B&G Report: The Value of Opting In, Outsourced Audits, and Wasted Art Funding

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Who do you trust? There’s been a lot of press coverage about the lack of trust in government, including state and local entities. Many of the readers of the B&G Report are employees of states and localities. So, we want to turn the table. Please tell us: Do you trust your citizens to understand government management and make appropriate decisions about it when given the chance? We’ll keep responses anonymous!

We're sympathetic to the revenue needs of states and cities, but a recent court case involving Louisiana’s effort to get its hands on federal money demonstrates that sometimes governments may reach too far. The case involved money that the state received from the feds between 1996 and 2006 for uncompensated Medicaid care. The federal government traditionally provides funding to reimburse states for hospital care for the uninsured. In this case, the feds reimbursed for hospital care in which costs were determined based on estimates. Louisiana argued that when the estimates were too high, it didn't have to give back the money. On the other hand, when the estimates were too low, it could collect additional federal dollars.

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The federal government clamped down on this practice back in 2012, and Louisiana choked up some $240 million -- but not without appealing the case. Now, the U.S. Court of Appeals for the 5th Circuit rejected the state's argument, saying that the state was laying claim to "an asymmetrical retrospective payment system.”  Fancy words, but we’d put it another way: We believe Louisiana was arguing from the “what’s mine is mine and what’s yours is negotiable” school of government accounting.

Not so long ago, we had lunch with a very smart, successful woman who we’ve known for years. The conversation turned to government, and we tried to explain what we do for a living. That was more complicated than we anticipated. She was surprised when we explained that there was a lot more to government than just politics. The idea that there was a management side had never even entered her mind.  

We thought back on that conversation when we came across a poll from Oregon Public Broadcasting done by DHM Research. It turned out that only about one in two voters could name the three branches of government and knew how many senators represented their state in Congress. What really struck us is that when the people were asked “to name a tax that Oregon residents pay that helps fund the delivery of state government services, 36 percent could not identify any tax and 33 percent said property taxes (which pay for local government services). Just 36 percent named income taxes as a tax that Oregonians pay to fund state services.”

Oregon gets nearly 70 percent of its revenues from the individual income tax -- a higher percentage than any other state. All this, by the way, isn’t meant as a knock on Oregon. It’s our guess that other states’ residents wouldn’t differ dramatically in their degree of ignorance.

It’s kind of sad how much currency this quote still has: “We live in a stage of politics where legislators seem to regard the passage of laws as much more important than the results of their enforcement.” -- William Howard Taft, the 27th president of the United States

It’s a well-established notion that once people are part of something, they're far less inclined to “opt out,” even if they would have been reluctant to “opt in” in the first place. South Dakota provides powerful evidence that states can take advantage of this, particularly states that offer supplemental retirement plans that allow employees to set aside money for retirement outside of the traditional pension plan, according to a study by the Center for State and Local Government Excellence.

The results of the study were staggering. When automatically enrolled, 91 percent of new eligible employees participated in the supplemental retirement plan. But without automatic enrollment, only 1 percent of new hires participated.

Employees can always opt out of the new plan, but only a little more than 8 percent of those who were enrolled have done so. They recognize the value of saving at a higher rate once they’ve been strongly led in that direction. Only a handful of other states also offer automatic enrollment, including Alaska, Virginia, Texas and Indiana. But as states become aware of this South Dakota study, it’s our guess that more will follow suit.

After years of pressure from various sources, Springfield, Mo., appointed an internal auditor in August 2008. The appointee died less than two years later and was replaced by a new internal auditor in September 2010. That auditor departed in spring of 2013. Both women were credited with audit reports that were useful to the city in a variety of ways.

So then what happened? Nothing much. Springfield has been trying to hire someone for the position with a salary that starts at about $60,000 -- not enough for the requisite qualifications.

So, the job is vacant and Springfield is attempting to outsource the position with a $80,000 one-year contract (including the cost of benefits).

Is internal auditing the kind of thing that can be effectively outsourced? We know that internal auditors don’t think so -- but nobody thinks his own job should be outsourced. That said, we tend to agree. It seems to us like the relationships an auditor builds are a critical part of the job, and an outsourced auditor, we’d guess, is less likely to build those. We’ll report back about Springfield’s experience next year.

Back on our soapbox. We’ve long been convinced that state tax rates have far less to do with economic vitality than is often said. A new report by the Center on Budget and Policy Priorities took a good hard look at reams of data and came to precisely that conclusion. The report disproves the idea that droves of productive workers are moving from state to state in order to pay lower taxes.

One of its findings was particularly interesting to us: Apparently, “people who do move are nearly as likely to move from low-tax states to high-tax states as in the other direction -- in some cases, more likely.” For example, over the last twenty years or so, more households left Florida, which doesn’t levy an income tax, for states with income taxes like Georgia and North Carolina than the other way around.

Many states lost capacity in their human resource departments during the recession from which they’re still recovering. Others have seen their HR directors descend from a cabinet level position to some lower form of governmental life.

We think that the diminution of HR as a governmental activity is a huge mistake. In a time of diminished resources, it’s vitally important for states, counties and cities to hire as wisely as they can. That’s extremely difficult absent a vital, thoughtful hiring division.

Consider some points made recently by Paul Petrone, communications manager at VoiceGlance, which is a screening platform that allows potential employers to effectively scan through dozens of applications. He points out that employment lawsuits have increased by 400 percent in the last 20 years, and the average award exceeds $490,000. Moreover, the Affordable Care Act and hundreds of new labor laws each year have made HR more complicated than ever.

Over twenty years ago, the city of Los Angeles set up a program requiring developers to pay a fee equal to one percent of the construction value of a new structure to help support public art. Sounds like good policy. But according to a recent audit, some $10 million has accumulated in the fund but very little public art has been commissioned for years.

The big blockade on sculptures, paintings and other art was a decision made by the city attorney back in 2007. At the time, the city attorney’s office indicated that the money set aside for public art could only be used within a one-block radius of the project. This has stymied the Department of Cultural Affairs, which has to commission the art for which this money can be used.

Apparently, city leaders are taking steps to turn some of that money into beauty. But it’s still sad to hear about money sitting in a barrel because the restrictions on spending are so stringent.

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