Author David Osborne Urges The Public Sector To Settle On The 'Price of Government'

Your previous books-most especially Reinventing Government-were very well received and the basis for state and national leaders to adopt new third-way public policies. Where does your new book, The Price of Government, fit within the context of reforming government practice?

This book puts Reinventing Government in the context of a permanent fiscal crisis. It argues that the fiscal crisis that we've endured in the public sector at all levels for the last three years is going to be with us for as long as the eye can see. It then proposes strategies to deal with that crisis. Some of the strategies are updates of what was in Reinventing Government and the last two books, Banishing Bureaucracy and The Reinventor's Fieldbook. And some of the strategies are brand new. It's the specific focus on the fiscal crisis that is different in this book.

Why don't you take a second to describe this fiscal crisis, which you suggest will be with us for as far into the future as the eye can see?

Well there are a couple of things happening. We still use a revenue structure based on an industrial economy, so more and more of the transactions in the information age and service age escape taxation. The most obvious example is the sales tax, which in most states does not tax services. Back in 1960, services were only 40% of transactions. By the year 2000, services accounted for 60% of transactions. Obviously, we are losing a lot of the economy there. We are also not taxing most internet transactions. And, in the global marketplace, large corporations are increasingly able to minimize taxation by moving profits offshore. So on the state level, corporate tax revenues are down to 6% of all state revenues. That's on the revenue side. Those problems are manageable- politically difficult, but fixable.

It's on the cost side where the crisis is sharpest and permanent-this is what most people don't understand. Even if the economy comes back and revenues grow, we have some costs that are going to continue to outstrip them. This explosion in costs is driven by two interconnected forces: the increasing cost of healthcare, and the aging of the population.

The cost of healthcare has gone up an average of 10% a year since 1970, and it will continue to do so. We have undertaken no reforms that will bring that average down. So healthcare will be an ever-increasing share of public budgets. Medicare and Medicaid are now about 20 percent of the federal budget, but in 25 years they will be 55 percent, according to Congressional Budget Office projections. At the state level, Medicaid and other health programs, including insurance for state employees, average about 30% of general funds, and they go up every year.

On the other side, there is the aging of the population. The average life span is pushing 80 now, which means lots of people are living to be 85 and 90. That affects pension costs, which are rising inexorably, including social security and state employee pensions, city employee pensions, county employee pensions, etc. The two trends come together in Medicare, which is the 800-lb gorilla in the federal picture. This is the reason the federal fiscal situation is far worse than at any other level.

In healthcare, unlike any other industry, technological breakthroughs raise costs rather than lowering costs. When we cure diseases, or even just improve disease management and keep people alive longer, we drive up our healthcare costs. The longer someone lives, the more we spend on him or her. If you have an aging population and healthcare inflation concurrently, you get a cost explosion in Medicare.

Even if revenues grow at the state or local level by 6-8% a year for a number of years, costs are going to be growing at that rate too. In my state of Massachusetts, for example, we face a $500 million structural deficit (a gap between projected revenues and projected spending) in next year's budget. We may close that two or three years down the road, but it's hard to imagine that we are going to be able to restore the $3 billion in cuts that we've made over the last three years.

The federal government, of course, is going to be cutting spending for state and local government, because the federal fiscal crisis is just disastrous. To put it in perspective, if current trends continue in revenue and spending, in 25 years we will have room for four items in the federal budget: Medicaid, Medicare, Social Security, and interest on debt. Nothing else. The problem starts to get really bad in about seven or eight years, when the baby boomers begin to retire-which is why President Bush only projected spending and revenue five years ahead in his last budget, rather than projecting 10 years, as we have done for decades.

You say assertively in the book that policymakers need "to get a grip" on the problem. Please elaborate on what you mean.

They need to get a grip on what their real financial situation is. Our elected leaders in most places have used a combination of real cuts, some tax increases, increases in tuition, fees and charges, and a lot of accounting tricks to deal with this problem. California is the exemplar, with all of its borrowing. We talk in the book about seven deadly deceptions, like borrowing to cover your operating costs, robbing Peter to pay Paul, taking money from one account to deal with a shortfall in another.

The book provides a tool that allows you to focus in on your fiscal reality: a simple five-line budget, projected over five years. The five lines are: your fiscal balance coming into the year, your projected spending, your projected revenue, your projected deficit or surplus, and your fiscal balance at the end of the year. If you project those five numbers out over at least five years, you've got a simple picture of your financial future. That's what our elected leaders ought to be doing, and that's what our public ought to be demanding from them. Then, we ought to be balancing those budgets in a real way-because the pain down the road from doing what California has done is going to be very severe.

The book argues the need for national and local leaders to focus on results of the budgeting process. Talk about the implications of what you mean by that simple term "focus on results."

People in the public sector know how we do traditional budgeting. The budget office sends off instructions. Each agency or department prepares its proposed budget for next year. It takes its cost from last year, adds money for inflation, adds money for caseload increases, and adds money for other increases or new things it wants to do. Then, it adds a little padding because it knows the budget will get cut. All of that goes into the budget office, where a small army of budget analysts looks it over and tries to find the padding. It's a game of hide and seek. Nobody trusts anybody. The budget analysts make their cuts. They recommend a budget package to the executive, who adjusts the cuts, often proposes raising taxes or fees, and then kicks it over to the legislature. They go through a similar exercise.

In a fiscal climate like this, all of that time and energy is focused on what we are going to cut, and none of it is focused on how we take the 95% we are going to keep and make it more effective. What we propose in the book is a budgeting system that focuses not on cutting but on how best to deliver the outcomes citizens care about.

Why don't you provide us with an illustration of the budgeting process you suggest is superior to a traditional approach?

Basically, you start the budget process by ignoring last year's costs. Then you ask the question, "How much revenue can we expect?" In this fiscal climate, we know we don't have enough to cover our costs. So, let's talk up front about whether we want to raise taxes or fees. In fact, let's try to reach an agreement on the appropriate price of government. Historically, if you are the state of California, for example, you spend about 15 cents on the dollar of personal income for state and local government. Citizens have determined that price over time, through tax revolts, elections and through all kinds of political feedback. So, you try to get the political leadership to decide on a level of spending for the next year.

Once you have done that, you move on to determine the results citizens want. Gov. Locke in Washington state defined ten basic results that he thought citizens most cared about: better K-12 education, better higher education, better health, better mobility, better environment and so on. He then had his budget team take 10% of the money off the top for overhead, leaving the remaining 90% to be divided up between those ten results. From a citizen's perspective, the relative importance of each of those ten results had to be gauged. In Washington's case, this process led to some shifts of money from public safety to K-12 education.

The next task was to develop a budget for each result. Ten results teams-one for each outcome goal-did a lot of research to figure out which strategies would have the most impact on their outcomes. They then looked at last year's spending programs in their area, ranking them from those with the most impact to those with the least. Starting at the top, they began buying. When they ran out of money, they drew a line and said, "These are the activities that we can no longer afford." All of that went to the governor's team and to the governor, who massaged it and made some adjustments. Within a matter of weeks the governor released the budget based on this approach. It was very simple and very clear. It began with ten pages, one focused on each outcome, showing what was above the line in health, in education or in mobility, and what was below the line.

Governor Locke talked in terms of setting priorities and focusing on results. The process was substantively very effective, because it ensured that the cuts were being made so that what was left had the best chance of delivering results that were important to people and what was cut had the least chance of delivering those results. And politically it was extremely effective, because it seemed so much like common sense. People recognize that leaders should set priorities and should eliminate what's least effective.

Are you suggesting that refocusing public budgets on results will make their allocation decisions easier to make or more politically acceptable with constituents and stakeholders?

The process in Washington state's Legislature was politically contentious, and it was particularly difficult for the Democrats in the Legislature. Democrats had a slight majority in the House and the Republicans had a slight majority in the Senate. The Democrats in the House basically split down the middle on the budget, because of some tough cuts proposed by the governor. Here's an example. Washington voters had passed two initiatives related to education: one to drop class sizes and another to raise teacher salaries. The governor's education budget team looked at all of the research on class sizes and teacher salaries and found that neither had any correlation with student performance. Because the governor had established student achievement as the desired result, he proposed suspending those two initiatives, which the legislature can do in Washington.

Of course, this was not easy politically. About 20,000 teachers protested on the statehouse lawn. But the legislature ultimately agreed with the governor. This is the kind of decision that can never be made unless you frame everything in terms of results. So this process does make it easier to make good decisions, in the face of political pressure.

In a term-limited world, you suggest legislatures and governors make annual budget decisions with reference to new criteria less tied to short term political consequences. What is the political risk electeds face by elevating public priorities to the forefront annually when the press and public rarely appreciate long-term savings, and often focus in the voting booth on short-term costs/impacts?

In a normal budget process, everything is short-term. Basically, in a situation of scarcity, the decisions ultimately get made according to this criterion, "What will cause me the least political pain before the next election?" That's the bottom line. By amending the framework and focusing on results, it is possible to make decisions that deliver more long-term success.

For example, if you put all of the education spending on one page, as Locke did, everyone can see what is above the line and what is below the line. Those who disagree have to argue that their programs, which fall below the line, have more impact on results than spending items above the line. The beauty of this process is that it defines the common good, and it communicates clearly what the tradeoffs are to achieve that good. This doesn't remove politics from the process, but it changes the incentive framework in a powerful way. Moreover, it's much more difficult for short-term political considerations to trump results in this context. It happens sometimes, but it's more difficult.

With your book now in circulation, Is practice reflective of theory? What have you heard by way of a critique that most resonates with you?

Some people fear that the poor and powerless will be left out in this picture. A lot depends upon the results that the executive defines as being critical. Under Gov. Locke, one of the ten desired results was "improving the condition of vulnerable adults and children." Not every executive would include something like that. Still, I would argue- and I do argue-that budgeting in the old way is very risky for the poor and powerless when the ultimate political decisions are made behind the scenes. In that scenario, the people without much political power are the ones who lose out. If you put the results you desire and the financial trade-offs out in the open for all to see, I think those people are going to fare better.

One of the weaknesses of government policy making today, particularly in California and Los Angeles, is the absence of public investment and planning being done holistically within the context of neighborhoods. Our city departmental silos rarely allow coordinated agency planning between and among housing, transportation, parks, air quality, health care, etc. Likewise, cities, regions, and states rarely are able to work collaboratively at the neighborhood planning level. How do we encourage our governmental agencies to break free of their silos and advance more holistic services?

The budget process we've been talking about is the way you do that. You decide on the results that are the most important. You don't fund programs and agencies and departments; you fund the services that produce those results. It forces everyone to look for more effective ways to deliver those results, including partnerships across bureaucratic lines, and partnerships between public and private organizations.