Category Archives: Interviews

Dealing with a State Budget Crisis: An Interview with Jim Johnson

Interviewed by Gray Wilson

Jim Johnson is a Visiting Professor of the Practice at the Sanford School of Public Policy at Duke University. Mr. Johnson is also a partner in Blount Street Advisors, a Raleigh-based government relations and business consulting firm that he founded in 2006. Until December 2005, he was the Director of the North Carolina General Assembly’s Fiscal Research Division, which is the legislature’s nonpartisan budget and finance policy staff. Before becoming director in 1999, he worked at the Division on budgetary and policy issues in K-12 education and in health and human services. Mr. Johnson is a graduate of the University of North Carolina-Chapel Hill, where he earned a Bachelor of Arts in political science, and of North Carolina State University, where he earned a Master of Public Administration. He has also participated in the Program for Senior Executives in State and Local Government at the Harvard Kennedy School of Government.

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I recently spoke with Mr. Johnson about his insights into the budget crises currently facing North Carolina and other states across the country. In the following excerpts, he discusses government employee pension funds, revenue-side solutions, the effects of the crisis on local governments, the role of the federal government in dealing with the crisis, and privatization.

 

—Government Employee Pension Funds[i]

 

GW: Dealing with state employee retirement plans seems to be a relatively universal problem across states.

JJ: Well, I think the problem isn’t the same in all the states, number one. It’s not the same in North Carolina as in, say, Illinois. North Carolina’s pension fund is currently funded at approximately 95-100 percent of its projected liabilities to current and future retirees–and there’s a story about how it got to this level of funding. There were decisions made a couple of decades ago to reduce the unfunded liability, and successive Governors and the legislature stayed on that path. The reason we’re somewhat below 100 percent right now is very straightforward. Number one, the stock market went down. Number two, a very conscious decision was made in 2001 to reduce the contribution to the pension fund, because at that time the system was funded in excess of its liabilities, at 104-105 percent. I was the director at the Fiscal Research Division at that time and agreed with the decision.  The legislators saw temporarily reducing the funding as a trade off against cuts in other areas of the budget, specifically education and human services. The problem is that the state did not return to a higher contribution rate after recession ended and revenues increased again.

JJ: I think the issue of defined-benefit versus defined-contribution is somewhat of a separate policy question from the funding of liabilities.[i] There are good reasons . . .  to argue that you ought to go to defined-contribution. The major reason is that it’s portable, and [young professionals don’t] think you’re going to work anywhere more than five years in a row, and you can’t take a defined-benefit with you to the next job. So there’s an argument that the defined-contribution plan benefits your younger employees. In the long run a defined contribution plan gives you better control over your costs because the employer’s liabilities do not exceed the dollar amount provided to the employee – there is no guaranteed benefit.

JJ: If you actually run the numbers in NC the transition costs to a defined- contribution would probably be greater in the intermediate term than the cost of the defined benefit plan alone, because of the need to fund both plans. Now that might be an expense you want to incur, for good policy reasons, but the transition costs have to be funded. If you cap the defined benefit retirement system and say that nobody can qualify for that plan who is not currently vested, then you are operating two programs until all of the beneficiaries of the defined benefit plan die. When I came to work for the General Assembly in the mid 1970’s the state operated a retirement home for the widows and daughters of Confederate Veterans. Liabilities can last a long time.

GW: Do you think NC’s experience in dealing with the pension plan has been different because its state employees don’t have collective bargaining rights?

JJ: Probably. . . . The legislature has maintained tight control over COLAs [Cost-of-Living Adjustments], so there is no statutory right to an automatic COLA increase in the state retirement system. There are two explanations for that. You might say “Oh, well that’s just great budgeting.” True. Well it’s also great politics. Why is that? Because if you create by statute an automatic COLA, the employees are going to be back saying, “Well, what have you done for me lately?” And they forget that you’ve given them the COLA. On the other hand – some very clever retail politicians figured this out – if we make the employee groups come to us every year, (a) we don’t have to give them as much because the first thing they’ll have to do is to spend their political effort to get the COLA, and the second thing is that we can control the cost. But it was as much political as it was good budgeting. But it’s good politics not to give away the COLA, so that you can give something away every year – or not give it away every year to control your costs. It also turns out that these same politicians created in statute and in the House and Senate rules a system that requires two actuarial estimates for the cost of any bill that makes changes to the state or local government retirement systems. These actuarial fiscal notes must be complete before the bill is considered.

COLAs also lead to a very interesting question in North Carolina and in a number of other states about implied contracts in the public sector. The legal theory of implied contracts in North Carolina is present in something called the Bailey case.[ii]   The N.C. Supreme Court said there was an implied contract that  retirement benefits would not be taxed, and therefore the benefits of employees who were fully vested in 1989 were exempt from state income tax. In my opinion the Court should not have injected itself into what is essentially a tax policy issue that properly was the responsibility of the General Assembly and the Governor.

The doctrine of implied contracts is not unique to North Carolina. In Colorado, where the legislature has tried to take back the COLA statute, apparently attorneys for employees are arguing against the statute on the basis that once you have granted a COLA by statute that the legislature cannot repeal that statute. So I think that what [the North Carolina legislature] avoided having to deal with that doctrine on COLA. There’s a debate this year as to whether retirees and employees can be required to pay for some portion of their health insurance cost. If the bill passes there will probably be litigation based on the implied contract doctrine.

But I think if North Carolina had collective bargaining, there would probably have been bargaining around things like automatic COLAs. That would have been very logical for the employees’ associations – teachers, state, employees, and retirees. The legislature so far has resisted, and I think that’s pretty well dead now, maybe for the next decade.

 

—Revenue-Side Solutions—

 

GW: What’s the role of revenue-side solutions in solving the state budget crisis?

JJ: Well, let’s go back to the question of what caused the crisis. The problem clearly is that the revenue has dropped–especially sales and personal income taxes. It’s not just all spending.

With the sales tax one of the big issues in every state is whether you tax services, and how you might do that. Some states currently tax services more than others. North Carolina does it only a little. Some states like Florida attempted it unsuccessfully. Texas applies the sales tax to a fair amount of services. So I think that the restructuring of the state sales tax to broaden the base is going to be a continuing issue. . . . Interestingly enough, some Republicans are beginning to talk about it, and they talked about it during the last election. They think about it as broadening the revenue base, but setting the rate so that it is revenue-neutral. The projection of a revenue-neutral rate for services that are not currently taxed that is a very serious technical challenge. The current majority in the North Carolina legislature doesn’t see increasing taxes as an option. It’s possible that in the next elections in some states one of the issues will be tax reform, including a sales tax on services. We will also likely see a continued debate on a sales tax on internet purchases, with the on-line sellers like Amazon continuing to resist this effort, and the retail merchants with a bricks and mortar presence supporting the application of the sales tax to decrease the on-line seller’s comparative price advantage.

 

— Local Governments—

 

GW: Are local governments getting the short end of the stick in all of this?

JJ: Yes. A couple of things are going to happen.

Since most of the state budget is in education, as state aid to public schools and community colleges is cut, it will be the local school boards–because of the way that education is governed in this state– who are going to be responsible for firing teachers. . . . The buck will stop at the local level with the school boards and the county commissioners.

At the local level the values of commercial and residential property that are subject to the property tax have dropped dramatically. The mantra on Wall Street was “Housing prices have never dropped more than five percent two years in a row since the Great Depression.” Well they did. What’s happening now is that–and it’s just beginning to play out in different counties in North Carolina, and across the country–as property is revalued over the next few years, the property tax base, which makes up most of the local government revenues in this state, is going to shrink. If you look at Florida, Nevada, and some of the beach communities in North Carolina there is going to be less local government revenue coming from the existing property tax base. The choice will be cutting services or raising the property tax rate, never an easy decision. County and city property tax revenues are used to fund schools, community colleges, health departments, parks, and some streets and roads, and other municipal service. This decline in property tax revenue is lagging the revenue declines at the state level, because of this revaluation cycle, that’s usually three to seven years.

GW: So between losing money on property revaluation and losing funding from the state government, how are local governments going to be able to sustain the public schools?

JJ: Well let’s put it another way. Even with the sales tax rebounding, which it is, it’s not enough to close the gap. I happen to think that it’s going to be very challenging for the public schools. Local money is mostly in teachers and buildings. At the state level it’s probably 80 percent plus when you add in the fringe benefits, retirement, and health benefit costs. So I think it’s going to be very challenging. We are likely to see bigger class sizes in K-12, like we’re already seeing in the universities and community colleges. We’re also probably going to have fewer assistant principals, guidance counselors and personnel that many legislators do not see as classroom-related positions.

An interesting question that I’m thinking about is when does the impact of the cuts become so great that the issue goes to court? In almost every state in the country there have been lawsuits based on the state constitutions–not the federal–around the rights of students. In North Carolina . . . it’s the right to a sound basic education.

Similar questions arise in the mental health systems around the country, which are primarily funded by the states. Cutting funding is not a federal budget question, but if you ask the question from a legal standpoint “where did all of these patients rights in the mental health system come from?” starting in the early 1970s, many of the rights of the mentally ill have their roots in case law in the federal courts, deeply embedded in an entire string of cases that have been litigated through the appellate courts. It’s very difficult to imagine the Roberts Court undoing what is 25-30 years worth of case law in this area. And when I say mental health, I’m grouping a number of things together–the mentally ill, the developmentally disabled and substance abuse. In the public schools, there are certain rights attached to special ed[ucation], and those are tied to both federal and state law. Both federal and state money support special education.

So I think that with all of these systems, questions will now arise on the legal side as to–GW: What’s the floor?–JJ: Yes what’s the floor, that’s a good way of saying it, or has the floor now become the basement?

GW: How can states reform their budget processes to insulate themselves the next time something like this comes around?

JJ: Well, they can’t . . . . in a downturn of this magnitude you can’t insulate yourself, but there will be a good deal of conversations going forward about the size of reserve funds.

 

—The Role of the Federal Government—

 

GW: What’s the role of the federal government in helping states through this? Does it have a role? Should it have a role?

JJ: Well the answer is they should, in my opinion, but that’s a value judgment. If you look at the biggest item in state budgets–in total dollars, not just state dollars–it’s the Medicaid program. In every state in the country now, with a couple of exceptions somewhere, the Medicaid budget is bigger in total than your school budget. Education generally is the biggest state expenditure, but in total Medicaid is bigger. And I think the debate is now, how much flexibility– and we’ve been through this before–the state should be given to manage the Medicaid program, how does that fit in with what happens with the National Health Program. There are folks . . . who think that Medicaid at some point should be shifted upstream to the national level. . . . On the other hand, [shifting responsibility for Medicaid to the federal government would] probably leave [states] with less room for experimentation. If the states don’t have any skin in the game there’s not much incentive to the governors to experiment. And there’s always, given the diversity among the fifty states, a good reason to think about experimentation in the US.

 

—The Role of Privatization—

 

GW: What’s the role of privatization in dealing with the budget crisis?

JJ: Well, and I’ll say I have a vested interest in this,[ iii]  there are a lot of different places that you might think about privatization, and the record is mixed as far as I can tell, and I don’t know that we’ve necessarily created a set of best practices. We tried it in the prison system in North Carolina and it just didn’t work very well, and we wound up taking them back over. Maybe the state picked the wrong company, who knows. On the other hand the state has successfully outsourced a number of IT services for years. The question is whether you have systems in place where you really can judge what the costs and outcomes of privatization. It’s kind of geeky, but those systems need to be in place to determine if you’re getting good value for the taxpayer. In my opinion, there is a role for the private sector in providing various services. I think that it’s very difficult, especially in the area of infrastructure (transportation, technology, water and waste water) for the government to mobilize the capital that’s needed without engaging the private sector.

 

—A Piece of Advice—

 

GW: What advice do you have for the next generation of policy-makers?

This is a great time to be in the public sector, and a great challenge. I think that what I see right now is, especially among many of the people that I’ve worked with who are now in key positions across state government,  this continued budget crisis is burning them out. And that’s not unexpected. Public managers have been dealing with a budget crisis since 2000. There was a short interlude of a year or two about mid-decade, and then problems begin again in 2008. So keep your optimism is my first piece of advice, bring that with you to your new position. Optimism, new ideas, and different ways of looking at problems are ways you can impact the lives of people. I think trying to make a difference is why we all got in this business.

 

Endnotes

 

[i] Explanatory note: A defined-benefit pension plan is one in which a retired employee’s benefits are determined by a set formula, and do not depend on investment returns. A defined-contribution plan is one in which an employee pays into an individual account during his or her career, and benefits upon retirement depend on investment returns from that account.  The employer may also make a contribution to the individual account, but has no financial liability beyond that amount.

[ii] Bailey v. State, 348 N.C. 130 (1998). The North Carolina Supreme Court held that the State impermissibly violated government employees’ contractual rights by imposing a tax on previously tax-exempt retirement benefits.

[iii] In his government relations consulting work, Mr. Johnson represents Aqua America, a publicly traded water company.

 

Gray Wilson is a Master of Public Policy candidate at the Sanford School of Public Policy, and a Juris Doctor candidate at the Duke University School of Law. He earned his Bachelor’s degree in Environmental Studies and Spanish from the University of North Carolina-Chapel Hill in 2008. At the urging of Mr. Johnson, he served as a research assistant at the North Carolina General Assembly’s Fiscal Research Division in the summer of 2010.

An Interview with Bernice Friedlander: 50 Years in Government

Interviewed by Gwen M. Tobert

Bernice Friedlander is currently the President of Chapter 282 of the National Treasury Employees Union, representing employees at the U.S. Food and Drug Administration. She began her career in Washington on Capitol Hill in 1965, and over the next seventeen years held a variety of positions including Chief of Staff, Legislative Director, and Press Secretary. In between her stints on the Hill, Ms. Friedlander worked as a lobbyist for Action on Smoking and Health, advocating for the 1970 Cigarette Labeling Act, and for the Autism Society of America, conducting autism education and research. In 1974, she ran for Congress in the New Jersey Democratic Primary, but lost. She went on to join the Executive Branch of the federal government, becoming  Director of Public Affairs for the Women’s Bureau in the U.S. Department of Labor from 1987-1994. She then became acting Director of the U.S. Office of Consumer Affairs and was appointed by President Clinton as the U.S. Delegate to the Organisation for Economic Co-operation and Development’s Commissions on Consumer Issues and Credit Issues. In 1998, she joined the President’s Food Safety Initiative at the U.S. Food and Drug Administration as a policy analyst, promoting the “Farm to Table” program. Ms. Friedlander holds an MPA from the Harvard Kennedy School of Government.

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I recently spoke to Ms. Friedlander about her extensive experience in public affairs and public policy. The following excerpts regard pressing policy issues that she has seen evolve from her unique perspective, including those related to modern media and government communication, health reform, and consumer regulation.

—Media and Government Communication—

GT: How does the existence of bloggers and other decentralized, ‘amateur’ journalists who form a 24/7 media presence impact your ability to get out the government’s message?

BF: The government has a much greater potential to reach consumers.… There are a lot of consumer organizations that have blogs and I think that can be helpful, but there’s also a lot of misinformation out there. The government has to be careful when it posts items on blogs or puts out information.… In the old days, you put a press release out and a reporter called you to clarify… but now it goes directly to consumers, so you really have to make sure you get it right the first time.… I think the government hasn’t permeated all of the new channels yet… and I’m not sure if that’s good or bad. In areas such as health and safety, and education, these new tools… are so powerful and can be so beneficial to people. But only if we develop them right.

—Health Reform—

GT: What strategies did you use to successfully counter such a powerful and wealthy opposition lobby during the passage of the 1970 Cigarette Labeling Act?

BF: There was so much tension about the tobacco issue, it’s hard to explain it in today’s environment.… It’s a major industry in a number of states… and congressmen and senators wanted to defend their turf, jobs, and funds they received from tobacco and broadcasting interests. Some of the nation’s most prestigious health organizations received money from the Tobacco Institute, so they weren’t in a hurry to sign onto a bill that would in any way limit smoking, even though they were using the Tobacco Institute funding to do research on the health effects of tobacco.

… In all negotiations and all lobbying, you have to use leverage. We had some of the most outstanding medical people in the United States… who were willing to lend their names and their influence to getting this legislation looked at and adopted.… The coalition of anti-smoking organizations—including educational, religious, consumer, and health professionals—relied on local grassroots organizational tactics. For example, we had a couple of busloads of young people—they were high school age—and they went on the Hill and presented at each congressional and Senate office what we called the “Lung Ashtray” [which turned black as people smoked around it]…. When a tobacco state Congressman tried to have the youngsters arrested, it made the front page of the Washington Evening Star.… We had a great ally in [small media companies and churches]. When you leveraged everybody’s little bit of power and added all the little bits up, it certainly helped.

The whole process of getting that legislation enacted really took a push from people—from consumers, from parents, from educators, and especially from medical professionals.

GT: In the health reform debates today, there are obviously some very powerful lobbies who have vested interests in continuing the status quo. Do you think any of the strategies that worked for you back in 1970 with the Cigarette Labeling Act could be leveraged today?

BF: Lobbying for issues, especially the things that are health, safety, and education related, just takes a lot of effort.… Democracy is from the bottom-up, and governance is usually from the top-down… and somewhere in the middle the people have to hear each other. And I think that that’s not been clear enough. There are a lot of people, for example, who want health reform, but it means something different to each person. A clearly understood reform package… well, that’s what we need. One of the strategies seems to be, “Let’s not be too specific and then we can pull people in and get enough votes for passage.” I think it wasn’t the best strategy because it seems today that no two people think the same way about what they believe is contained in that healthcare bill. It’s a huge bill with all kinds of implications. People are fed up… because they’re not sure what specifically it’s going to do for them, except they know it’s going to make government bigger and, many believe, more intrusive.

GT: So you think the problem is really less about the lobbying parties and more about how the legislation is presented? That it’s just too confusing, the way the Clinton package was?

BF: Yes. Government is big, but Medicare is big! Government can handle large programs and handle them well. What I am saying is if you presented one or two or several alternatives for how you’re going to pay for this new program, then you can discuss A versus B… and everybody will know what we’re talking about. Instead we have a lot of contradictions, numbers being thrown around, and one wonders if anyone really knows what is contained in this huge piece of legislation, which is an attempt to pull as many interests together in order to reach 60 votes in the Senate.

GT: So do you think we need to be more incremental?

BF: Two things:  the legislation has to be understandable and it needs to be affordable.… If you can’t summarize it in a page and a half—the benefits as well as the funding mechanisms—then it’s not going to go anyplace.… People are not going to swallow something they don’t understand…. And it’s very easy to scare people about the unknown. Disinformation and scare tactics have been used throughout history to try to beat back progressive legislation. It was tried during the fight for the Voting Rights Act. There were so-called intelligent people serving in the Congress saying this was the end of America if “Negroes” received their just right to vote… if the States weren’t allowed to discriminate through poll taxes, [etc.]…. And in the end all we did was make America better. There are always some people who will propagandize to try to win you over by making you fearful.

GT: Do you think it would be more acceptable to people if it were the States who were reforming healthcare?

BF: I really think it’s a federal issue. Right now,… just too many people fall between the cracks. In a federal bill, you might leave parts of it open to the individual states… what additional options can be offered, if they want to offer more than another state… you can build that into the legislation. But the basic framework of a truly national health insurance reform has to come from the federal government, be universally available and guaranteed.

GT: Do you think Obamacare will pass?**

BF: Well, I don’t know if it will be Obamacare, but I do believe there will be reform. When it will pass, I don’t know. It will probably be some scaled down version of pending legislation. But that’s okay. Perhaps we’ve bitten off a little more than we can chew right now due to current economic times. We have to put a stop to the escalating costs of healthcare before it devastates us; plus, we have to make healthcare a reality for millions of Americans so they can go forward and pursue the American dream. It is an important step we, America, need to take if we are going to thrive in the 21st Century.

—Consumer Regulation—

GT: Could you tell me a little bit about the FDA “Farm to Table” program and where we’re going now in terms of consumer regulation?

BF: In the late 1990s, President Clinton wanted to see stronger and more consistent regulation of imported and domestic produce. The nation was having problems due to the presence of pathogens such as e. coli and salmonella popping up in the food supply and making people sick. Both the President and Congress, together with a vigilant and assertive consumer voice, sought to clean up the marketplace. The makeup of produce in the American marketplace was changing. For example, in 1998, 40 percent of the produce for purchase in your neighborhood grocery store came from outside the United States. Now that number is 60 percent. The President’s Food Safety Initiative and the President’s Produce Initiative sought to create a culture of safety from farm to table… that is to say,… from the time produce is planted and harvested, transported, processed, and packaged, until you open it up to have dinner tonight, America’s policy was to have a safer, better process… Agriculture, food processors, food importers, and food stores were invited to work with the government in order to promote a cleaner, healthier, and more efficient marketplace for all. The Department of Agriculture, the Food and Drug Administration, the State Department, and other agencies also worked with other countries to ensure that foreign exports would be safe and meet America’s standards.

… After President Bush came to office, the program continued.… I believe the program was funded for another year or two. But then, basically, it was gutted. In the next four or five years, United States producers suffered because of an increase in food recalls… [and] a reduction in Congressional appropriations for enforcement.… We simply didn’t have the resources to enforce the laws. In 2007, Congress changed, and so did the attitude about funding food inspectors here and in foreign venues.  In the last two years of President Bush’s administration, for the first time in history, the FDA established three offices in China, an office in India, and one in the Middle East to work with those countries to ensure that products coming into American markets are safe.  Unfortunately, more problems arose mostly due to the lack of sufficient numbers of trained inspectors to enforce the laws.

By the time President Obama came to office, he was greeted by a near crisis in this area. He doubled the FDA budget… it went from approximately $600 million to $1 billion. We have more inspectors now, more consumer safety officers, more people in the labs, and are working with the states and other countries. They are able to intervene early if there’s a problem with imports at the source. FDA is today able to deploy cadres of investigators and train others around the country to help both industry and consumers build and sustain confidence in our food safety processes and products.… I just hope they keep the funding.

—A Piece of Advice—

GT: What advice do you have for the next generation of policymakers?

BF: I think it’s important to know what’s real.… Before you look at the black marks on white paper… it’s important to… involve yourself in the community… in the subject that you’re working with. Be sure you really know what’s going on, and that it isn’t just an intellectual exercise. Policy is as much about everyday, “How do we live? How do we survive? How do we do it with grace and integrity?”… You need to question. You need to never be afraid to question the efficacy of something.… You have to think things out, talk to people, and not be afraid to be criticized.… The policy that you’re working on is going to affect millions of people. So it’s important to check your ego at the door…. And never be afraid to say the other guy’s got a good idea or even a better idea, if that is the case. The role of integrity and ethics and truth in policymaking can’t be overstated.

**  This interview was conducted in February 2010.


Gwen M. Tobert is a Master of Public Policy candidate at the Sanford School of Public Policy, Duke University. She earned her Bachelor’s degree in Anthropology from Washington University in St. Louis in 2008. Tobert has also been a long-time friend of Ms. Friedlander and is proud to have such an accomplished mentor.