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participants' responses to this interview.
Schowalter, MN Commissioner of Management & Budget
Caucus, 8301 Creekside Circle, Bloomington, MN 55437
March 4, 2011
of the Discussion
Dan Loritz (chair); David Broden, Paul Gilje, Sallie Kemper, Tim McDonald,
Janis Clay, Jim Hetland, Wayne Popham
Summary of meeting:
Schowalter describes challenges facing Minnesota, and
opportunities arising from them. He explains the variability of state
revenue and cautions that the state's control in certain areas, such as
higher education, is decentralized and rarely direct. He sees presently a
greater opportunity for change than at most any other time in his career.
Welcome and introductions
Schowalter was appointed Commissioner of Minnesota Management & Budget (MMB)
by Governor Dayton at the beginning of this year. He served previously as
deputy commissioner, assistant commissioner, and state budget director
under Governor Pawlenty and has led the budget process for Minnesota for
the past six years.
Schowalter served on
the Board of the National Association of State Budget Officers and
frequently testified before the state Legislature. He has also served as
executive budget coordinator for Health and Human Services and Local
Government, as well as executive budget officer.
Before coming to Minnesota, Jim worked as regional economist at the Boston
regional office of the U.S. Department of Housing and Urban Development,
and as budget officer at the U.S. Office of Management and Budget. He is a
graduate of Macalester College and the Harvard Kennedy School.
Comments and discussion
Schowalter noted that he got into public policy early and then never
left. He was honored to be asked by Governor Dayton to stay on at the
agency. "If a Democrat were elected, I'd rather work for a Democrat," he
had said at the time, "but politics as they are-being appointed by a
Republican and serving during his time, I was prepared to accept my fate."
Instead of being succeeded by a new appointee, he was promoted to his
Opportunities with the challenges facing Minnesota
After the election he
had gone out with a friend for coffee. The friend told him, 'Jim, this is
the time to deal with the problems of recent years. One way or another,
they will be resolved in the next couple of years. Do you want to be part
of that or not?'
The conflicts that
need to be resolved are not just about money, Schowalter told the group.
There are conflicts about values and governmental process as well. The
challenge is to resolve these conflicts constructively so that this state
continues to be a place where people want to live, with a government that
delivers quality services, and where you can make public decisions on an
outlined a few of the major challenges he sees facing Minnesota through
this budget process:
1. Transitioning to
a new federal medical framework. Health care costs continue to grow
year in and year out. That growth is the primary factor driving state
budget problems. We need to do something to contain this growth. The
governor is taking the early option into Medicaid as a first step; more
market reforms and the development of health exchanges are to follow.
2. Settling on how
much revenue to collect and who pays. There is not agreement on how
much revenue the state should operate with. In the end what is the right
level of revenue for Minnesota, and how is it generated? The state also
has to restore the financial tools to manage the volatility that goes with
government even when the state has little direct control. Changing
government is an indirect process. "We talk about state government as if
it were a single, private organization," Schowalter said. Rather, it is a
loose collection of systems that indeed get some funding from the state,
but have independent governance and leadership. A participant likened it
to a university whose various departments are "connected" solely by a
heating plant. "And then some departments start building their own steam
4. Adapting state
agencies for an aging public work force nearing retirement.
Demographics affect the public sector, too, Schowalter pointed out. Many
agencies will have 40 percent of their workforce eligible for retirement
in next few years.
Resolve the budget now
In the end the budget
will be resolved, Schowalter said. And he likes the governor's approach,
stating definitely that the budget will be settled by May 23rd.
We sometimes liken the legislative session to a three-act play. The
question is, does the play get any better with more drama?
"We need to deal with
the budget, and go through it thoughtfully, faithfully, now." Then we get
to work to implement it, deal with the substantial impacts that result and
look for ways to deliver services better.
Redesign for the future-but big ideas are not implemented quickly
A participant asked
about groups that are putting together ideas for innovations in state
government. Are they bringing any good ideas?
Schowalter said-and they will continue to do
so. There are major areas of state government that can benefit from (and
need) continual innovation. But big ideas don't get implemented quickly.
They are usually so conceptual that they need a lot of work to be brought
Significant structural changes, or goals for structural changes, need a
champion to promote them for multiple years. When it comes to resolving
the structural nature of the budget deficit, we all need to keep at it,
year after year.
Revenue sources are volatile and unpredictable
Anyone that invests
knows that higher risk means higher return, Schowalter said. It's the same
for the volatility of the state's revenue sources. So long as our revenue
is tied to the economy we'll have a degree of volatility. Volatility is
not bad, so long as we have the tools to manage it. If you wanted to
lessen volatility, you'd have to substantially trim back corporate taxes
while expanding the sales tax.
Our volatility is
already managed to some extent by having multiple tax types. Some states
put it all in one form of taxation. That puts them far out on the
volatility or instability range. We could go 'all in' to property tax,
which would be more stable, but then we'd have revenues that grow more
slowly and that are not closely tied to economic activity or growth.
Another source of
stable revenue source is fees. But fees are not a good tool for balancing
the budget, and there are not many increased fees in the governor's
proposed budget, Schowalter said. A few dedicated fees have gone up to
cover added services that members of a particular group wanted-such as
fees on hunting licenses, etc., and its best to keep that revenue tied to
the services offered.
Explaining the state's structural budget deficit
"I was interested in
seeing a $2 billion structural deficit next year," a participant said.
That's current law, Schowalter replied-forecast spending is expected to be
that much more than revenues every year. The governor's recommendations in
his budget bring the deficit down substantially, to about a billion
dollars for the entire fiscal 2014-15 biennium.
In describing the
different kinds of proposals being considered to address the budget,
Schowalter emphasized that a democracy "doesn't skip to the end." The
budget process is one in which we start with ideas and then they get
tested. That is a healthy process, and that is what the legislature will
be doing in the coming weeks and months. In the end, everyone won't like
the compromises but we should be able to say that we all understand the
proposals and their consequences.
Post-secondary education costs are driven federally; institutions have a
As the discussion
touched on post-secondary education, one participant asked whether rising
education costs are fundamentally a federal issue-that is, driven
(enabled) by federally subsidized education loans.
"Calling out federal
loans, or student loan capacity is a great point and one that's
under-appreciated," Schowalter said. One example is law school. It is
hard to make an economic case for anyone going to law school in the next
three years-there is such a backlog of lawyers-yet it's a process that is
being facilitated by federal loans and the questionable perception that
there is money to be made on the other end, following graduation from law
said, the problems are lack of information and easy credit. There's a lot
of responsibility for the president and leadership level of universities
to manage their students and curriculum in a responsible way, so graduates
have real opportunities in the future.
Within the state,
higher education funding is hands-off. "We give the U of M a lump sum and
say, 'here you are, go forth.'" That could change as some states try and
succeed with other arrangements. But then education in general needs to
change. "People in college can acquire information more quickly than ever,
yet we have brick-and-mortar campuses all over. There's a need to talk
The role of MMB in controlling budgets and promoting changes
observed that the role of MMB is to be the economic voice of reason with
the other agencies. My understanding, the participant said, is the number
of people running to the capitol asking for more, for new spending, is
growing rapidly. There are not enough creative, low-cost ways to help
people who are disabled; to take the child in K-12 who is seriously
limited and bring him up to 'significantly limited'; to provide mass
transit at a public subsidy. We can take $150,000 and use it to improve a
person's situation a little bit. But, there's no limit, in other words, to
legitimate and important needs. Advocates not only solicit the
legislature, but they hit the departments as well. Your agency must look
at what's coming out of the departments and then say: This is an
interesting idea, but it's going to cost so much money.
that he asks himself, and the agency asks itself-what is the problem we're
trying to fix? The default is always the numbers, because that's the
urgent issue. But the answer lies beyond the budget, to processes. A focus
on budgets has lead to greater dependence on the federal government, when
that may or may not be the right thing.
"This has been very
interesting," Schowalter said, to close. "In
addition to what you're doing at the Civic Caucus to promote redesign, I'd
just encourage you to investigate the processes of government and the
processes of change."
possible to change processes. For example, in only a few months Minnesota
went from one of worst states in terms of transparency to one of the best.
You orient yourself, you decide, you act, and then you go back to step one
you to the Commissioner for his time and insights.