent savings rate could yield a biennial savings of $450,662,808. These savings by FTE position need to be carefully “bid out” and seen if such savings are possible. Individual savings by FTE position may be less or more than the averages mentioned above. But a careful analysis of these possible savings makes sense,

•    Consolidate government programs that are duplicative.

•    Eliminate programs that duplicate those provided by the private sector or local government and/or are not a proper function of state government.

•    Revamp programs that have failed to serve Virginians.

Through various recommendations provided in this report to rightsize programs

and services, the author calculates a biennial savings of as much as $2.5 billion.

Note: The author wishes to thank John R. LaPlante for his expertise and tireless assistance with this report.

Recommended Savings to the 2000-2002 Biennial

Budget

GovernmentOffice	Approved 2000-2002 Biennial Budget	Recommended Savings: Increasing Spending at Population Growth Plus Inflation7 8	RecommendedSavings:Rightsizing
LegislativeDepartment	$111,783,396	$2,537,595	$ 14,709,270
Office of Administration	$1,197,622,410	$78,971,111	$ 17,902,777
Office of Commerce and Trade	$1,442,640,476	($5,189,350)	$167,478,385
Office of Education	$18,430,945,538	$300,778,183	$312,161,842
Office of Health and Human Resources	$11,692,734,337	$716,558,277	$892,886,208
Office of PublicSafety	$3,900,247,632	$415,379,566	$547,764,185
Office of Transportation	$6,315,761,836	$220,510,093	$794,538,995
Total	$47,871,727,928’	$1,729,545,475l,)	$2,747,441,662

In the analysis that follows, the last budget and current budget are analyzed in an effort to figure out how much potential savings are available through two management techniques: limiting the growth of the budget to the rate of population growth and inflation – indicated with the designation of “P+I;” and the rightsizing suggestions that are detailed in this study – indicated with the designation of “R.”

The formula used to determine the “P+I” result is to multiply the previous budget for 1998-2000 by 7.744%, the increase in population and inflation for this two-year period. And then the difference between the actual budget and the “would be” budget had it increased by this formula is the savings that is designated.

%

The budget proposal for the next two-year budget has yet to be presented by our Governor. These budget numbers will be changed by the next Governor and by the General Assembly. The savings that are outlined in this study are a road map for our elected leaders to use as they strive to make Virginia’s state budget more manageable.

8

1

Virginia Department of Planning and Budget, Virginia s Budget Database. See http://www.dpb. state, va. us/budget/vabud/vabud.cfm.

2

Stephen Moore, “The Governors’ List: What ‘Too Much’ Success Has Done,” National Review March 5 2001.

3

7.74 percent is the annual population growth plus CPI for 2001 and projected for 2002. Data from the Virginia Senate Finance Committee.

4

The Council defines a commercial activity as “an activity performed by or for government that is not an inherently governmental activity and that is or could be obtained from a commercial source. Commercial activities represent competitive government opportunities.” For a listing of all state government commercial activities identified, see Appendix. Also available at http://www.egovcompetition.com

5

Most commercial activities that arc outsourced to the private sector yield an average savings of 30 percent. See the Executive Office of the President, Office of Management and Budget. The President’s Management Agenda: Fiscal Year 2002, p.17; and Ronald D. Utt. “Improving Government Performance Through Competitive Contracting,” The Heritage Foundation, Backgrounder, No. 1452. June 25, 2001.

6

While the list is comprehensive, it is important to note that the list should be reviewed by the state

legislature. These are potential savings, meaning they could run higher or lower than the 30 percent average.

Because no amendments were passed by the General Assembly in the 2001 legislative session, the two-year budget passed in 2000 remains in effect.

The base year is the actual 1998-2000 biennial budget. The growth rate applied is 7.74 percent, the annual population growth plus CPI for 2001 and projected for 2002. Data from the Virginia Senate Finance Committee.

7

his number represents the total approved biennial budget for 2000-02, including government offices not covered in this report.

8

This number represents the total savings that could be achieved for the 2000-02 budget by limiting total

state expenditure growth to population growth plus inflation, including for government offices not covered in this report.