California’s budget deficit is approaching $24 billion and even the politicians are starting to get serious about fixing it. The problem is they have wasted most of their lead time and thus the cuts required to balance the budget must be even deeper. Add to that the voter disgust with the performance of state politicians reflected in a resounding “ a pox on all your houses” message in defeat for all the ballot propositions except the one freezing politicians pay in years the state budget is in deficit.
With that context to the problem, I think this is actually a great time for California to put some of its innovation skills to work both addressing the immediate hole in the state bank account, as well as solving the structural problems that got us there in the first place.
No, this is not a rant about political or constitutional solutions. I’ll save that for later. This is a short list of extreme makeover ideas for California that focus on the spending side of the equation. Fasten your seatbelt, these ideas are going to hit just like the ‘Big Drop’ ride at Great America amusement park—feel your stomach up there in your throat?
Rethinking California Public Services Business Models
It is time to put some of this California brainpower to work rethinking the business models used for the major categories of state public services expenditures. What are those categories and how much do we spend on them
- K-12 Education (41%)
- Heath & Human Services (29%)
- Higher Education (12%)
- Public Safety & Corrections (10%)
- Transportation, Resources, Housing, Other Departments (8%)
A big part of California’s “spending problem” is that the money required to support these programs is largely formula driven with constituencies all along the food chain ready to scream bloody murder if their program is cut. The usual defense is that California spending is falling behind other states. This is the constant argument for education, for example, with the view that the ONLY solution is to spend more.
And, in truth, California voters have demonstrated over and over again that they are willing to spend more when convinced there are getting good value for money invested. That’s why more than 75% of local ballot measures for increased parcel taxes or operating levies for school have been approved. Regrettably we have reached a tipping point where the State has assumed such a large share of the cost of K-12 education that economic volatility can ripple through the system causing massive cuts in a short period of time.
Similarly, health and human services’ spending is driven by demand for the services and the needs often are real. But the unintended consequence again of state revenue volatility is the people most in need of assistance are often stranded by budget cuts in recession as the state cuts services.
Higher education has always enjoyed a storied place in the heart of California and the reputation of the University of California system and other branches of higher education are substantial factors in the economic vibrancy of the state. It has enormous potential for good if focused to unleash that brainpower and creative energy, but it has grown fat and lazy living off the dole rather than seeing itself as an the engine of growth. Oh it does an impressive job of spinning off research for start-ups but the vast intellectual property created with the resources of state spending leveraged research grants are not being used to their full potential.
We spend more money to incarcerate a prisoner for one year than we do to educate a brain surgeon. We reacted to an increase in drug driven crime with the three strikes law which has failed to reduce the crime rate or cut into drug offenses and its collateral damage while it swells prison population and drives up the share of state spending on locking people up and teaching them how to be hardened criminals or gang members.
The State spends about 8% of its budget on everything else it does including transportation, environmental resources, housing and all the state departments and employees of government. It is not that these areas are unimportant or that there are no opportunities for efficiencies—it’s just that even if you eliminated all of it there still would be a major budget deficit. BUT these programs are both pioneers and pariahs in devising regulations that either set the pace for the nation such as in emissions reduction or drive us crazy by their absurdity.
So what does this rant have to do with extreme makeover of State business models?
Now is the time for the State of California to reclaim its pioneering spirit and reposition its competitive position for the future. The Golden State has the potential to turn government on its head and unleash the economic power of its creative brainpower to reinvent the business models used for each of these categories of services as a byproduct of reducing the cost of service near term by sweating the fat out of the system and focusing the spending on the priorities most dear to the constituents.
Changing the California Public Service Business Models:
- Use Competition to Improve K-12 Education with Vouchers. Consolidate all the state spending categories for K-12 education and suspend all the bureaucratic allocation rules which prevent local school districts from most effectively deploying the money. Set per pupil K-12 Education Voucher Payments and allocate them to parents of K-12 students to spend in any accredited public, parochial or charter school of their choice. Parents can vote with their feet each school year about where to send their kid and school will quickly learn to respond to parent expectations about performance. Parents reclaim control over their children’s education; school districts are free from the mind numbing state education bureaucratic rules; the State can reduce the staffing at the Department of Education since School Districts are back in the business of defining the rules that govern local education subject to standardized testing performance schools to measure results. If the school district needs more money than the sum of the state vouchers and its existing local tax levies let them ask voters for more or reduce expenses.
- Create a Competitive Market for Health and Human Services. The sums spent by the State of California for this category are large enough to attract world class players both inside the state and from elsewhere seeking to capture market share of the state’s business. The state should create such a market by outsourcing blocks of services using performance-based contracts that pay incremental profits for desired outcomes. With a focus on preventive care and home-based services the goal would be to attract the Wal-Mart and CVS scale players to a segment now dominated by traditional healthcare providers on a fee for service basis with little incentive to reduce costs while changing the basis for payments so that vendors compete for a client’s voucher for a given category of service within a large pool of potential customers.
- Supercharge Higher Education with Venture Capital Entrepreneurship. California has the potential to revolutionize higher education and with it to supercharge its own economic growth by enlisting the help of venture capital and its entrepreneurship skills to remake the business model for higher education around three principles:
- Teaching. California should focus state spending on training the next generation of citizens in disciplines needed for the future economy by integrating its teaching resources into a seamless progression from high school to community college to university. High school students in college prep classes in grades 11 and 12 could be able to take those courses at any community college for transferable credit applicable to their high school graduation requirements and for college credit. The point of entry to the California university system should be at the community college level for lower division courses for all students. Transfer to the University of California or California State University systems should be reserved for upper division students. The state should spend state money primarily of supporting this teaching progression.
- Research. California should leverage the capital gains and revenue potential of research at the University of California and California State University System by contracting with private equity firms with the dual performance objectives of advancing California’s share of research dollars coming into the system and monetizing of the intellectual property, patents and copyrights created by such research to build recurring revenue streams for the endowment of the University. The overall goal is to make the research side of higher education a source of wealth building for the University endowments and enable research to pay its own way without incremental state subsidies. The VC firms would also weed out the fat and unproductive expense to improve research performance margins and their revenue potential.
- Service. Throughout higher education there are scores of service programs focused on good causes and funded with money from the state and from research grants. The objective of service programs should be to leverage research grants (external sources of revenue) for public service purposes. To the extent the state spends taxpayer money on these service programs it should appropriate a specific total sum and force a competition among service programs for funding annually.
- Public Safety and Corrections. The state spends vast sums locking people up for violations of the law even when doing so is not in the public interest because the cost of incarceration is disproportionate to the offense and the consequence of incarceration is to teach the offender to become a worse offender not a rehabilitated one upon release. The three strikes and you get life law sounds good in sound bites but it has proven to be an expensive failure as public policy. California should change it shifting resources from lock-up to beefed-up parole, drug treatment and rehabilitation. Other policy changes would materially improve public safety and lower costs:
- Apply military counter insurgency lessons to counter gang violence. Gang violence is at epidemic levels in many cities due to the demand for drugs and the need for a neighborhood level distribution network. This threat overwhelms local police. An effective state gang violence program focused on drugs and the causes of gang violence could improve public safety in measurable ways. We’ve learned valuable lessons from fighting insurgencies in Iraq and Afghanistan maybe its time to use them to fight gangs here at home giving people a fair chance to reclaim their neighborhoods from these gangs and curb the violence.
- Drug Treatment and Supervised Rehabilitation. More effective drug treatment efforts combined with intensive supervision could produce better outcomes than incarceration for both individuals and the state, but will require more resources to make enforcement and participation effective.
- Deport illegals convicted of felonies. Yes some will come back into the country but that should earn them a stay in federal prison for the duration of their suspended sentence.
- Release elderly and nonviolent prisoners. The cost of retaining these prisoners in lock up far outweighs any societal benefits from doing so. The state should divert them into half-way houses or supervised parole to reduce its costs. Re-offenders would see their suspended sentences reinstated.
I recognize these ideas challenge longstanding practice and policy and are a clear admission that I am not a card carrying member of the political class, but California has a big problem—but it also has big potential and needs to unleash that to solve its problems.