Can Other States Tap Tennessee’s Secret Sauce for Government Efficiency?

Once seen as a laggard in public administration, the state is now a leader.
by | November 2017
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Derek Young is no stranger to the C-suite. As he waits for a client in his 10th-floor corner office in downtown Nashville, he talks about his passion for culture change. One of the services he offers companies is as a motivational speaker and executive coach who charges “anywhere from one to six thousand dollars” a pop.

This morning, Young is meeting with Marcus Dodson, who manages IT operations for a large financial institution. When he arrives, Dodson updates Young on the project he is currently working on. He’s been trying to get everyone in his 250-person organization up to speed on Microsoft Excel. But the project isn’t going well. Dodson wasn’t as prepared as he had wanted to be, and as a result, the first round of reviews from participants let him know that. But then, Dodson worked to improve his presentation, and his subsequent reviews were dramatically better.

Having a coach help an executive work through challenges is common in corporate America. But Dodson doesn’t work in the private sector. He works for the state. He’s responsible for infrastructure and security at the Tennessee Department of Treasury. He’s receiving coaching through an innovative leadership development program known as LEAD Tennessee.

Seven years ago, Tennessee was seen as a laggard in the field of public administration. Today, it’s a leader. Gov. Bill Haslam has made improving the operations of the state government a major focus of his administration. LEAD Tennessee and other innovative programs, as well as an overall willingness to invest in training, have been attracting attention from other state governments.

In 2012, the Haslam administration took on civil service reform, overhauling the state’s antiquated hiring and promotions practices and replacing them with a pay-for-performance system. It also became the first state to appoint a so-called chief learning officer as part of a broader effort to offer new employees training opportunities to learn on the job. A year later, Haslam appointed an IBM executive, Greg Adams, to serve as the state’s first-ever chief operating officer. Adams has taken the governor’s desire to emphasize “customer-focused government” and translated it into a well-organized operating system, where heads of cabinet departments, known as commissioners, meet monthly to discuss operations and pursue opportunities for collaboration. Sub-cabinet working groups also meet regularly to address immediate problems, such as access to health care or capital for small businesses in rural areas. The state says it has eliminated more than half a billion dollars in recurring expenses as a result of its focus on better performance.

Tennessee offers a compelling example of what conservative government can deliver. With its AAA bond rating and well-funded public pension plans, low unemployment rate, rising educational achievement and an innovative program that offers two years of free community college, Republicans see Tennessee as a national model of good governance. “All our constitutionally elected officers are Republicans,” says state Sen. Jack Johnson, a co-author of the Haslam administration’s breakthrough civil service reform act. “We are a Republican-dominated state, and that plays a big role in why we are succeeding as a state.”

To be sure, not everyone is ready to applaud the Haslam administration’s reform efforts or credit it with big changes. Randy Stamps, who heads the Tennessee State Employees Association, sees a commitment to cost cutting and outsourcing that belies many of the claims made about investing in people. “They’ve trimmed down state government,” Stamps says. “When they’ve had trouble managing, their first reaction is not to try to manage it better, but to outsource it.”

Others note that it was Haslam’s predecessor, Democrat Phil Bredesen, who moved the state Medicaid program, TennCare, to managed care, initiated sweeping education reform and pushed more than 1,600 state employees to seek early retirement. Many of Haslam’s achievements have built on these earlier initiatives. However, Haslam’s legacy of improving the operations of state government is entirely his own. Those improvements, and the systems and the philosophy that undergird them, have made Tennessee a model for other states, says Leslie Scott, executive director of the National Association of State Personnel Executives. “Tennessee is the state that our other member states look to for innovation.”

 

In 2010, Haslam was elected governor of Tennessee. Like his predecessor, Haslam brought both business and political skills to the governor’s office. His previous job had been as mayor of Knoxville. Before that, he had been serving as president of the Pilot Corporation, which operates a chain of truck stops started by his father that is one of the largest private businesses in the country. (Haslam’s personal stake in the family business makes him one of the wealthiest elected officials in the country. Forbes currently pegs his personal net worth at $2.5 billion.)

As mayor of Knoxville, Haslam operated in a system with nonpartisan elections. “I could’ve told you who the Republicans and Democrats were, but our votes didn’t break down that way,” he says today. As governor, though, political affiliation matters. Haslam became the first Republican governor with Republican majorities -- supermajorities at that -- in both chambers since Reconstruction. That put him in a position to make big legislative changes if he could maintain the support of Republicans in the legislature. If he lost that support, his agenda would be at risk. In Tennessee, a simple majority of lawmakers can override a governor’s veto.

 

Gov. Bill Halsam has made improving the operations of the state government a major focus of his administration. (AP)

 

When he took over the reins of power, Haslam chose his moves carefully. His first focus was on education, in part because he believed that improving it was the best way to raise incomes. But he also saw there was momentum there. Under his predecessor, Tennessee had enacted a series of reforms that made it one of two states to receive Race to the Top funding for education reforms. Education would become the defining feature of Haslam’s two terms as governor. He brought in a former Teach for America executive to run the Department of Education. He also championed legislation that created a state school district with the power to take over failing schools. In 2014, the legislature passed Haslam’s Tennessee Promise Scholarship Act, which gave high school graduates access to two years of free community or technical college.

While education was the high-profile agenda, Haslam was also determined to improve the way state government worked. In moving from Knoxville to the state Capitol in Nashville, Haslam realized he faced big new management challenges. State government was a $37-billion-a-year enterprise that employed over 40,000 workers. It was, Haslam says, “like going from Double-A baseball to the major leagues. It’s the same game, but it was a lot bigger and faster.”

To get a handle on how state government was working, he had the commissioners of his 23 departments conduct top-to-bottom reviews, looking for issues that stood in the way of efficient operations. One of the people involved in the review was Rebecca Hunter, the state’s new human resources commissioner. At the end of the process, Hunter says, “every single cabinet member came back and said, ‘We have to do something about the antiquated employment practices if we’re going to move forward.’”

The Haslam administration’s response was the Tennessee Excellence, Accountability and Management Act. Passed in 2012, the TEAM Act swept away the old civil service system, in which seniority was the most important qualification for hiring and retention. Under TEAM, agencies were given the leeway to do their own hiring and more easily discipline or even terminate existing employees, and it changed the way the state evaluated its workforce. The TEAM Act also eliminated the old system of occasional across-the-board raises, replacing it with a pay-for-performance system whereby employees were rated on a scale from “unacceptable” to “outstanding.” 

The TEAM Act was an important step in the Haslam administration’s push to restructure operations. And therein lay a problem for Haslam. As governor, he had so many responsibilities, such as dealing with legislation, recruiting companies to come to Tennessee and dealing with the federal government. “I spend a lot of time in Washington arguing about what’s going to happen to Medicaid,” says Haslam. “I don’t spend nearly as much time [on operations] as I would if I was a CEO running the business.”

So he looked for an operational solution. In the summer of 2013, he created the new position of state COO and hired Adams. Haslam then instructed his cabinet members to run operational issues past Adams rather than bringing them to him.

In the HR department, which was not centralized, Hunter followed a similar strategy. Instead of being the department that handled problems, she worked on a plan so that departments would call her before they made decisions about structural or personnel changes. The idea was to help them make sound decisions rather than call her for help “because it didn’t work as well as they had hoped it would.”

Adams also brought discipline to the state’s push for customer-focused government. One of the Haslam administration’s first initiatives had been to set up just such an office. The underlying idea was to get government to stop thinking like a monopoly and to start seeing residents as customers. “Nobody has to live in Tennessee,” Haslam says. “You can say, ‘I can move my business, I can move my family, to Kentucky or Georgia or Utah.’”

 

As part of its reform efforts, Tennessee appointed the first-ever state chief learning officer, Trish Holliday, as well as its first chief operating officer, Greg Adams. (Kristina Krug)

 

To emphasize the importance of the new focus, Adams began holding monthly customer-focused government cabinet meetings that brought commissioners together to discuss operational issues. Greg Gonzales, the state’s top bank regulator, says the cabinet meetings “have taken coordination to a whole new level.”

As a case in point, Gonzales cites the recent development of a comprehensive state disaster recovery plan. Initially, he says, the plan envisioned almost no role for his department. However, when he talked with the head of the Tennessee Emergency Management Agency, the two men realized that ensuring access to cash would be critical to a successful emergency response. The result was that last year Gonzales’ department created and ran the first disaster recovery exercise for financial institutions in the state’s history. This year, it expanded the exercise to consider a cyberattack and include federal partners and over 100 financial institutions throughout Tennessee. “That’s the kind of coordination and pulling departments together that I think has been pretty unique,” says Gonzales. “We’ve never done anything like this in state government -- at least in my 31 years.”

 

In his book Good to Great, management consultant Jim Collins writes about something he calls “the flywheel effect.” It’s a metaphor he uses to describe the tremendous power that exists in the continued improvement and delivery of results. It’s something Adams thinks is happening now in Tennessee. The governor sets his priorities. Departments then enumerate operational goals and strategic initiatives that are tracked by metrics. Take tourism. One operational goal of the Department of Tourist Development is to increase tourist revenue from $19 billion to $20 billion over the course of the year. The strategic initiative is to do it by attracting more European tourists. These goals and initiatives can then be written into individual employees’ performance plans. By tying pay to performance, the TEAM Act encourages employees to excel in meeting these goals.

How to help them excel? In the pre-TEAM Act days, says Chief Learning Officer Trish Holliday, “there was this idea that the organization was responsible for the employee’s learning.” Holliday rejects that perspective. “To me, the organization is not responsible for the employee’s learning,” she says. Her job as CLO is to give departments customized, research-based curricula for learning that can be utilized by those motivated to move ahead.

The numbers suggest that this approach is working. Since 2013, participation in leadership training and development among the state’s 7,500 managers has more than doubled, rising from 314 in 2013 to 715 in 2017. The cumulative result over this five-year period is that the state HR department has trained 2,476 leaders in state government. Not only is that a desirable outcome, says Hunter, the HR commissioner, but it also has implications for the state’s ability to recruit high-performing employees to the state workforce. According to Hunter, research shows that the benefit new workers value most is “training and development.”

Adams believes the state’s restructured management systems and energized philosophy have begun to deliver big results. One measure he points to is the $500 million in recurring costs that the state has identified and eliminated since 2012. Groups such as the Tennessee State Employees Union are skeptical of the claims. They note that the biggest savings come from two areas -- TennCare, and corrections and parole. The $164 million savings from TennCare reflect the state’s ability to wring savings from its managed care programs. It’s an impressive achievement but, given the size of the program, not an altogether surprising one.

The other big reduction in costs is more surprising. The state says it has identified $88 million in lower spending in corrections and parole since 2012. Some of those savings have come through creative deals, including privatization arrangements whereby county jails contract with private prison providers to house state prisoners. That troubles people like Hedy Weinberg, executive director of the ACLU of Tennessee. “At the end of the day, private prison corporations answer to their shareholders,” she says. “They are not interested in saving taxpayers money.”

Union officials and even some lawmakers have also criticized the state for its approach to outsourcing. Since 2015, the state has moved ahead with ambitious plans to outsource the management and operations of state office buildings to a Chicago-based company in which Haslam reportedly had an investment. (The governor moved his assets into a blind trust in 2011.) More recent efforts to expand that push to the state’s college and university campuses led to concerns from both Democratic and Republican lawmakers about its impact on the salaries and benefits of maintenance workers.

But even critics acknowledge that overall the new operating system has yielded at least some good results. Internal promotions, for example, have risen sharply from 2,500 in 2013-2014 to 3,900 in 2016-2017. Salaries have risen significantly, too, from an average of $39,577 in 2012 to $47,267 in 2017. “We appreciate those [pay raises],” says Stamps of the state employees association. Moreover, for the 700-plus managers who have taken advantage of the state’s leadership programs -- people such as Dodson from the state Treasury Department -- the new regime has been liberating. “I grew up in Southern Kentucky, a farm guy,” Dodson says. “I get into IT, something that I love, and now I have this passion of helping people to develop and get to their personal goals [through] education and training. I have the best of both worlds.”

That’s exactly the attitude that Haslam wants to hear. “At the end of the day,” he says, “the team with the best players wins.” 

CORRECTION: A previous version of this listed Tennessee's Department of Tourist Development as the Department of Economic Development.