How Real Is the Bankruptcy Threat? · How Real Is the Bankruptcy Threat? ... 100 Blue Ravine Road...

CONNECTING AMERICA’S LEADERS May 2011 $4.50

How Real Is the Bankruptcy Threat?

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05.2011

FEATURES26 HOW BAD IS IT?

State and local leaders have taken to saying, ‘We’re broke.’ The true story is a lot more complicated.By Ryan Holeywell

32 HELP FOR THE HELPERSNonprofi ts deliver the lion’s share of health and human services. Right now, they need all the support states can give them. By Jonathan Walters

36 THINKING SMALLCities are struggling to increase residential density without destroying their established single-family neighborhoods. In Seattle, that means the return of the backyard cottage. By Zach Patton

42 CODE CURETo move ahead on a low-energy future, states and localities are turning to their building codes. By Linda Baker

48 MAKING PRISON WORKStates are increasingly utilizing prison labor to plug budget holes, but public employee unions aren’t happy. By Russell Nichols

VOL. 24, NO. 8

Inmates haul hay at a prison in Cañon City, Colo.

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Surplus Federal Personal PropertyMaking Efficient Use of America’s Resources


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PROBLEM SOLVER

54 Data-Driven Policing Geomapping helps law enforcement fi ght crime while lowering traffi c incidents.

56 Smart Management When is a shortfall a budget gap and not a budget defi cit?

58 Idea Center Five localities are on a mission to eliminate junk-mail waste.

60 Tech Talk A new standard solves an Internet address shortage while opening the door to innovation.

62 Public Money Have states and localities borrowed too much?

64 Player The nuclear crisis in Japan has put one public utility commissioner in the spotlight.

DEPARTMENTS

5 In This Issue

6 Letters

8 Dispatch Can free-market thinking fi x the food stamp program?

POLITICS + POLICY

11 Observer A diffi cult fi rst year doesn’t mean new governors won’t win re-election.

14 At Issue Spring training is over, but the stadium debate isn’t.

16 Potomac Chronicle When it comes to bankruptcy, we can’t rely on fi ction.

17 FedWatch Federal land-use policies anger public offi cials in the West.

18 Health Does a new county program aimed at reducing smoking cross the privacy line?

20 Green Government The consolidation trend is reaching state natural resource agencies.

22 Economic Engines Are temporary jobs the future of economic development?

23 Urban Notebook The lack of access to fresh food in cities is growing worse.

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IN THIS ISSUE

Seeking Some Clarity

When Wall Street analyst Meredith Whitney told 60 Minutes in December to expect hundreds of billions of dollars’ worth of public-sector defaults in the coming year, it was a shot heard round the municipal

bond world. The resulting panic led investors to fl ee the market—$38.7 billion of outfl ows in the fi rst three months of this year. Issuers, who were already struggling to borrow money from the market, saw interest rates on the highest-rated muni bonds increase by more than one-third.

It took one minute of 60 Minutes to set the municipal bond market on edge, and that’s partly why it’s such a hot topic in the pages of this month’s issue. Three writers are tackling the specter of municipal bond defaults and bankruptcies, starting with our cover story, How Bad Is It?, on page 26. Governing’s Ryan Holeywell acknowl-edges that, “Many storylines have, in fact, emerged around the question of munici-pal solvency.” So he sets out to debunk the myths and get to the reality that lies at the core of the bankruptcy storyline.

On a similar note, Governing’s founder and contributing columnist, Peter Hark-ness, takes a look at the budget pressures states and localities are under (Bankruptcy’s Tall Tales, page 16), and how these pres-sures have led to confusion in the public’s eye about impending bankruptcies in cit-ies and counties. John Petersen, on the other hand, takes a more historical look at debt, and how states and localities handle it (The Debt Demon, page 62).

Also in this issue, Jonathan Walters examines the fi nancial squeeze on nonprofi ts. According to a recent Urban Institute study, about 33,000 nonprofi t organizations are connecting with governments to provide services ranging from youth develop-ment to family support. As federal, state and local governments begin ratcheting down budgets, cuts are hitting health and human services the hardest. Although the nonprofi t world is gamely try-ing to maintain service levels in the face of cuts, the fact is that many can’t, which raises questions about both the nation’s social safety net and whether lost capacity can ever be rebuilt.

And fi nally, one reminder: Nominations for this year’s Public Offi cials of the Year are due June 3. This award honors extraordi-nary public servants who provide distinguished leadership, strong management expertise and good governance. Do you know an out-standing state, city or county leader who has shown true courage, innovation, creativity and excellence in his or her job? I invite you to nominate such an individual at governing.com/POY.

Enjoy our May issue, and let me know how we’re doing by sending me an e-mail at [email protected].

By Fred Kuhn, Publisher

Publisher Fred Kuhn

Editor Tod NewcombeExecutive Editor Jonathan WaltersEditor-at-Large Paul W. TaylorManaging Editor Elizabeth DaigneauSenior Editor Zach PattonAssociate Editor Jessica B. MulhollandChief Copy Editor Miriam JonesCopy Editors Elaine Pittman, Lauren KatimsStaff Writers John Buntin, Caroline Cournoyer, Ryan Holeywell, Russell Nichols, Tina TrenknerCorrespondents Katherine Barrett, Richard Greene, Alan Greenblatt Contributing Editors Penelope Lemov, Steve TownsColumnists William Fulton, Peter A. Harkness, Donald F. Kettl, Alex Marshall, Girard Miller, John E. Petersen

Creative Director Kelly MartinelliDesign Director & Photo Editor David KiddArt Director Michelle Hamm Senior Designer Crystal HopsonIllustrator Tom McKeithProduction Director Stephan WidmaierProduction Manager Joei Heart

Marketing Manager Jenna AlifanteEvents & Program Manager Jennifer Carman

Founder & Publisher Emeritus Peter A. Harkness

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Associate Publisher Erin Waters [email protected]: Account Director Chris Hempel 818-445-4451South/Midwest: Account Director Jennifer Gladstone 281-888-4125East: Account Director Erica Kraus 202-862-1458VP Strategic Accounts Jon Fyff e jfyff [email protected] Director Strategic Accounts Shelley Ballard [email protected] Production Manager Kori Kemble 202-862-1448Advertising Coordinator Alina Grant 202-862-1450Advertising Coordinator Nikki Bogopolskaya 202-862-1456

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CEO Dennis McKennaCOO Paul HarneyCAO Lisa BernardExecutive Editor Steve TownsExecutive VP Cathilea RobinettVP Strategic Initiatives Marina Leight

Reprint Information Reprints of all articles in this issue and past issues are available (500 minimum). Please direct inquiries for reprints and licensing to Wright’s Media: 877-652-5295, [email protected]

Subscription/Circulation Service

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Governing (ISSN 0894-3842) is published monthly by e.Republic Inc., with offi ces at 1100 Connecticut Ave. N.W., Suite 1300, Washington, D.C. 20036 and at 100 Blue Ravine Road, Folsom, CA 95630. Telephone: 202-862-8802. Fax: 202-862-0032. E-mail: [email protected]. Web: Governing.com. Periodical postage paid in Washington, D.C., and at additional mailing offi ces. Copyright 2011 e.Republic Inc. All rights reserved. Reproduction in whole or in part without written permission of the publisher is prohibited. Governing, Governing.com and City & State are registered trademarks of e.Republic Inc.; unauthorized use is strictly prohibited. U.S. subscription rates: Government employees—free; all others—$19.95 for one year. Foreign subscriptions: $74.95 in U.S. funds. Post-master: Send address changes to Gov-erning, 100 Blue Ravine Road, Folsom, CA, 95630. Subscribers: Enclose mailing label from past issue. Allow six weeks. Member: BPA International. Made in the U.S.A. May 2011 | GOVERNING 5



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LETTERS


Audience BreakdownThe following chart shows which articles from the April issue of Governing drew the most reader views. Although we receive many article comments online, letters to the editor are still welcome and encouraged at [email protected].

Pollution Prejudice by Linda Baker 1%

The CDBG Mobilization by Zach Patton

Not Just Semantics by Alex Marshall

Other articles

Voluntary Force by John Buntin

2%

6%

14%

Recall Feverby Ryan Holeywell

26%

51%

GOVERNING | April 201136 37April 2011 | GOVERNING

VoluntaryForceIn California’s Inland

Empire, volunteers are taking on jobs once

performed by public- sector employees. Does

government work require government

workers?

“Ed Laguna [above] is one of the most active volunteers we have,” says Lt. Chris Catren. When backup is needed, “I call Ed, and it’s over. He handles the rest of it.”

By John BuntinPhotographs by David Kidd

Volunteers WelcomeI enjoyed your article and appreciate the coverage of Redlands’ eff orts to maxi-mize the use of volunteers [Voluntary Force, April 2011]. The Redlands Police Department truly has a very successful volunteer program.

I noticed that there was no mention of the volunteers working in the Fire Department. The Fire Department has had a very active volunteer emergency radio operators group for over 18 years. These dedicated residents come back during major community events and emergencies. In addition, we have made up for a 60 percent cut in headquarters staffi ng with a number of committed administrative volunteers that [help out] daily. We already have volunteers involved in our fi re prevention program, producing educational videos, updating our website and Facebook page, and as fi re chaplain/grief counselors.

Needless to say, I am proud of our vol-unteers and I am always looking to get the word out that they are making a diff erence and that more are welcome

— Jeff L. Frazier, fi re chief, Redlands, Calif.

Well, isn’t Redlands just a little utopia. They send out a letter to the homeless to vacate land, and they all move? Where do they move to? How many homeless are we talking about? What happens when one of these volunteers gets injured [or] gets carried away and hurts someone? Do volunteers get preferential treatment

when a real job opens up even if they don’t have the minimum requirements, like education? Do these police volunteers go through a background check and periodic drug tests? I hope so. Just some questions fl oating through my mind.

— From a Governing.com reader

Rethinking the Gas TaxThese distinctions become increasingly important as Congress eyes major cuts to transportation programs [Not Just Semantics by Alex Marshall, April 2011]. Too easily do falsehoods about the gas tax and what it is “supposed” to fund take the place of real debate about what scarce funds should best be used for. Those wish-ing to see the research report on this topic, Do Roads Pay for Themselves, can fi nd it at www.masspirg.org.

— Phineas Baxandall, senior analyst, U.S. PIRG, Boston, Mass.

How about if everyone pays what it costs [to use the roads and public transporta-tion]? The gas tax could go up enough to actually support the roads, and the cost of public transportation for a ride could be the actual cost of that ride. The gas tax might be $3 a gallon and a short bus trip $10, but the “users” would be covering their costs. Anything carried by truck, plane or rail would go up in cost too, and that’s most everything these days.

— Charles Compton, senior data area specialist, University of Michigan

Transportation Research Institute, Ann Arbor, Mich.

Alex Marshall replies:Charles Compton raises an interesting thread about how high the gas tax would have to be if we were to pay for all the costs of roads out of it. There have been studies done on this, and one I remember from a decade ago said that the price of gasoline would be triple or quadruple what it is now, meaning we would be paying more than $10 a gallon for gas. The reason it goes so high is that once you raise the gas tax dramatically, people start driving less and using more fuel effi -cient cars. That in turn means you have to raise the tax even further to make up the diff erence, which then leads to even less driving, more fuel effi cient cars, and so on. This is good in some ways, but it makes it hard to pay for roads just through the gas tax, because you get this eff ect of diminish-ing returns.



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Selling food stamps is illegal. Yet these welfare benefi ts are frequently turned into cash, sometimes out of greed or crimi-

nal intent, and sometimes out of necessity.At fi rst glance, cashing out food

stamps seems like a cut-and-dried case of government waste, fraud and abuse—a media story that would evoke strong reactions from readers and viewers, and even stronger reactions from elected and appointed offi cials.

The term “food stamps” is a holdover from a bygone paper era. Electronic Ben-efi t Transfer (EBT) cards took the place of paper in 2004, and share many of the same features as debit cards. They came with the promise of less fraud and abuse, and simpler, streamlined administration.

But like the food stamp coupons they replaced, EBT cards are being sold for cash too, often at a deep discount. From Memphis to Los Angeles to Seattle, cards have been abused in ways that program

By Paul W. Taylor

Legalizing CashCan free-market thinking fi x the food stamp program?

DISPATCH

lem is about a felony crime, where those responsible for the conspiracies should be prosecuted to the fullest extent of the law.

But is this issue really so black and white? Some individual welfare recipi-ents may be selling their monthly food-only benefi ts for cash on street corners or Craigslist, but is it possible they are acting out of desperation?

When it comes to feeding and shelter-ing a family, 50 cents today may be more valuable than a full dollar at the end of the month. A good day is a day you make your bills. One way to preserve programs is to introduce reforms such as caps and cuts in the name of tighter fi scal controls, as has been proposed in Washington state and elsewhere.

But what if cash conversions were not only legalized, but also made unnecessary by replacing welfare programs with direct cash grants to the poor through the tax sys-tem? Government would be involved at the front end, but decisions on how to spend it would ultimately rest with the individual. That was free-market economist Milton Friedman’s idea more than three decades ago. His son David Friedman thinks the idea still has currency because, as he recently told the urban-policy magazine City Jour-nal, “many welfare recipients already know how to transform in-kind welfare like food stamps into cash.”

The idea would maintain a social safety net, but instead of administering myriad welfare programs, we’d simply be moving money around—requiring a much smaller bureaucracy. It would be a hard swallow for both the left and right, but may hint at a potential compromise at a time when policymakers are confronting just how much—and what kind—of government we can aff ord. G

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administrators never intended. These mis-uses—often illegal—lead to calls for reform and, at worst, to program budget cuts that hurt the honest users in need.

In Memphis, a television news crew caught a man in a local grocery store parking lot off ering to buy groceries for other customers with his benefi ts card in exchange for a cash kickback. In Seattle, some grocery stores allegedly had been paying EBT cardholders 50 cents on the dollar for the food-only benefi ts, only to

then redeem the cards for full value from the government. A further investiga-tion into these allegations in late March uncovered a wider scheme in which some 27,000 PIN-protected, but anonymous, EBT cards were reported lost or stolen each month. The cards were replaced, no questions asked.

At one level, the problem is with the system, which is characterized by lax con-trols, inadequate oversight and infl exible technology. At another level, the prob-

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America’s Wireless Companies


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OBSERVER By Alan Greenblatt

Buyer’s Remorse?

unpopular items such as the leasing of a toll road and changes to policy regarding daylight-saving time. But he ended up winning re-election handily and has been talked up as potential presiden-tial timber. “He certainly went for everything on his agenda all at once, up front,” says Ed Feigenbaum, editor of Indiana Legislative Insight , a capitol newsletter. “He plunged in, and he wasn’t going to let what some people saw as the political realities stop him from at least proposing things that he wanted.”

Of course, not every governor who loses political traction can regain it. Bruce Cain, a political scientist at the University of Cali-fornia, Berkeley, suggests that comebacks may prove particularly tough for governors who “may have misread their mandates, los-ing Reagan Democrats and fi ring up the union base along the way,” such as Wisconsin’s Scott Walker and Ohio’s John Kasich.

It’s one thing to temporarily lose the support of indepen-dents due to economic circumstances that might easily change, Cain says. “But policy overreaches aff ect the partisan bases that, once antagonized and mobilized, work against the public offi -cial until he or she is defeated,” he says. “It is not always the case that buyer’s remorse wears away quickly or that grudges do not carry over several years.” G

A lot of new governors were elected last year—28, in fact—and right out of the gate, many are hurting in the polls. Governors in several states, including Connecti-cut, Florida, Maine, Michigan, Ohio, Rhode Island and

Wisconsin, have seen their approval ratings dip into the low 40s and even 30s.

Don’t count them out, however. A diffi cult fi rst year doesn’t necessarily mean they’ll have a hard time winning re-election.

Governors can make themselves unpopular in a number of ways—raising taxes, for instance, or doing the reverse and draw-ing up austere budgets that cut spending dramatically—but they don’t want to stay unpopular for too long. “It aff ects the ability of governors to get things done,” says Justin Phillips, a Columbia University political scientist. “As governors’ popularity declines, they end up narrowing their legislative agendas.”

But those who push controversial agenda items in their fi rst year have several years to recover before having to worry about re-election. “Does it make sense to go for the big controversial stuff early on?” Phillips asks. “The answer to that question is yes.”

Indiana Gov. Mitch Daniels, for example, saw his numbers decline dramatically during his fi rst year in offi ce as he pushed

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A look at the people, events and ideas that shape state and local government.

Wisconsin Gov. Scott Walker’s approval ratings dipped to the low 40s in late March.

11May 2011 | GOVERNING



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Detroit is losing the numbers game, and that could have real fi nan-cial consequences for the Motor City. Since 2000, Detroit has lost

25 percent of its population, slipping to 713,777 residents. That matters, because under Michigan law, cities with popula-tions of more than 750,000 have special taxing authority.

As the only Michigan city with more than 200,000 residents, Detroit has had a unique advantage. It is able to levy a higher income tax than other municipali-ties, which accounted for $245 millionlast year and is expected to bring in $215 million this year. Detroit’s special status also allows it to impose a 5 percent tax on utilities, which last year contributed $44.1 million to police department coff ers.

The state specifi es population size rather than naming Detroit in its statutes because laws pertaining to a particular

place require a two-thirds vote of the Legislature. In theory, legislators can now simply lower the threshold to 600,000 or 700,000. But whether state lawmakers are inclined to do that is uncertain.

Gov. Rick Snyder has been seeking big changes in local fi scal management and wants to tie state aid to localities to changes in compensation and pension packages. Lansing observers say that Detroit’s special status may well become a bargaining chip within that larger debate.

“I have no sense that the Republicans will do that, but of course there are no guarantees,” says Fred Durhal Jr., a state representative from Detroit. “I don’t anticipate there will be any problem, but if there is, we will do what we need to do to make sure the bill stays as clean as possible.”

Legislators will be torn between two competing notions, says Jack McHugh,

senior legislative analyst at the Mackinac Center for Public Policy. They recognize that there’s a need to help the struggling city, he says, “but there’s also been a tra-ditional attitude among state offi cials of, ‘Let them stew down there. If they want to impose all those destructive taxes and fees, that’s their problem.’”

The Republican majorities in both chambers contain few members with any connection to Detroit. As a result, the city will likely see its special status preserved, but at a much greater cost than if it had been able to retain 40,000 more residents, suggests Craig Thiel, director of state aff airs for the Citizens Research Council of Michigan. “It’s clear that a lot of the changes [from the state level] have been premised more on a stick than on a carrot: ‘You show us the reforms, and then we’ll give you the money.’” G

What do renewable energy, minimum wage levels and dog breeding have in com-mon? They are all addressed

by state laws, approved through ballot initiatives and now subject to revision or reversal by the Missouri Legislature.

“I feel like we are in a situation where the Legislature is increasingly willing to overturn the will of the voters,” says state Sen. Jolie Justus. “The reality is that the

changes […] are actually gutting the intent of what voters meant to do.”

Justus, who says she’s not a huge fan of ballot initiatives, still fi nds it surprising that conservatives—who have often com-plained about “activist judges” overturning the popular will—are so willing to do the same thing through the legislative process.

While some states off er extra protec-tion for statutes enacted by popular vote—California’s Legislature can only amend

such laws by sending them back to the voters, and Arizona needs three-fourths of the legislative vote to approve any changes—in most states, they’re fair game. “In Washington state in the last year or so, they had to temporarily suspend a couple of voter-initiated measures having to do with teacher pay and class size to save a billion dollars,” says Jennie Bowser of the National Conference of State Legislatures. “There’s a fundamental fl aw in that way


Fewer People, Less Money

When Lawmakers Overturn the Popular Will

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| AT ISSUE

By Ryan Holeywell

A Financial Home Run?

Spring training is over, but the stadium debate isn’t.

Last summer, Florida’s Lee County was tasked with closing a massive budget defi cit. Hit hard by the housing bubble and facing an unemployment rate that’s more than 40 percent higher than the national average, the county cut millions from its emergency medical services budget, approved employee pay cuts and furloughs, and took $75 million from the reserve fund .

Yet in the midst of the penny pinching, the county still decided to sell $81 million in bonds to fund a new baseball stadium where the Boston Red Sox would play just 18 to 20 spring training exhibition games per year .

To some, the deal represents a giveaway to a team that doesn’t need a hand-out—the Red Sox franchise is worth an estimated $870 million. But to elected offi cials in Arizona and Florida, facilities like the one in Lee County represent invest-ments that pay for themselves many times over.

The spring training Cactus League in Arizona and Grapefruit League in Florida, they argue, contribute millions to state economies—more than $350 million in Arizona, and $753 million in annual sales in Florida, including $385 million from out-of-state visitors. “It’s a proven economic driver,” says Nick Gandy of the nonprofi t Florida Sports Foundation, adding that the stadiums also host minor league teams and college baseball tournaments that likely make the facilities’ impact even greater.

Offi cials also highlight the intangible benefi ts: Cities that might otherwise be obscure get cachet and name recognition by serving as spring training hosts. That, in turn, can result in businesses’ investing in the community.

Economists, on the other hand, have a different outlook. Since the teams change spring training locations so frequently—half a dozen , for example, have moved their spring sites from Florida to Arizona since 2003—there’s ample data to determine whether a city suffers when its team leaves. Philip Porter, a sports economist at the University of South Florida in Tampa, says “nothing changes” when a team skips town. Sales tax, property values and the size of the tax base remains at comparable levels, undermining the argument that the stadiums pose a vast economic benefi t.

A study by University of Akron professor John Zipp examined the amount of taxable sales in Florida communities that hosted spring training in 1995, when the baseball strike caused a 60 percent drop in attendance. If spring training had a major fi nancial impact on those communities, they should have suffered tremendously. That didn’t happen, and in fact, their taxable sales increased. Those fi ndings, Zipp

wrote, “may indicate that spring train-ing is not the major tourist draw that many claim.”

For a more detailed look at the issue, visit governing.com/spring-training

of lawmaking, in that we’re asking people to make decisions in a vacuum. Of course, small class sizes are good, but how do those decisions fi t into the budget?”

Proposals in both New Mexico and Montana to repeal voter-approved medi-cal marijuana laws may have stalled this year, but the Missouri Legislature is show-ing little hesitation in going after a wide range of targets. Justus suggests this is because there has been a surprising lack of political blowback following eff orts in recent years to roll back initiatives regard-ing regulations on campaign fi nance and carrying concealed weapons.

Even supporters of the so-called puppy mill initiative, which imposes stricter regulations on commercial dog breeding operations, recognize that legislators may succeed in upending the initiative. That measure prevailed in November because citizens in St. Louis, Kansas City and their respective suburbs outvoted the rest of the state. It was defeated in 103 out of Missouri’s 114 counties.

“They really are going against the will of the people in repealing the entire thing,” says Bob Baker, executive director of the Missouri Alliance for Animal Leg-islation. “But a lot of them campaigned on this issue. They found it a good issue for rural legislators. They pretty much have to do a repeal.” G


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Bright House Field in Clearwater, Fla., the spring home of the Philadelphia Phillies

Missouri may over-turn some ballot initiatives.

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Catch up with us in one of our selected cities for 2011.

www.governing.com/events

To get involved, please contact:

Liz Wallendorf, Event Director

[email protected] | 520.869.1276

North Carolina Raleigh, NC April 27, 2011

TexasAustin, TXSeptember 7, 2011

CaliforniaSacramento, CA October 6, 2011

New YorkAlbany, NY November 9, 2011

Each regional GOVERNING forum offers public leaders

an opportunity to learn and share best practices in a

highly interactive format custom tailored to the specifi c

issues of the host jurisdiction.

• Jobs • Policy• Budgets • Healthcare

LE ADERSHIP FORUMS2011

GOVERNING is pleased to announce our new series of Leadership Forums.


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Bankruptcy’s Tall Tales If we’re going to make smart choices, we can’t rely on fi ction.

By Peter A. Harkness

A couple of months ago while skiing in Utah, my son and I shared a lift with a lean, athletic-looking man in a fancy one-piece outfi t. It turns out he was an invest-ment banker from New York City.

After the obligatory jokes about how unpopular investment bankers are, I asked for his take on municipal bonds: Were they as shaky as some analysts and politicians were warning? He laughed, noting that munis now made up more than half of his personal portfolio. But, I asked, what about the interview on 60 Minutes where a Wall Street analyst warned of a coming wave of state and local bankrupt-cies amounting “to hundreds of billions of dollars’ worth of defaults?”

“I hope the analyst issues more warn-ings like that,” he replied, “because I’ll just keep on buying at a third off where the price ought to be.” And as our lift mate skied off , he added, “That analyst is a complete idiot.” I guess New York investment whizzes don’t mince words.

I gave his on-the-slopes anal-ysis some credence though, because I had been hearing the same thing—expressed in less infl ammatory language—from fi scal experts at the National Governors Associa-tion and National League of Cities, as well as from Mark Zandi of Moody’s Analytics.

I may end up gorging on crow, but I’m betting that the skier-banker knew what he was talking about and we won’t see a wave of public bankruptcies.

If that’s true, why has this belief been perpetuated ? I suspect it has a lot to do with the public-sector pay and benefi ts issue, which this past winter has made some state capitals remi-niscent of Cairo or Tripoli. Public employees are being

depicted as a privileged class that is paid more and has superior benefi ts than workers in the private sector. It’s certainly true that they have fared better in income growth and job security during this past decade of subpar economic performance. But the notion that they are paid better is false. Research shows that when jobs requiring similar skills and education are compared, public-sector workers at the federal, state and local levels make somewhat less than those in the private sector. As they move up toward higher-end jobs, they earn substantially less.

Where there is a signifi cant disparity is in pensions and benefi ts, in part because private-

sector employees have had their benefi ts pared back substantially in recent years, and public-sector workers have not. In addition, there have been serious abuses where some workers, particularly those in public safety, gamed the sys-tem by retiring at incredibly young ages, double-dipping and either maximizing overtime or job-hop-ping late in their careers to pump up pensions.

To recap, pay generally is not a problem, but pensions and ben-efi ts must be addressed because the current situation is unsus-tainable, both fi nancially and politically. At the same time, exaggerating the problem—to mythic proportions in the case of muni bond defaults—has been a useful device in trying to hobble public employee unions, but that’s more about politics than budget balancing.

Furthermore, the fi c-tion that fi ghting waste, fraud and abuse could eas-ily trim government down to some optimum size, or the opposite, that waste is inconsequential in the great scheme of things, is not true. The contin-ued fragmentation of

Politics+Policy | POTOMAC CHRONICLE


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By Ryan Holeywell

much of local governance surely quali-fi es as wasteful. A recent report from the Government Accountability Offi ce off ers stunning evidence of mind-boggling redundancy in federal programs wasting billions of dollars. But in both cases, the problem isn’t so much administrative as political, because behind every local juris-diction or redundant federal program that cannot be consolidated are politicians and their constituents protecting their own turf.

Nowhere is fi ction-making more of an art than in Washington, which is one reason much of what passes for a “debate” about the federal debt crisis is so disheartening. Two independent commission reports on

the debt problem were supposed to provide some reality therapy—both for leaders and the populace. Eventually that may happen, but evidently not before we go through a political charade of concentrating on about 12 percent of the budget without addressing reforms of entitlements, the tax system and national security expendi-tures. All the stuff that’s in the center ring of controversy—Planned Parenthood, Head Start, environmental regulation, student loans, public broadcasting—is meaningless in any discussion of a $3.8 trillion budget.

There is a price to pay for all this deception. If we’re going to make choices, let’s make sure they aren’t false ones. The process of whittling down our public debt level, if it’s done right, will be painful for everyone. Powerful interests and common folks alike will have to give something—and that’s the reality. G


I’m betting we

won’t see a wave of

public bankruptcies.

So why has this belief

been perpetuated?

“

By Ryan Holeywell

New Wilderness War?

State and local offi cials are railing against new policies they say will prevent development and job growth in huge swaths of federally managed land in the West. Now they’ve fi led a federal lawsuit, and more legal challenges could be forthcoming. The suit, fi led in March by tiny Uintah County, Utah, (population 31,500) and the Utah Association of Counties (UAC), seeks to overturn the new “wild lands” policy announced by Department of Interior Secretary Ken Salazar last December—a policy that calls for the Bureau of Land Management (BLM) to compile an inventory of federally controlled land that has “wilderness char-acteristics” and update land-use plans for areas that fi t that description. The BLM oversees 245 million acres of land.

The new policy is a shift for the bureau, which had essentially stopped taking action on wild lands as a result of a 2003 settlement between the state of Utah and then-Interior Secretary Gale Norton that was criticized by environmental-ists. Both state and local offi cials say they weren’t consulted before the new policy was announced, which has made the fi ght even more personal. “The anger and the angst that is coming from our members—they feel this as a bit of a slap in the face,” says Ryan Yates, associate legislative director of the National Association of Counties.

For Uintah County, the lawsuit’s stakes are high. More than half of all of the natural gas and oil produced in Utah is extracted from that county. Mark Ward, attorney for UAC, says the policy will have a major impact on the energy indus-try in Utah, and even before the BLM implemented the policy, it had started rejecting lease applications and drill permits in the area, resulting in decreased revenue for state and local government. “This is our jobs,” says Uintah County Commissioner Mike McKee. “This is about our families, our livelihoods, our way of life.”

Opponents of the policy say it was created to allow the BLM to bypass rules that only give Congress the authority to designate wilderness areas. But Nada Culver, senior counsel at The Wilderness Society, which advocates for preservation of wilderness land, says the BLM’s new policy is a return to its traditional mission and duty.

BLM officials argue that a 2008 appeals court ruling requires it to main-tain a wilderness inventory and consider wilderness preservation as it plans land use. The bureau also maintains that the new wild lands desig-nation is flexible and not nearly as restrictive as its critics claim. Bureau offi cials say it won’t impair economic activity or halt existing projects, and it will help preserve areas that host outdoor activities like fi shing and hunt-ing, which generate $7.4 billion annually for local economies in the West.

Still, more lawsuits could be coming from other states and counties that expect it will restrict the oil and gas industry, as well as the construction of energy transmission lines and other projects. Some House conser-vatives may also work to simply block funding that would allow the BLM to implement the policy. McKee says he hopes the BLM will repeal the policy on its own. “I would love to see the Department of Interior step back and say, ‘We made a mistake.’” G

|

Find out what thefeds are up to at governing.com/fedwatch

FEDWATCH

Federal land-use policies anger public offi cials in the West.



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By Jessica B. Mulholland

Testing for NicotineDoes a new county program aimed at reducing smoking cross the privacy line?

Politics+Policy | HEALTH

18

Penalties against tobacco smokers took a big leap forward in 1994: California became the fi rst state in the country to ban workplace smoking, followed by a ban in 1998 on smoking in bars and restaurants. Other places soon fol-

lowed the Golden State’s lead, and today all 50 states ban smoking in the workplace and 25 completely ban smoking in bars and res-taurants. Some cities have even taken the initiative a step further by prohibiting smoking at parks and on beaches.

Yet as health-care costs continue to rise, especially those related to tobacco consumption, some governments are taking the practice of penalizing smokers to a new level. Starting in July, Maricopa County, Ariz., will test its employees for nicotine. Those who pass the saliva test will receive $20 in health insur-ance discounts per pay period, up to $480 annually. Those who refuse to take the test or don’t turn up nicotine-free pay the full insurance premium.

It’s well known that health care for smokers costs sig-nifi cantly more than for nonsmokers. For every pack of cigarettes sold in Indiana, for example, residents spend $7.57 in health-care costs related to smoking, accord-ing to the Indiana Tobacco Prevention and Cessation Agency. Smokers in the Hoosier State visit health-care professionals up to six times more often than nonsmokers, and they’re admitted to the hospital almost twice as often.

But is it right to fi nancially penalize those who smoke? Alessandra Soler Meetze, executive director of the American Civil Liberties Union of Arizona, says no. “I think there are much better and less intrusive ways of doing this,” she says, noting that one of the fi rst things to consider should be smoking cessation programs, which are much more eff ective at helping people quit. “It would probably make more sense for them to take that approach rather than forcing their employees to compromise their privacy rights.”

In March, Soler Meetze told The Arizona Republic she opposed the test because it’s an intru-sion on privacy—it crosses the line when it comes to an employee’s rights. According to the county’s Non-Tobacco User Premium Reduction program, the Employee Benefi ts Division will only receive a report show-ing the saliva test results as either a pass or fail, and because of Health Insurance Portability and Accountability Act regulations, the division also will keep the results confi dential.

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But Soler Meetze remains concerned about what the policy actually states, and that testing saliva for nicotine is potentially a slippery slope. “It could open the door to all other sorts of dis-crimination,” she says. “There is nothing prohibiting the county from using that information to gather additional information about health conditions—and that is not the employer’s business.”

Ultimately people should be judged based on their ability to perform their job-related functions, Soler Meetze says, “not on whether they smoke when they are off duty or whether they have other lifestyles or unhealthy habits.” G





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By Elizabeth Daigneau

Politics+Policy | GREEN GOVERNMENT

The Green SqueezeThe consolidation trend is reaching state natural resource agencies.

As state budget pressures continue to mount, more and more leaders are trying to cut costs by consoli-dating agencies—and that includes environmental departments. In inaugural speeches, State of the State

addresses and budget proposals this spring, no fewer than 15 governors proposed combining two or more departments in the areas of natural resources, interior, parks, wildlife, environmental protection and energy.

“A lot of [governors] are taking a top-to-bottom look at govern-ment,” says Sue Gander, director of the Environment, Energy & Transportation Division in the National Governors Association. That may mean consolidating environmental agencies.

In Connecticut, Gov. Dannel Malloy is planning to merge the departments of Environmental Protection and Public Utility Con-trol. In Maryland, Gov. Martin O’Malley is considering merging the state departments of Natural Resources and Environment. And in Colorado, Oregon and Washington, state offi cials are working to merge their wildlife and parks programs in an eff ort to save money and streamline services.

Some critics worry that all this eco-consolidation may water down the impact of state environmental protection agencies. In Florida, for example, Gov. Rick Scott has considered creating a Department of Growth Leadership, an agency that would value job creation and economic development as being just as impor-tant as clean air and water.

And it may not even save that much money. A state’s parks and wildlife program, says Gander, “is not a place where a lot of money is to be had.” In Colorado, a merger of the wildlife and parks agencies may only save the state $3 million to $4 million a year. In Washington, the merger is estimated to save $2.5 million in the second year. In a state facing a $2.5 billion budget gap, $2.5 million isn’t much money. That’s partly why the Washington Fish and Wildlife Commission (WFWC) is opposing the merger. “The cost savings identifi ed in the bill are relatively small in light of the

substantial reorganizational eff ort that a merger would entail,” the commission said in statement released in February.

Conservation groups like the WFWC and the Colorado Wildlife Federation have a litany of concerns and objections to the proposed mergers, mostly involving the impact it will have on wildlife management and how hunters’ and anglers’ license fees are spent. The concerns are not unfounded. In 1963, the Colorado Division of Games, Fish and Parks merged with the State Parks department. The union lasted a mere nine years before the agencies were split again in 1972 because hunters and anglers were worried that money from hunting and fi shing was being spent on parks. Keeping parks and wildlife funds sep-arate is one of the main challenges facing the mergers this time around too. Much of the Colorado Division of Wildlife’s $110 million budget comes from hunting and fi shing license revenue and fees. About $20 million of that are federal dollars generated by taxes on ammunition and on hunting and fi shing equipment. If the money is used for anything other than fi sh and wildlife management, the state could lose that funding.

For that reason, not every state is following the consolida-tion trend: Michigan is abolishing its Department of Natural Resources and Environment just 18 months after it was created. After determining that their core missions were too disparate and vast to be run under one agency, Gov. Rick Snyder re-established the Department of Natural Resources (DNR) and the Department of Environmental Quality (DEQ) in March. “Michigan is blessed with an abundance of natural resources, and we need to be a leader and innovator in protecting these resources,” Snyder said in signing the executive order to split the single agency. “Separat-ing the DEQ and DNR means we can better address these key priorities.” The two agencies had been pulled apart once before—in 1995 under Gov. John Engler. G





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the answer will shape the future of the business. After all, economic development usually revolves around the whole idea of “jobs”—growing them, stealing them, add-ing them to the local economy and makingsure constituents have them. Oftentimes, economic development success is mea-sured in terms of the number of jobs created or saved, and economic develop-ment deals between government agencies and private companies are based on jobs as a metric.

What happens when there really is no such thing as a “job” anymore? How do you practice the art of economic development?

The answer is that even though there may not be jobs in the conventional sense, there is still work. That’s the whole idea of the 1099 economy. It’s just a diff erent way of organizing the economy. Busi-nesses need economically valuable work to be done, but instead of employing people full-time and permanently, they contract with individuals to do the work temporarily. The work ebbs and fl ows, the businesses come and go, and the 1099 employees work for a while and then move on. It’s a lot more fl uid—and seemingly uncertain—than the traditional economy.

What this means is that economic development eff orts become much less about individual businesses and much more about the underlying infrastruc-ture—the dynamic fl ow of business growth (entrepreneurs, fi nanciers, public infrastructure) as well as the labor force (skill levels and the density of the labor supply). The “ecosystem” of economic growth becomes more important because a fl uid economy requires this system to be operating at all times—and most of it is in the community or the region, far beyond the factory gates.

Some of America’s most prosperous economic sectors operate this way. The

The 1099 EconomyAre temporary jobs the future of economic development?

Having watched both her parents work in the 1099 economy throughout most of her childhood, my daughter isn’t par-ticularly afraid of 1099 jobs. But she, like everybody else in the so-called Millennial generation, is a little uncertain about where this will lead. How stable is 1099 work? Will she ever have a full-time job? What will she do about medical insurance once she turns 26 and is no longer eligible to be on my policy?

These questions boil down to this: Is the 1099 simply a temporary situation because employers are skittish about the future? Or are we seeing a permanent change where most people freelance and only a few have full-time jobs?

This is a good question for economic development practitioners to ask because

By William Fulton

Politics+Policy | ECONOMIC ENGINES

My daughter’s just about fi n-ished with college and has started the job search. It’s both exhilarating and fright-

ening at the same time, of course. Yet it’s yielding a few surprises: First, there actu-ally are jobs out there. Second, they’re not exactly, well, jobs.

Most of the entry-level jobs she’s run-ning across in her fi eld are “1099 jobs.” In other words, you don’t become a full-time employee with benefi ts. Rather, you simply enter into a contract with your employer to provide work. Maybe you have regular hours and maybe you don’t; maybe you have a workstation and maybe you don’t. In any event, you are a contractor, not an employee—so at the end of the year you get a 1099 form from the IRS, not a W-2.

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Over the years, I’ve lived in a number of cities. While having access to good public transit was a must, so too was a neighborhood grocery store. Each time I moved, I never had a problem fi nding a place with a market in walking distance that off ered fresh food.

It’s been more than 20 years since my last move, however, and when it comes to grocery stores in cities, the situation has changed. Forget about living in a city where virtually every neighborhood has a food store within walking distance or even a short commute. Now, health experts talk about “food deserts” where grocery stores are vir-tually nonexistent, McDonald’s are plentiful and fresh fruits and vegetables are scarce.

In March, the Massachusetts Public Health Association released a report show-ing the Bay State has one of the worst shortages in the nation of city supermarkets that off er fresh food. For an affl uent and urban state like Massachusetts, which prides itself on the quality of its education and health-care system, the results are startling. For example, Lawrence, with a population of 70,000, has just two full-service grocery stores. The report also mentions how some city residents have to ride as many as three diff erent buses to reach a grocery store.

The problem isn’t just about inconvenience. A number of studies have shown that people living in communities without a supermarket suff er disproportionately from obesity and other related health issues. In addition, opening and operating a super-market in a city faces several hurdles. Training, security and maintenance costs are considerably higher in urban areas, according to a study conducted by The Reinvestment Fund, an organization that helps fi nance neighborhood revitalization.

To counter the disadvantages, health advocacy groups have been developing state-fi nanced initiatives to attract super-markets to underserved neighborhoods. The most notable success so far is the Penn-sylvania Fresh Food Financing Initiative, which started in 2004 and used $30 million in state seed money to fi nance the develop-ment of nearly 70 supermarkets and fresh food outlets in urban and rural areas around the state. One Philadelphia-based grocery store operator found that his four new inner-city stores are as profi table as the ones he runs in the suburbs.

Other cities are taking notice. Houston, which has a ratio of one store for every 12,000 people, compared to the national average of one to 8,600 people, is seeking to set up a Texan version of Pennsylvania’s initiative. First lady Michelle Obama has also praised initiatives that put more grocery stores in cities, citing the health impact on children.

Funding for a $35 million federal program called the Healthy Food Financing Initiative, however, could be in trouble. Congress is looking at ways to reduce the budget defi cit, and has threatened to cut the program, which also mirrors Pennsylvania’s eff ort. That would be a shame, say health food advocates, given the ever-growing need around the country for fresh food in city neighborhoods. G


entertainment industry functions this way not only in Los Angeles, but in New York and other cities as well. Everybody’s a “jobber,” moving from project to project. Silicon Valley works in a similar manner, with highly skilled employees fl oating from startup to startup.

As a result, savvy economic devel-opers who want to tap into the 1099 economy must recognize that they must focus on a diff erent version of the basics. Visiting existing large businesses in the community remains important because your largest businesses are probably where your future entrepreneurs cur-rently work. But you also have to know the subtle ebbs and fl ows of your local economy, especially where the clusters of small business activity are located. You have to stay in touch with your educational community, especially your community colleges, to understand what skills your labor force has and needs. And, of course, you have to read all those Craigslist ads that my daughter is reading.

It’s a much more ear-to-the-ground approach than traditional economic development because the 1099 econ-omy is basically an ear-to-the-ground economy. Traditional statistics may tell you that no jobs are being created and unemployment is high, but some-where in your community, somebody’s doing work. G


By Tod Newcombe

| URBAN NOTEBOOK

Taking on Food DesertsThe lack of access to fresh food in cities is growing worse.

What happens

when there really is

no such thing as a

‘job’ anymore?

How do you practice

the art of economic

development?

“

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May 2011 | GOVERNING 23



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2010 HONOREESLEFT TO RIGHT: Rep. Jerry Madden, Texas; J. Wm. Covington, Superintendent, Kansas City, Missouri Public Schools; Sonny Perdue, Governor, State of Georgia; Steve Fletcher, Chief Information Offi cer, State of Utah; Mick Cornett, Mayor, Oklahoma City; Sen. John Whitmire, Texas; Ana Gelabert-Sanchez, former Planning Director, City of Miami; Rep. Diana Urban, Connecticut


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2011 CALL FOR Nominations

PUBLIC OFFICIALS

YEARof the

GOVERNING’s Public Offi cials of the Year are extraordinary public servants who provide distinguished leadership, strong management expertise and good governance.

We invite you to nominate such an individual for GOVERNING’s 2011 Public Offi cials of the Year. Do you know an outstanding state, city or county leader who has shown true courage, innovation, creativity and excellence in his or her job?

Award winners will be featured in GOVERNING’s November issue and honored at a gala at the Willard InterContinental Hotel in Washington, D.C. on November 17, 2011.

Please submit nominations through our website: www.governing.com/POY

Deadline: Friday, June 3, 2011

For more information, contact: Fred Kuhn, Publisher, 202.862.1455, [email protected].


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R evenue is falling. Demand for services is increasing. A trillion-dollar pension liabil-ity looms. No wonder there is

speculation about the fi scal well-being of states and localities. In some circles, there’s a growing presumption that these fi nancial woes will lead to a bevy of municipal bond defaults or even some big bankruptcies.

Is it true or just conjecture? That all depends on who is doing the talking.

By now, the claims of analyst Meredith Whitney—who predicted on 60 Minutes last December that there would be 50 to 100 sizable municipal bond defaults—are famous. Her predictions came just as fed-eral stimulus money that helped states weather the recession was scheduled to end. States then started passing the fi scal pain down to localities by cutting aid to them. Meanwhile, localities had already been through several years of belt-tight-ening, with the worst yet to come: the likelihood that property taxes will decline next year and beyond that.

Headlines about these struggles, compounded by Whitney’s predictions, have spooked investors and caused a boatload of trouble for state and local governments hoping to raise money in the capital markets. When the press gets its teeth into a story like this, “it does have an impact on fi nancial markets,” says Mike Belarmino, associate legisla-tive director at the National Association of Counties. The result has been a 30 to 35 percent increase in the cost of bor-rowing for state and local governments since last summer. “Meredith Whitney cost us quite a bit of money,” says Wash-ington state Treasurer James McIntire.

To an extent, state offi cials them-selves may be contributing to the sense of impending disaster. Some state and local leaders, for instance, have pled poverty in the hopes of persuading Congress to restore lost federal aid. Others, working to advance their cost-cutting agendas, have created an atmosphere of fi scal crisis by repeating, “We’re broke.” Meanwhile, the media, seeking to advance the next big story, has furthered a narrative that munici-

State and local leaders have taken

to saying, ‘We’re broke.’ The true

story is a lot more complicated.

How Bad Is It?

By Ryan Holeywell



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pal bonds are the next housing bubble. There has also been specula-tion that some investors capitalized on the situation by pushing a mass exodus from investment in municipal bonds.

Many storylines have, in fact, emerged around the question of municipal solvency, some of which threaten to be accepted as reality. Some stories are just that—myths that aren’t backed by any solid facts. But in most cases, separating truth from fi ction is much more complicated.

Myth 1: Meredith Whitney’s predictions were hopelessly wrong.

Nary can a conversation be had about municipal fi nance with-out Whitney’s forecast being mentioned [see Bankruptcy’s Tall Tales, page 16]. Most analysts in government and fi nance agree that, yes, she vastly overstated her case on 60 Minutes. Even she has backtracked somewhat since December. But the reality is, municipal defaults could reach much higher levels than the low-risk municipal market is used to. Given the pressures on state and local budgets and the announcement by Moody’s, the credit-rat-ing agency, that there will continue to be more credit downgrades than upgrades this year, her pessimism isn’t misplaced.

She also raised valid concerns about which constituents states are ultimately beholden to—taxpayers, bondholders or public employees. The three often have competing interests that can’t be easily reconciled. Even Whitney’s critics say her comments have helped put a much-needed spotlight on the fi scal issues states and localities are facing, particularly with underfunded pensions, unfunded health care for retirees and the rising costs of Medicaid. Forty-four states and the District of Columbia project budget short-falls totaling $112 billion for fi scal 2012. This is not the fi rst, second or even third year they’ve faced massive budget gaps. The situation is such that, Reid Smith, a portfolio manager with RBC Global Asset Management, has suggested that states and localities do a complete re-evaluation of how governments operate, what services they need to provide, and what means they use to pay for those services. “Deci-sions,” he says, “have to be made outside the box.”

As for Whitney’s specifi c predictions on defaults, critics counter her argument by noting the historically low rates of default in the muni market, [see The Debt Demon, page 62]. While the market is not likely to face the sort of catastrophic scenario

Whitney described, she is correct on at least one point, writes Greg Donaldson, director of portfolio strategy at Donaldson Capital Management, in a column on the Seeking Alpha business website. “[T]oday’s municipal bond market is not the sleepy, low-risk market that most of us have come to know and trust over the years.”

That said, when it comes to avoiding a default on a bond, states and localities have an inherent advantage over corporations: they can increase taxes or fees to raise money to pay their bondhold-ers, or they can fi nd the money by cutting services without losing income. Both tactics come, of course, at a high political cost, but even in a fi nancially troubled state like Illinois, “its fundamentals are ultimately substantially better than an over-debted company,” says Phineas Baxandall, a senior tax and budget policy analyst with the advocacy group U.S. Public Interest Research Groups. None-theless, academics and industry analysts agree that while there is likely to be an increase in defaults, such events won’t reach the levels predicted by Whitney—and they will be isolated events.

Myth 2: Bond debt and retiree benefi ts are crushing states.

Yes, the Great Recession has taken a tremendous toll on pen-sion fund portfolios; states and localities have not jumped to make up the diff erence with tax revenue. And yes, states have taken advantage of low interest rates and federal subsidies on those rates to raise money for public projects. But commentators who see these as back-breaking costs for state and local purses have commingled the two issues, says Iris Lav, a senior adviser at the Center on Budget and Policy Priorities. And that, she suggests, makes the immediate future seem more dire than it really is. Municipal bond debt payments account for only 5 to 8 percent of state and local budgets, which is considered a reasonable level. Pensions are only 3 to 4 percent of state and local spending.

True, there are serious issues facing pensions: In 2008, most state pension plans were more than 80 percent funded, while last year, only about one-third of states funded them at that level. But the issue has not reached a crisis level in most states. Most plans can continue covering benefi t payments for 15 to 20 years, and even in New Jersey—which according to the Pew Center on the States has one of the highest levels of unfunded pension liabili-ties—state pension assets covered 2009’s obligations tenfold. The


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the city.

The city, citing a $16 million

defi cit, fi led for bankruptcy. It was

ruled ineligible because it wasn’t

technically insolvent.

California didn’t offer Orange

County a bailout, so the locality

issued $880 million in bonds to pay and refi nance

its debt.

The struggling city fi led for bank-ruptcy rather than take state aid that came with strings attached. Camden ultimately withdrew the petition, and it

got state aid.

When the city faced up to $4 billion in

debt, the state and federal government

provided aid.



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majority of states are taking steps to address the stress facing their plans, such as cutting benefi ts for new employees, reducing cost-of-living adjustments and increasing employee contributions above the now typical 5 to 10 percent level. The problems are huge but not insoluble. States also have a big bill coming due on retiree health benefi ts. But those benefi ts don’t face the same legal protections as pensions, so they may lend themselves to a wider variety of solutions.

In a recent report, the Government Finance Offi cers Associa-tion noted that neither bond payments nor pension funding will cause default or bankruptcy. But that doesn’t mean governments can kick the can down the road. Governments need to act fast on pensions, since there is little room for error. Bond debt and pensions “are two distinct problems right now,” says Peter Hayes, head of the municipal bonds group at asset management fi rm BlackRock. “That distinction is beginning to narrow over time.”

Myth 3: State bankruptcy is a far-fetched notion.

The federal bankruptcy code allows municipalities to declare bankruptcy. It makes no such provision for states. Some congres-sional Republicans began speaking earlier this year about the pos-sibility of creating a bankruptcy mechanism for states. The idea was to give states a way to get out of debt. But it also stemmed from a self-protective refl ex: A bankruptcy provision for states could reduce the likelihood that the federal government would have to bail out a struggling state.

Advocates of a state bankruptcy provision say it could off er states some needed fl exibility. For starters, a state might be able to alter the contracts of unionized employees and get more savings than they would through piecemeal changes outside of the bank-ruptcy process. They might also be able to alter some—though not all—aspects of retiree pensions.

Bankruptcy also might allow a state to reduce its bond debt, which is diffi cult to alter outside that process. By using the bank-ruptcy court to bring bondholders to the table, bankruptcy would ensure that employees and citizens aren’t alone in bearing the sacrifi ces of a state’s fi nancial struggles.

Critics of allowing states to declare themselves bankrupt—namely, governors—have taken umbrage at the discussion of a state

bankruptcy mechanism. They argue that they don’t need it and that such chatter spooks investors and increases borrowing costs.

To be sure, a declaration of bankruptcy would have serious implications in the fi nancial markets. But, says David Skeel, a law professor at the University of Pennsylvania, it would beat a complete default. As to arguments that state bankruptcy would be unconstitutional due to its threat to state sovereignty, Skeel, who is one of the leading advocates for a state bankruptcy law, dis-misses that notion. He suggests that it could easily be worked out by making the process voluntary, as it already is for municipalities.

Critics say state bankruptcy isn’t needed because states almost always fi nd a way to make payments, even if it isn’t pretty. The last state default was Arkansas in 1933, and virtually nobody expects a state to default as a result of the current fi nancial situ-ation. So why bother? “It’s dangerous,” Skeel says, “to say that something that happens rarely is something that we can ignore.”

At the present time, House leadership has dismissed the notion.

Myth 4: Bankruptcy is a panacea for ailing municipalities.

In many states, localities can declare bankruptcy—and a few have. But that’s not to say that those who’ve done it have found it to be an ideal option. To even consider bankruptcy, a locality would likely be facing extreme pressures from declining tax rev-enues and increasing demands for social services. But other factors are more likely to drive it to the brink of bankruptcy: mismanaged investments, poor oversight over the fi nancing of an infrastructure project or unsustainable labor contracts.

The most recent example of a city working its way through a declaration of bankruptcy is Vallejo, Calif. It fi led for relief from its creditors in 2008, and it is likely that a judge will approve its fi nan-cial plan as early as next month. That plan involves restructuring some $50 million in publicly held securities. It also gave the city the opportunity to renegotiate contracts with city workers—one of the main reasons the city declared bankruptcy—which has already resulted in savings of $34 million through June 2010.

But bankruptcy has its challenges. In about half of the states, municipalities must fi rst get permission from their legislatures to fi le for bankruptcy. That itself is an uphill battle. Furthermore, the market can punish a bankrupted municipality for years if



2008VA L L E J O , C A L I F.

2010H A R R I S B U R G , PA .

2010N A S S A U C O U N T Y, N . Y.

2011B O I S E C O U N T Y, I D .

2011JEFFERSON COUNTY, ALA .

After three years of defi cits, the

city was insolvent. A judge could

approve its restruc-turing plan this

summer.

The state govern-ment came to the

rescue and kept the city from missing

a $3.3 million debt payment on bonds for its incinerator. But bankruptcy is

still an option.

A $176 million defi cit prompted a state board to

take over the Long Island county’s

fi nancial operations.It recently sus-

pended employee pay raises.

Bankruptcy was needed to keep the county running after

it lost a $4 million lawsuit for violating fair housing laws.

A court invalidated a key revenue source for the county, which

faces $3.2 billion in debt from a sewer

project. Bankruptcy is a real possibility.



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creditors get stiff ed, and bankruptcy can cause a stigma that hurts the area’s business climate. Then there’s the actual fi nan-cial cost of bankruptcy attorneys, which can top seven fi gures for large entities. That’s a big sum for a service that does absolutely nothing to address the underlying fi nancial problems facing a government. The bankruptcy in Vallejo could ultimately cost up to $10 million in attorney’s fees, says John Knox, a lawyer rep-resenting the city.

Bankruptcy is unlikely to help municipalities adjust their pen-sion obligations—until it’s too late. A municipality must be insol-vent to get protection. “It’s not a balance sheet test that says your debts are bigger than your assets,” Knox says. “It’s a cash-fl ow test. If you look down the road and the actuary says the pension trust goes bankrupt in 10 years and has no money, that’s not going to get you into bankruptcy.”

Given bankruptcy’s limitations and downsides, few state and local offi cials expect to see a spate of municipal bankruptcies. Since 1980, there have been 250 municipal bankruptcies; only 46 of those were a city, village or county—most were utilities or special districts.

So far this year, there’s been one major bankruptcy: Boise County, Idaho, and it shouldn’t be considered a harbinger of trouble to come. Its problems were caused almost entirely by one extraordinary event: A federal jury awarded a judgment against the county representing more than half its $9.4 million operating budget. Jeff erson County, Ala., has been on the verge of bank-ruptcy also due to an extraordinary event: miscalculations in the fi nancing of a new sewer system.

There’s another reason why it’s unlikely that many cities or counties will declare bankruptcy. For localities that get in trou-ble, there’s typically a backstop: the state. Whether it was New York in 1975 or Philadelphia in 1990, localities are often aided by a control board set up by the state to advise and helplocal leaders. Earlier this month, Michigan created a law that allows for earlier state intervention and greater authority of emergency fi nancial managers when a municipality is spiraling out of fi s-cal control. New York state recently took steps to oversee Nas-sau County’s fi nances—over the objections of county offi cials. Financial analysts expect to see more of those actions rather than bankruptcies.

Myth 5: The municipal bond market is now an unsafe place for investors.

Last fall, investors started taking more money out of muni bond investments than they were putting in. In December alone, mutual funds pulled $12.9 billion from the municipal bond market .

For the most part, the bulk of the disinvestment has been by individual investors, who tend to hold the bonds through mutual funds. Less knowledgeable than institutional investors about the vagaries of the municipal bond market, they have been spooked by the headlines suggesting that states and localities are broke and can’t pay their bills.

They also may be uneasy over recent defaults—271 totaling $8 billion since July 2009. But those defaults, says Thomas Doe, CEO of Municipal Market Advisors, represent one-quarter of a percent of the market. Moreover, the defaults didn’t include any general-obligation bonds—the kind that are backed by the full taxing authority of a municipality—or revenue bonds that are backed by payments from an infrastructure project, such as road tolls or water fees. Instead, trouble has come from bonds “on the fringes” of municipal fi nance, such as housing and casino deals. “It’s important to carve out general-obligation debt and [other] tax-backed debt from the rest of the municipal market,” says Hayes of BlackRock.

Some commentators have compared the state of the municipal market to the pre-bubble mortgage market. But Lav, of the Center on Budget and Policy Priorities, says that’s not an apt description, since the quality of debt off ered hasn’t deteriorated like it did with subprime mortgage bonds.

In fact, many seasoned Wall Street investors and analysts say they have seen nothing to change their minds that both state and local general-obligation debt is secure. “When we get beyond this [volatile time],” says John Dillon, chief municipal bond strategist at Morgan Stanley Smith Barney, “we’re going to see this market shouldn’t have been traded that way.”

Indeed, the situation has already started to improve. As of the end of the fi rst quarter of 2011, the drain away from municipal bond investments had slowed—but it had not stopped. G




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Building the Innovation Nation

an interactive tool of State and Local e-Government performance measures.

Get the full report at www.governing.com/innovationnation

underwritten by:


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When Betsy Sawyer-Manter buttonholed Maine legis-lators this session, one thing she knew not to ask for was more money. Not that the nonprofi t she heads up didn’t need it, but she knew legislators were already

wrestling with the state’s $450 million budget gap. Instead, Saw-yer-Manter, executive director of SeniorsPlus, which handles everything from meals on wheels to Medicare counseling, wanted policymakers to think hard about the rules and regulations under which nonprofi ts operate in Maine.

“Some legislators want to cap our salaries and restrict out-of-state travel,” says Sawyer-Manter, on what she views as extreme oversight being proposed for nonprofi ts in Maine. She wants less meddling. On her wish list are such items as simpler audit-ing rules, a straightforward application process for grants, and uniform contracting rules and applications. In short, she wants an easier way to meet all the paperwork requirements the state lays on nonprofi ts.

In these days of budget constraints and defunding debates, the health and welfare of nonprofi ts is a signifi cant issue for states. Health and human services nonprofi ts deliver crucial services to the most vulnerable populations—in essence acting as shadow government agencies on the front lines of service provision. Many of the services they provide are meant to head off worse and more expensive problems down the road.

According to a recent study on the nonprofi t sector by the Urban Institute, 33,000 nonprofi t health and human services agencies now operate nationwide, working under nearly 200,000 contracts and grants to provide everything from housing and youth counseling to job training and elder care. In some states like Maine, nonprofi ts provide nearly 100 percent of the state’s health and human services.


Budget constraints are endangering non-profi t programs like the Coordinating Council for Children in Crisis in New Haven, Conn.

HELP FOR THE HELPERS

P H O T O S B Y R O S E M A R Y D E L U C C O - A L P E R T

BY JONATHAN WALTERS

Nonprofi ts deliver the lion’s share of health and human services. Right now, they need all the support states can give them.



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All totaled, government contracts account for nearly 30 per-cent of nonprofi t agencies’ budgets. Since the beginning of the recession, though, many state governments have slashed non-profi t funding at the same time individual contributions have dropped and as the need for human services has risen. “They’re trying to provide a decent safety net for vulnerable populations,” says Scott Schnapp, executive director of the Maine Association of Nonprofi ts, “and there’s this huge budget gap.”

Sawyer-Manter may have known not to ask for money in these hard times, but that doesn’t change the fact that administrative relief isn’t all she or other nonprofi ts need. “It’s diffi cult,” says Cheryl Burack, executive director of the Coordinating Council for Children in Crisis (CCCC) in New Haven, Conn. “We’re work-ing with families that have experienced signifi cant trauma. My employees are experiencing the secondary trauma from all the painful stories they hear every day, while at the same time not knowing if they’re going to have a job in two months.”

There are other consequences of the budget squeeze. Accord-ing to the Urban Institute study, nearly half of nonprofi ts reported late payments by state governments as a constant problem. The epidemic of late payments has not only caused signifi cant uncer-tainty among providers, says David Thompson, vice president of public policy for the National Council of Nonprofi ts, but many have also had to take out expensive lines of credit or bridge loans. In referring to the late payments, Thompson repeats a joke mak-ing the nonprofi t rounds: “In the race to the bottom, it was a 50-state tie for fi rst place.”

In the litany of woes detailed in the Urban Institute report, 68 percent of nonprofi ts report that government payments don’t cover the full cost of contracted services; 57 percent say they experience mid-stream problems with contracts, including cancel-lations, cutbacks and postponements. Forty percent calculated that

they would be looking at annual operating defi cits. On the admin-istrative front, the vast majority of nonprofi ts—nearly 80 percent—fi nd that the application process has become hugely complicated and time consuming. It is, in its way, pushing them further down the cash-short road.

Despite the troubles brought on by tough fi scal times, service delivery has so far held up remarkably well. Only 21 percent of the nonprofi ts surveyed by the Urban Institute said they’ve responded to budget problems by cutting services. But that remarkable level of constancy comes at a high cost. “Everyone is carrying higher caseloads,” Burack says. “We’re running waiting lists—and the people who come to see us have dire needs. Sometimes I feel like we’re hanging on by our fi ngernails.”

If a large number of nonprofi ts have been hanging on by their fi ngernails, there does seem to be a hint of opportunity in the air. Offi cials like Maine’s Schnapp and the National Council of Nonprofi ts’ Thompson see this as a particularly oppor-

tune time to push for change within the nonprofi t community as well as in the often-troubled relationship between nonprofi ts and government.

“We’re trying to widen and frame the right conversation about public systems reform,” says Schnapp. Given the squeeze on resources, Schnapp thinks that nonprofi ts nationally are sim-ply going to have to move to a conversation that looks at a whole range of operating issues, including effi ciency, eff ectiveness, mis-sion and potential partnerships.

The partnership piece is the most obvious one to pursue right now, says Thompson. It may not have much sex appeal, but public-private collaboration is, he says, the “low-hanging fruit here.” He can rattle off numerous examples where govern-ment and the nonprofi t sectors have recently gotten together to work out issues ranging from late payments to overly bureau-cratic regulations. One important example is creating a single repository for all fi nancial and tax status information. That way nonprofi ts don’t have to fi le information multiple times with diff erent state agencies.

The stakes are clearly high when it comes to the success of any new push on partnership: It’s estimated that nonprofi ts employ more people than the construction, fi nance and insurance indus-tries combined. Replacing that workforce with government employees is obviously not a viable option. So it behooves gov-ernment to step up—and in the absence of the ability to contrib-ute more resources—fi gure out how to be as eff ective partners in service delivery as possible.


H E L P F O R T H E H E L P E R S

Cheryl Burack of the CCCC says of the fi scal climate, “I feel like we’re hanging on by our fi ngernails.”

34%

36%

46%

Organizations Receiving Late Payments, by Size

33

33

44

$100,000 to $249,000

$250,000 to $999,000

$1 million or more

SOURCE: THE URBAN INSTITUTE, NATIONAL SURVEY OF NONPROFIT-GOVERNMENT CONTRACTING AND GRANTS (2010).



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Connecticut is one state taking on that challenge. Going into calendar year 2011, it had the highest budget defi cit per capita of any state, including California, New York and Texas. Clearly it was in no shape to be of any fi nancial help to its nonprofi ts. But rookie Gov. Dannel Malloy created a cabinet-level position for a liaison for the nonprofi t world, and appointed Deborah Heinrich, a former state legislator, to the post.

Heinrich says she has four basic goals. The fi rst is to open up a direct line of communication between the governor’s offi ce and the nonprofi t world, something that has heretofore been nonex-istent. Second, to “answer the question of how we as a state can clear the path so that nonprofi ts can focus on the services they provide versus the bureaucratic demands of government.” Third, assess how government can encourage nonprofi ts to adopt best practices, measure their performance, and encourage coopera-tion and collaboration among themselves. And fourth, to develop relationships with the state’s philanthropies on ways to “leverage dollars for system change.”

While that might sound like a relatively simple and sensible list, the complications and potential pitfalls are manifold. As Thompson points out, there’s been a certain amount of bureau-cratic friction in Connecticut between government and nonprof-its. Lawsuits fi led against the state in the past for substandard performance on the human services front have complicated deci-sions about who should deliver certain services.

While the governor and his liaison are working on improving conditions for nonprofi ts, the nonprofi ts have stepped up eff orts to adapt to the challenges fac-ing front-line providers.

Those challenges have been fi erce. In the fi rst two years of the recession, agencies were experiencing 30 percent increases annu-ally in service demands. “We saw organizations scrambling,” says Michael Johnston, CEO of the United Way of Western Connecti-cut. “They were developing emergency response plans, including pulling in more volunteers and coordinating with other agencies to balance the load. But it was all ad hoc.”

Now, Johnston says, there is a much more methodical and measured eff ort to encourage greater collaboration among non-profi ts. As an example of the new model of collaboration, John-ston points to a promising new coalition of more than two dozen organizations in his region. They are working on an ambitious childhood anti-obesity program, led by the Stamford Hospital, called the Coalition for Healthy Kids.

Meanwhile, Johnston’s Danbury-based organization has taken over the administration of city funds that go to community non-profi ts. “It’s an interesting partnership,” says Johnston. “I have the feeling that nonprofi ts and government—particularly at the local level—are really starting to look at ways to work together more eff ectively.”

That said, the fact remains that nonprofi ts tend to be turf-con-scious. Discussions of merging agencies, for example—something that’s been happening nationally in response to the big squeeze—seems to set nonprofi t agencies on edge. “We do cooperate and coordinate with other agencies,” says Burack of the CCCC. “But there’s some danger in this merger argument. Having large orga-nizations swallowing up small ones and not valuing the services that the smaller agency provided is always a risk.”

At the same time, the Connecticut Commission on Non-Profi t Health and Human Services’ report was just released at the end of March. It includes 49 recommendations, many of which are already being taken up by the Legislature and state agencies.

With $1.4 billion annually in nonprofi t service provider con-tracts, the work has already “fostered increased communication and understanding between the state and nonprofi t community-based providers,” says commission co-chair Peter DeBiasi, a member of the Connecticut Association of Nonprofi ts board of directors. “That will only strengthen our partnership as we work to meet the growing needs of the state.”

For providers like Burack, hanging on by her fi ngernails, the promise behind that kind of rhetoric can’t be delivered too soon. G



H E L P F O R T H E H E L P E R S

Deborah Heinrich is Connecticut’s fi rst nonprofi t liaison to the governor.

Average Amounts Governments Still Owe Nonprofi ts, by Level

State

Local

Federal

SOURCE: THE URBAN INSTITUTE, NATIONAL SURVEY OF NONPROFIT-GOVERNMENT CONTRACTING AND GRANTS (2010). NOTE: FIGURES ARE BASED ON ORGANIZATIONS THAT REPORTED PAST DUE PAYMENTS AND THE DOLLAR AMOUNT STILL OWED.

$117,679

$97,635

$38,937



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Thinking



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It’s chilly, gray and raining.In other words, it’s an utterly unremarkable spring day in Seat-tle, as the city’s urban planning supervisor Mike Podowski pulls up to a home in the Columbia City neighborhood southeast of downtown. The large clapboard-and-cedar house is a charming two-story Craftsman, but Podowski’s not interested. Instead, he makes a beeline for a freestanding structure in the backyard. “This is great!” he says, as the homeowner ushers him through a gate. “It’s an ideal set-up.”

Podowski has come to check in on one of Seattle’s fastest-growing new modes of housing: the backyard cottage. Since 2006, the city has allowed homeowners to build stand-alone cottages—offi cially known as “detached accessory dwelling units”—behind existing single-family homes. At fi rst, the zoning change only applied to a few neighborhoods on the city’s south side, includ-ing Columbia City. But in November 2009, Seattle expanded the pilot program throughout the city, to any residential lot of at least 4,000 square feet. In the 18 months following the expansion, 57 backyard cottages have been permitted, and roughly 50 of those are either completed or nearly fi nished.

Like other mid-size cities that came of age in the fi rst few decades of the 20th century, Seattle is made up largely of com-pact neighborhoods fi lled with single-family bungalows. Today, almost two-thirds of the city is zoned for single-family homes, so it’s harder for Seattle to accommodate its growing population—the city swelled from 563,374 residents in 2000 to 608,660 last year—without spreading farther and farther into the forests of

Cities are struggling to increase residential density without destroying their established single-family neighborhoods. In Seattle, that means the return of the backyard cottage.

By Zach PattonP h o t o g r a p h s b y D a v i d K i d d

small

Seattle’s newest variety of homes max out at a footprint of just 800 square feet. The owner of this house uses it as an offi ce.



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the Pacifi c Northwest. That’s partly why the city saw backyard cottages as an attractive new alternative, a way to add aff ordable housing options without a wholesale redesign of the city’s signa-ture neighborhoods.

These structures are small: Seattle’s code limits them to a foot-print of 800 square feet, and they max out at 22 feet tall. Construc-tion costs typically range from $50,000 to $80,000, although more elaborate units can cost upward of $140,000 to build. Some hom-eowners use the freestanding cottages as home offi ces, or as extra room for when relatives visit. Others are building them as in-law apartments for aging parents, or as crash pads for post-college children who can’t yet aff ord their own place. But a large number of homeowners are actually renting the cottages to tenants. (City law requires that the homeowners live on the property at least six months out of the year.) In some cases, the owners themselves have moved into the backyard cottage in order to rent out the larger house facing the street.

Seattle isn’t alone in its experiment with accessory dwelling units (ADUs). Localities everywhere from California to Minne-sota to Massachusetts are re-examining their zoning laws and considering the role that ADUs can play in the makeup of their urban design. To be sure, there are plenty of critics who say back-yard cottages are a bad idea, that renting out tiny apartments to strangers will destroy the character of a neighborhood. “We’re seeing both a continued resistance to [ADUs], but also a recogni-tion that they provide a level of moderately priced housing,” says John McIlwain, a senior housing fellow at the Urban Land Insti-tute. The “growing driver,” he says, are elderly parents who can’t aff ord nursing care, or who simply would rather age in place with their families. “That’s hard for a community to rally against,” he says. “And once you cross that threshold, it’s hard to exclude other uses for backyard cottages. We’re going to be seeing a lot more of this style of housing in the next several years.”

Backyard cottages are actually a throwback. Stand-alone in-law apartments, or “granny fl ats,” were common neighborhood features a century ago when multiple generations of a family lived together. By the 1950s,

however, Americans were decamping for the suburbs, pursuing the dream of a single-family home on a large tract of land. Many urban zoning codes of the second half of the century essentially banned the construction of new backyard cottages.

But as attitudes toward urban density have shifted in recent years—and as aff ordable housing has become scarce in many places—more and more cities have reconsidered the granny fl at as an important part of a neighborhood. Portland, Ore., and Santa Cruz, Calif., both have strong backyard cottage programs. Chicago and Madison, Wis., have considered relaxing their prohibitions against ADUs. Denver last summer revamped its entire city zon-ing code and now permits stand-alone ADUs in certain neighbor-hoods. California in 2003 passed landmark legislation essentially forcing localities to allow ADUs. (However, because cities were allowed to design restrictions as narrowly as they wanted, the law hasn’t had as much impact as it could have. Pasadena, for exam-ple, only allows ADUs on lots larger than 15,000 square feet, and mandates that an ADU have its own two-car garage. Only one

By allowing backyard cottages, Seattle hopes to provide a new affordable housing option. In the 18 months since the units have been allowed citywide, about 50 have been completed.

THINKING SMALL



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In homes this small, every inch counts.

At right, a homeowner demonstrates how a custom-built Murphy

bed maximizes space.

Critics fear the added density and new rental tenants will transform Seattle’s treasured single-family neighborhoods.



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When their son went to college, the homeowners at this property opted to move into their backyard cottage and rent out the “big house” in front.

So far, Seattle’s backyard cottage

boom has been evenly spread throughout

neighborhoods across the city.



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backyard cottage has been built in Pasadena since the 2003 law took eff ect.)

Not everyone is pleased. Critics say the additional residents put a crunch on available street parking. Some neighbors worry about privacy with a two-story cottage looming just over the property line. But the biggest concern tends to be the notion that allowing backyard rental cottages will irrevocably change the feel of a neighborhood. While Seattle was debating the cottages in 2009, one real estate agent called the city’s proposal a “de facto rezone of the entire city,” adding, “There will no longer be single-family neighborhoods in Seattle.”

Podowski acknowledges that vocal objections from some crit-ics made it “challenging to get the legislation passed. People are very protective of their single-family neighborhoods, and they weren’t sure this was something that was going to fi t in.”

But after the city’s three-year experiment with ADUs in the southeast part of town, Podowski’s offi ce conducted a survey of residents living near a permitted backyard cottage to gauge the impact the units had on neighborhoods. What the city found was something of a surprise. Eighty-four percent of the respondents said the ADUs hadn’t had any discernible impact on parking or traffi c. What’s more, most people didn’t even know they lived near an ADU, says Podowski. “More than half of them didn’t even real-ize there was a unit next door. It really helped us to show that a lot of the fears people had about these were not going to be realized.”

That positive feedback helped encourage the city to expand ADU zoning citywide. Council members also eliminated a cap on the number of backyard cottages that could be built in the city, and they rejected a proposed “dispersion” requirement, which would have limited the number of ADUs in a given neighborhood. The city prepared a design guide for homeowners, tips on being a good landlord and ideas for how to best respect neighbors’ privacy. Since then, the 57 new permits for backyard cottages number “in the ballpark” of what the city had predicted, says Podowski, and they’re evenly spread in neighborhoods across Seattle.

To hear Podowski tell it, the benefi ts of an ADU are relatively prosaic: They’re good for aging parents, or the rental income can help off set a homeowner’s mortgage. But in some ways, back-yard cottages represent a bigger shift than that. “Cities are strug-gling with, ‘How on earth do you increase density in a suburban neighborhood of single-family homes?’” says Witold Rybczynski, an urbanism professor at the University of Pennsylvania and the author of Makeshift Metropolis and other books on urban plan-ning. “The backyard cottage is an easy fi rst step toward densifi -cation,” he says. Unlike high-rise residential towers or even mid-rise apartment buildings, Rybczynski says, backyard cottages “are an eff ective way to increase density without a radical change in neighborhood standards.” With the twin challenges of accommo-dating an aging population and providing diverse housing options to an ever-growing pool of residents, an increasing number of cities may fi nd a solution right in their own backyards. G


Many of the cottages, like the one above, have

alley access and a garage, making them feel less

attached to the main house.

THINKING SMALL

See expanded coverage and a photo tour of more of Seattle’s new backyard cottages at governing.com/Seattle



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GOVERNING | May 201142J.B

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To move ahead on a low-energy future, states and localities are turning to their building codes.

In Oklahoma, the governor’s mansion is powered by a wind turbine. In Chicago, City Hall keeps its workers summer-cool with a sod-garden roof. In Colorado,

the state capitol provides legislators with heat and light from solar panels. These are some of the glamour projects states and localities have built to harvest energy sav-ings and encourage other property owners to go forth and do likewise.

But these high-profi le projects are just part of what states and localities are doing to chart a path toward a low-energy future. The bigger thrust comes from a more mundane approach: reconfi guring building codes. Over the past few years, an increasing number of jurisdictions have done one of two things : They’ve adopted the Leadership in Energy & Envi-ronmental Design (LEED) green building standard, mostly for public buildings, or they have strengthened requirements detailing what materials and construction techniques new buildings should be using to conserve energy, primarily through sys-tems for heating, cooling, insulation and lighting. Many places have done both.

A handful of pioneers has taken code-improvement projects a step fur-ther by turning to performance-based codes—focusing on the ends rather than prescribing the means. “We are at the beginning of a dynamic shift in which the focus is on effi ciency results,” says Jim Hunt, chief of Boston’s Envi-ronmental and Energy Services, “not technologies installed.”

By Linda Baker

Sustainable building standards have come a long way since Chicago’s City Hall began sporting a green roof in 2001.



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There’s a reason why state and local environmental experts are setting their sights on construction codes. Energy experts see them as the next means to achieving higher levels of effi ciency—in part because buildings are a huge

energy drain. Energy use in buildings accounts for close to 70 per-cent of electricity consumption and 40 percent of all greenhouse gas emissions in the United States. Energy effi ciency in buildings is also considered the “least expensive carbon abatement,” says Jim Edelson, senior project manager for the New Buildings Institute, a nonprofi t group that works on model building codes.

The movement toward energy-wise code modifi cation began—where else?—in California. In 1978, the state adopted Title 24, a set of high-effi ciency standards dictating energy-saving requirements for walls, roofs, windows, insulation, heating, water heating, lighting, and ventilating and air conditioning systems. Some 30 years later, the results are impressive. Along with man-dates for energy-effi cient appliances, the Title 24 standards have saved Californians more than $56 billion in electrical and natu-ral gas expenses, according to the Cali-fornia Energy Commission. Although per capita electricity use in the U.S. has increased by nearly 50 percent since the mid-1970s, California has essentially maintained its per capita electricity use .

“Here’s an example where policy really does work,” says Matthew Tyler, an engi-neer with an energy-conservation fi rm .

Since then, a number of other states have taken aggressive approaches to developing low-energy building codes. Last year, this eff ort to create, through regulation, more environmentally friendly buildings took a quantum leap. The American Society of Heat-ing, Refrigerating and Air Conditioning Engineers (ASHRAE) and the Inter-national Code Council (ICC)—the two organizations charged with developing the nation’s model energy codes—released groundbreaking new versions of those stan-dards. States typically use the model codes, which are updated every three years, as the basis for their own building regulations that cover private and public developments.

Known as the ASHRAE 2010 Standard 90.1 and the Interna-tional Energy Conservation Code (IECC) 2012, the latest standards are about 30 percent more effi cient than earlier versions—and represent the largest single increase in the history of the energy codes. Among the major changes to the code were lighting that shuts off automatically in commercial buildings; minimum energy performance standards for heating systems in computer rooms; and more effi cient water-cooled air conditioners. “It’s a signifi cant improvement,” says Edelson.

Energy codes are evolving in other ways—most notably by including other environmentally friendly green building features such as recycling and water use. In 2010 , for example, ASHRAE, the ICC and several other organizations jointly released a draft


C O D E C U R E

of the fi rst International Green Construction Code. Meanwhile, California became the fi rst in the country to adopt a statewide green building code, CalGreen.

But even as energy codes advance, the nation’s approach to building regulations has its limits, because states can choose to adopt any version of the model codes—or not adopt any code at all. The result is “a quilt of code adop-

tion across the country,” says Lane Burt, director of technical policy at the U.S. Green Building Council (USGBC). “It’s an energy policy problem. We don’t have a coherent national policy in terms of code.”

To help rectify the situation—and promote building effi ciency nationwide—the Department of Energy in 2009 stipulated that any state receiving funding from the Recovery Act’s State Energy Pro-gram had to meet the 2009 IECC standard for residential buildings and ASHRAE Standard 90.1-2007 for commercial buildings.

According to Jen Stutsman, an energy department spokes-person, those eff orts are bearing fruit. Over the past two years,

50 percent of states and territories have adopted these codes, she says. By con-trast, in 2008, only 18 percent of states had updated their residential codes and 12 percent had implemented or upgraded their commercial codes.

Despite the progress, evidence sug-gests that not all states plan to comply with the conditions imposed by the Recovery Act, which distributed $3 bil-lion to state energy offi ces to improve energy effi ciency. To qualify for the funds, states were supposed to provide assurances that they would update their energy codes to meet an earlier version of ASHRAE or the IECC. Some states—Wyoming and Arizona, for example—have chosen not to play.

Where a handful of states are drag-ging their feet, at least two—Massachusetts and Oregon—are forging ahead with innovative approaches. They have adopted add-ons to their basic codes, which together function like a LEED code in that they are voluntary but designed to push the market forward. Unlike LEED, however, they are promoted by states, not a separate, environmental organization such as the USGBC.

Known as “reach” or “stretch” codes, the regulations drafted by these two states do more than raise the bar for effi ciency. They also expand the purview of conventional building regulations, which typically dictate materials and construction methods but don’t necessarily measure the amount of energy the building actu-ally uses. The new trend is to do just that—either by modeling energy performance to ensure energy savings or by testing the systems post construction to make sure they are really working.

In 2009, Massachusetts became the fi rst state in the country to adopt a stretch code—an optional set of building effi ciency standards that is about 20 percent more effi cient than the state’s base mandatory code. The voluntary code is part of a larger eff ort

Colorado installed solar panels on the state Capitol building’s roof in 2008.

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to meet the goals of the Massachusetts Clean Energy and Climate Plan, which mandates a 25 percent reduction in greenhouse gas emis-sions below 1990 levels by 2020. About 8 percent of those reductions will come from building effi -ciency strategies, says Mark Sylvia, commissioner of the state Department of Energy Resources.

The stretch code includes effi ciency standards for measures such as window performance, light-ing controls and mechanical equipment effi ciency. It also marks a “philosophical diff erence” from the regular standard by emphasizing performance and real-world testing, says Ian Finlayson, a senior climate policy analyst with the Massachusetts Executive Offi ce of Energy and Environmental Aff airs. For example, homes built to the stretch code must attain a minimum score by the Home Energy Rating System (HERS), a system that quantifi es energy performance based on a set stan-dard. So far, 53 local jurisdictions have adopted the stretch code, including Boston.

In Oregon, policymakers updated the state’s energy effi ciency code this year to require a 15 percent reduction in energy use for commercial structures and a 10 percent reduction for homes. An optional but even more stringent set of effi ciency standards—the “reach code”—will go into eff ect later this year and improve that standard by an additional 20 percent.

The voluntary standard will include features such as energy modeling of large commercial buildings, renewable energy-ready infrastructure—to make installations of solar and wind technolo-gies easier and cheaper—and elements from the ICC’s new model green building code, such as water conservation and gray water standards. “The reach code is being developed as a test bed for new technologies,” says Andrea Fogue, green building services manager with the Building Code Division of Oregon’s Department of Con-sumer Services. “We want to see what the market is capable of.”

But that’s not all. Fogue reports that by 2030, policymakers will require “net zero” energy use in all structures.

The Oregon and Massachusetts stretch and reach codes incor-porate elements of the 2012 IECC, which is about 5 percent more effi cient than the 2008 version of California’s Title 24, according to the New Buildings Institute’s Edelson. Then there is CalGreen, an overlay on Title 24 that is expected to reduce greenhouse gas emissions by about 3 million metric tons by 2020, according to Dave Walls, executive director of the California Building Standards Commission.

Despite the fl urry of activity, there’s a long road ahead for energy-effi cient building codes. The challenges start with states like Wyoming that have not adopted a state-wide energy code and don’t plan to—despite receiving

$20 million in stimulus funding for energy effi ciency. In lieu of regulation, the state “is committed to education at the local level to encourage responsible action,” says Shannon Stanfi ll, manager of the Wyoming Business Council’s State Energy Offi ce.

There are also misunderstandings about the role codes play in moving the building industry forward. As a minimum standard, codes “defi ne the worst building you can legally build,” says engi-neer Matthew Tyler. Moreover, strengthening building standards is an ongoing and dynamic process. “What’s legal today cannot be built three years from now,” Tyler says.

Think tanks such as the New Buildings Institute continue to push the boundaries of performance-based energy codes toward what Edelson describes as “outcomes-based” standards, in which the amount of energy a building consumes is regulated over time. One idea, he says, is “to come back 18 months after the building is occupied and measure if the building is really performing at a higher effi ciency level.” Although the new codes begin to phase in this kind of approach, various challenges remain, such as defi ning what constitutes energy performance data—and accounting for variables such as tenant behavior, weather and operating hours.

Local jurisdictions are also moving ahead. To help align build-ing regulations with outcomes-based approaches, several cities—including New York, Seattle and Washington, D.C.—have imple-mented requirements that commercial properties must disclose information related to energy performance. California and Wash-ington also have also passed such mandatory reporting laws.

As these initiatives move forward, building effi ciency experts say it’s important to understand the interplay between voluntary, mar-ket-based, green-rating systems and regulatory mechanisms such as building codes. That is, as elements fi rst promoted in certifi cation programs such as LEED become part of a mandatory baseline code, organizations such as the USGBC are then free to pioneer new inno-vations, which in turn become part of code. And now innovations by select cities and states are adding to that dynamic. “The code is the minimum standard,” Finlayson says. “We are raising the fl oor, while the voluntary programs are raising the ceiling.” G


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Inmates process tilapia in the fi sh farm at the Cañon City Correctional Complex.



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The Cañon City Correctional Complex in southern Colorado is a veritable city of prisoners. More than 8,000 inmates are housed in the complex of 13 correctional facilities—nine state and four federal—most notably in the Supermax, a state-of-the-art federal facility known as the “Alcatraz of the Rockies.” But on a recent early spring day, Colorado

Correctional Industries (CCi) Director Steve Smith isn’t concerned with inmates. He’s concerned with tilapia.

In a greenhouse in the center of the correctional complex, Smith surveys the fi sh splashing and thrashing about in a pool of murky green water. “This is their death row,” says Smith, seemingly oblivious to the warm water pelting his gray suit. From here, the hormone-free tilapia will be killed, gutted, cleaned, chopped, vacuum-sealed and ultimately shipped to Whole Foods stores.

This fi sh-farming program is staff ed by inmates, and that’s not the only job performed by the Cañon City prisoners. Across some 6,000 rural acres , low-security inmates also raise cows and goats to produce milk, craft custom fi shing rods, train dogs, grow fl owers, tame mus-tangs, recycle trash from nearby counties to resell it, build chairs for state agencies, and more.

CCi receives no tax dollars, Smith says, but the entire operation last year generated $57 million in revenues , which benefi ts the state eco-

MAKINGPRISONWORKStates are increasingly utilizing prison labor to plug budget holes, but public employee unions aren’t happy. By Russell NicholsP H O T O G R A P H S B Y D A V I D K I D D



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nomically. “Every inmate that works here saves taxpayers $5,000 a year,” Smith says. “Most states are going away from agriculture, selling land to balance their budgets. We’re trying to expand.”

The idea to put prisoners to work has been around for decades. In the 1950s, chain gangs in the South built roads and broke rocks as a form of punishment. But now, with states drowning in budget defi cits, prison labor has become more valuable than ever. In the face of falling tax revenue and fading federal fi nancing, offi cials are fi nding creative ways to utilize inmate labor. In Washington state, inmates recycle mattresses that would have ended up in landfi lls. In California, they help clean state parks, and at the Cal-ifornia Institution for Men, some perform underwater welding work. In Hunterdon County, N.J., they clear dead deer off local and county roads to ease the costs of roadkill removal.

Cheap prison labor, supporters say, helps off set the high costs of incarceration, prepares inmates for real-world jobs and reduces recidivism in a system plagued by overcrowding. But pub-lic employee groups object to what they say amounts to inmates’ taking over jobs that once belonged to government workers.

Last year in Racine County, Wis., the decision to use inmates to cut grass along state highways at no cost to taxpayers hit a snag when a county employee union successfully argued that the move would violate county labor contracts. In 2009, Ohio wanted to use prisoners with good records to replace statehouse janitors laid off because of budget cuts. After the Ohio Civil Service Employ-ees Association fi led a grievance, the proposal was put on hold. The union argued that the plan to employ inmates was not only unfair, but also unsafe given the number of children who tour the statehouse.

In Nebraska last summer, even as state corrections offi cers were forced to take unpaid furloughs, 250 prison inmates report-edly received $525 bonuses for showing up on time and doing good work at prison shops. According to the state corrections agency, the bonuses were part of a long-standing program to reward inmates for good behavior. But public employee repre-sentatives saw the move as grossly unfair. “Inmates are looking at employees and saying, ‘Ha ha, I got a bonus,’ while the employees are taking pay cuts,” says Julie Dake Abel, executive director of the Nebraska Association of Public Employees. “It’s not good for the morale of public employees.”

Despite public employees’ concerns, the recession has spurred the expansion of prison programs in recent years, and offi cials don’t plan to stop. Following Colorado’s lead, Correctional Indus-tries in Washington is in the infant stages of a tilapia farm. In its mattress recycling program, inmates process 36,000 mattresses a year to put them back into retail. “It works well for a prison because we don’t have the labor costs,” says Tom Beierle, assis-tant director for Correctional Industries in Washington. “Am I making a lot of money on it? No. But if I can break even and keep the mattresses out of the landfi lls, does the state of Washington benefi t? Defi nitely.” G


See more photographs of the Cañon City prison at governing.com/prisonwork



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Each program at the prison requires a different skill set. Here, low-security inmates are training wild horses, tying fi shing fl ies, milking 800 cows three times a day or waiting for a goat to give birth.



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There are some 8,000 inmates at the Correctional Complex, but only between

1,500 and 1,800 jobs. Inmates work regular daily

shifts. According to program managers, these jobs not only

keep inmates productive, but also reveal talents they

never knew they had.



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Yours, Mine and OursState Technology Leaders Driving Operational Excellence

August 28 - September 1, 2011Omaha, Nebraska

Hilton Omaha / Qwest Center Omaha

34thAnnual Conference & Technology Showcase

National Association of State Technology Directors www.nastd.org

Since 1978, the National Association of State Technology Directors (NASTD) has provided state government information technology professionals with information, educational programs and networking opportunities with a focus on helping members improve productivity and ef ciency in state government operations.

The 2011 Annual Conference and Technology Showcase will examine innovative methods and sourcing opportunities for delivering operational excellence. The program will focus on achieving excellence in three areas: service leadership, data center management and network operations.

Attendees will include state government technology professionals along with representatives from the private sector technology organizations that serve them. The annual conference is NASTD’s premiere event for networking, sharing information and learning about new ideas and solutions.

For more information about the 2011 Annual Conference and Technology Showcase, visit www.nastd.org or contact Pam Johnson at 859-244-8184.


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Police in a growing number of communities are fi nding that by merging crime and traf-fi c data, they can take steps

to dramatically lower traffi c accidents and violations, and reduce crime with little or no additional funding.

Using data to determine community “hot spots,” where both criminal activ-ity and traffi c incidents occur, police are deploying high-visibility traffi c enforce-ment offi cers to targeted areas. The initiative, called Data-Driven Approaches to Crime and Traffi c Safety (DDACTS), was fi rst piloted in several communities in 2008 by a partnership among the National Highway Traffi c Safety Administration (NHTSA), Bureau of Justice Assistance and National Institute of Justice.

The pilot sites—law enforcement agen-cies in Baltimore County, Md.; Lafourche Parish, La.; Nashville, Tenn.; Rochester, N.Y.; the Vermont State Police in coop-eration with St. Albans, Vt.; and Washoe County, Nev.—used geomapping technol-ogy to plot areas with high numbers of both crime and traffi c incidents.

After mapping, they quickly noticed an overlap: Where crime is high, traffi c inci-dents are often high as well. “You don’t hear of walk-by shootings,” says Michael Alexander, commander of the Metropoli-tan Nashville Police Department. “Most of the time the criminal element is either rid-ing or driving in the car.”

To address the overlap, the pilot agencies targeted specifi c areas, and stepped up their police presence and

traffi c enforcement in these places. The result? Decreases in robberies, vandalism, theft and many other crime categories, and increases in vehicle stops, warnings, traffi c citations and DUI/DWI arrests.

The successful pilot initiatives quickly gained national attention, and today an increasing number of police and sheriff s’ departments are taking an interest. Com-munities wanting to learn more about the initiative are invited to participate in workshops off ered by the NHTSA and representatives of the pilot cities.

Shawnee, Kan., a Kansas City suburb, was the fi rst city to take part in a work-shop. With a population of roughly 60,000, Shawnee was struggling with reduced budgets, fewer resources and increasing crime. DDACTS was a natural fi t.

Problem SolverReal-world solutions and ideas for government managers.


Geomapping helps law enforcement fi ght crime while lowering traffi c incidents.

Data-Driven Policing

VE

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By Heather Kerrigan



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Shawnee focused increased enforce-ment on an area that covers about 4 per-cent of the city but accounts for one-third of the total crime. In moving from reac-tive to proactive policing in the targeted area, residential and commercial burglar-ies decreased by nearly 60 percent, and vehicle crashes declined by 17 percent, says Shawnee Police Department Capt. Bill Hisle. “Overall, crime in the entire city is down about 8 percent,” he says, “due in large part to the eff ect of just reducing crime in that one area.”

Maryland’s Baltimore County, with a population of around 800,000, also saw signifi cant declines in robberies, burglar-ies and vehicle crashes. In 2010, 14 areas were targeted with increased, highly vis-ible enforcement. Robberies and vehicle crashes fell in 10 of the 14 target areas based on a three-year average; burglaries decreased in 12 target areas.

Though DDACTS’ results speak for themselves, some police departments are hesitant to implement the initiative due to a lack of both funding and data analyt-ics capabilities, says Baltimore County Police Department Capt. Howard Hall. But one of DDACTS’ strengths, he tells interested communities, is that it doesn’t require a large investment or new person-nel. Because this is a philosophy rather than a program, changing the way peo-ple think doesn’t cost a thing. Increasing enforcement in targeted areas is simply a redirection of resources.

As for data analytics, Hall says, “If you’ve got a map with some pins in it, that’s where you can start.” As the philosophy becomes ingrained in the culture, depart-ments can work toward accessing better information and sophisticated analytics.

That was the situation in the Lafour-che Parish Sheriff ’s Offi ce. “We had nothing. No true record management system ... no mapping,” says former Capt. Scott Silverii, who is now chief of police in Thibodaux, La. “Our beginnings were very, very humble.”

With call record data and a map, Silve-rii and his team plotted out the data and

decided how best to target enforcement. As the initiative continued, Lafourche saw the need for a more seamless system, and eventually invested in one.

Lafourche relied heavily on the NHTSA to help build an analytics system and assist with analysis. It’s this partner-ship that the NHTSA and other federal organizations involved in the initiative want to stress.

Since the pilot phase began, no fed-eral mandate or specifi c guidelines were created for participating departments to follow. The pilot phase did, however, lead to the creation of seven principles. No agency is required to follow any of the principles—they are merely sugges-tions—but the NHTSA and other federal agencies nevertheless encourage com-munities to learn them.

One principle that the NHTSA says is key to DDACTS’ success is information sharing and outreach. “The communica-tion piece is big whether it’s in the agency or out to the community,” says Nashville’s Alexander. Internally communication helps get the necessary buy-in from top administrators in a department. Making leaders comfortable with DDACTS’ phi-losophy is key to ensuring offi cers on the street have the right attitude as well.

Furthermore, internal communica-tion cannot be a one-time occurrence throughout the initiative’s implemen-tation—it’s important to keep the lines of communication open and informa-tion fl owing. In Nashville, daily roll call briefi ngs now feature crime maps that

track DDACTS’ enforcement and prog-ress. Sharing this data with offi cers on a daily basis helps keep them motivated. “Hanging our hat on the data speaks to the offi cers buying into the management philosophy,” Alexander says.

The diff erence between DDACTS and other crime reduction programs is that it doesn’t have a start and end date; it’s about a long-term change in the way com-manders and police offi cers think about enforcement. “This is not just an initiative for us,” Hisle says. “This is really a new policing philosophy for our department.”

The change in thinking doesn’t come overnight, but seeing steady progress in high crime areas helps DDACTS become part of the policing culture. Baltimore County is stressing this idea to its 2,500 personnel, but Hall admits that it’s a slow process. “Long term, this is one of the pri-mary methods we’re using to deploy our resources,” he says. As offi cers understand this, it continues to get easier.

Externally law enforcement entities in DDACTS’ communities are taking their message to homeowners, businesses and “anyone who will listen,” Hisle says. Shawnee’s Police Department met with the community in its target area before implementing DDACTS so residents and business owners better understood why they would see an increased police pres-ence. For the most part, the community is receptive. Now, Hisle says, offi cers hear from community members who say, “It’s great you guys are here; we feel safe in our neighborhoods again.”

Nashville’s Alexander echoes the importance of outreach, noting the con-cern that business owners have expressed about the increased police presence deter-ring patrons. But having data available on the reduction in crime in targeted areas over weeks, months and years makes a diff erence. “If you don’t have the data, it’s much harder to be accountable not only to department leadership, but to the com-munity as well,” he says. G



Because this is a

philosophy rather than

a program, changing

the way people think

doesn’t cost a thing.

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media. In fact, the reason we’ve chosen to spend this much space on the Journal is that it is one of the most highly respected fi nancial publications in the United States. On the whole, a blogger with 43 followers can make this kind of mistake, and it’s not really a big deal. But when it reaches into the pages of hugely infl uential publica-tions, that’s another story.

Curiously the “defi cit” fi gures used by The Wall Street Journal were taken directly from a chart prepared by the Center on Budget and Policy Priorities. But the CBPP carefully uses terms like “budget gaps” and “shortfalls” to refer to these fi gures. Says Elizabeth McNichol, senior fellow at the CBPP and one of the authors of the recent reports on upcoming budget shortfalls, “We try to be clear in the text of our paper that we are talking about projected gaps, comparing projected revenues to the cost of continuing current services, and we do say when we talk to reporters, that states have to balance their budgets so they don’t run defi cits in the same way. I do see the confusion as a concern.”

Why do we seem so worked up over something that sounds like little more than verbal confusion? It’s because we see that misusing the word “defi cit” is widespread and we fear that it helps lead

By Katherine Barrett and Richard Greene

56

Problem Solver | SMART MANAGEMENT


attributed to the current fi scal year). The problem is lodged in the way it uses the word “defi cit” itself. The mistake the Jour-nal and others make is using that word to refer to money a state would need over the course of the next year or the next bien-nium—shortfalls that the state has some time to fi x through cuts in expenditures, increases in taxes and fees, or other mea-sures. Ohio’s budget offi ce has that number pegged at about $4 billion for each year of the coming biennium. The sky may be cloudy. It may even be storming. But it’s sure not falling.

As Ohio budget director Tim Keen says, “In Ohio, defi cits are not permitted. We do not have a fi scal year 2011 problem. That’s a misstatement.” In fact, the current biennial budget, which ends June 30, is in balance, as is required by law. That wasn’t easy and required using one-time revenues and other budgetary gimmicks to keep the budget in balance—not an unusual cir-cumstance in many states as they muddle through the hideous economy of late.

One important note: We bear no ill will toward The Wall Street Journal, even though the example we’ve focused on comes from its pages. The confusion about defi cits is widespread in the press, in studies and reports, in blogs and other

On March 1, The Wall Street Journal told its readers that Ohio’s Republican Gov. John Kasich faced “a defi cit esti-

mated between $5 billion and $8 billion for the two-year budget cycle ending June 30, which represents about 9 to 14 percent of Ohio’s annual state spending.”

Those numbers seemed beyond belief. But then, things got even more puzzling. The article also noted that Ohio was in OK shape relative to other states. The Jour-nal pointed to “such states as California, where a $25.4 billion one-year defi cit is equivalent to 29.3 percent of its budget.”

It’s no wonder that so many people are talking—foolishly, we think—about state bankruptcies these days. We’re told that Ohio isn’t the worst and yet, just two months away from the end of its fi scal year, it presumably has to fi ll a hole equal to 9 to 14 percent of its spending. Perhaps equally horrifying is that Ohio apparently doesn’t even know whether it needs $5 billion or $8 billion over the next few months.

How could any budget offi ce fi x such a defi cit, short of taxing like the Sheriff of Nottingham?

It doesn’t really have to. The Journal’s references to “defi cits” simply aren’t accu-rate (nor, by the way, were the numbers it

Dictionary DefaultWhen is a shortfall a budget gap and not a budget defi cit?

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Discover the tips, secrets and strategies of working better

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real reason why government is broken — and how to fi x it. Quickly now, get your boss and your whole team to read this book, and then strap on your tool belts and do it yourself!”

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AUDITS FOR WASHINGTON STATE AND EXECUTIVE MPA

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FACULTY AT THE UNIVERSITY OF WASHINGTON


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to the conclusion that states and cities are in dramatically worse shape than they actually are—which is bad enough. “Defi cit is a much more loaded word because it connects to what people see at the federal level,” says Scott Pattison, executive director of the National Asso-ciation of State Budget Offi cers. And of course, the federal government is actu-ally allowed to run a defi cit at year’s end, unlike virtually all states.

“I get really frustrated,” Pattison contin-ues. “‘Defi cit’ implies the actual fi nancing of debt. People who don’t know assume that states are using the equivalent of Treasury Bills to fi nance a defi cit. But except in rare instances, debt at the state level is used to fi nance capital (not oper-ating) expenses. You shouldn’t use the word ‘defi cit’ for shortfall because defi cit implies the fi nancing of debt.”

As Pattison further notes, having a shortfall in a future budget provides no proof of fi nancial distress. It just means that projected spending (however that is calculated) is greater than projected revenues, or that budgetary estimates of revenues or expenditures turned out to be wrong. Pattison was budget director in Virginia between 1997 and 2001. The late 1990s were robust times for Virginia’s budget, as for most states. “Every year in Virginia we started with a huge shortfall because everyone comes in and says, ‘We need this amount of money,’” he says. “Even in good times, every state that I know of starts with a shortfall.” G


By Caroline Cournoyer

Goodbye, Junk Mail Five localities have signed up to save money and eliminate paper waste simply by cutting down on junk mail, such as credit offers, phone books and advertise-ments. Residents in Berkeley, Calif.; Kansas City, Mo.; Tompkins County, N.Y.; Marion County, Ore.; and Chicago can now opt out of receiving any unwanted mail by registering on a localized website, according to GreenBiz.com. The Mail Preference Service program, created by the California-based nonprofi t Catalog Choice, allows residents to manage how much and what kind of mailings they receive. The annual cost of disposing of unwanted mail and phone books can equal at least $1 billion, according to Catalog Choice. These initiatives could save cities up to $10 per participating household due to reductions in collection costs and landfi ll space. The local governments will eventually receive data displaying the participation rates and environmental impact of the program.

| IDEA CENTER

911 Gets Smart When taking an emergency phone call, public safety offi cers’ response time is often slowed by having to collect information from a panicked caller. To improve the speed and quality of emergency assistance, municipalities in more than a dozen states have implemented Smart911—database software that allows citizens to create online profi les for free. Participants can upload photos of them-selves and their children with information that includes an address, a physical description, emergency contacts and medical conditions. When someone with a profi le dials 911—whether from a landline or cell phone—the call taker can imme-diately forward all relevant information to fi rst responders, such as fi refi ghters and police offi cers. Smart911 also reminds users to update their information twice

a year. If they fail to do so, their profi le is deactivated and can no longer be accessed in emergency situations.

Find more ideas forcreative programs atgoverning.com/ideas

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Individual coverage underwritten and offered by American Family Life Assurance Company of Columbus. In New York, coverage underwritten and offered by American Family Life Assurance Company of New York. Some policies may be available as group policies. Group coverage underwritten and offered by Continental American Insurance Company. Policies may not be available in all states. Aflac pays cash benefits direct to the insured, unless assigned. Aflac processes most claims in an average of four days. For Continental American Insurance Company, the average is five days.

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By Steve Towns

Learning to Love IPv6A new standard solves an Internet address shortage while opening the door to innovation.

Problem Solver | TECH TALK

numbers of disaster victims, for instance. The same technology also could monitor the condition of bridges, highways and other critical infrastructure. Furthermore, networked wireless sensors could be worn on clothing or embedded in living spaces to remotely monitor the condition of elderly citizens, allowing them to safely remain in their own homes longer.

“We even developed a bike helmet with sensors in it, so if the person riding were to have a head injury, the helmet communicates with the rider’s cell phone to call 911,” says Tom Siracusa, executive director of IP service development for AT&T Labs. “But for these applications to really scale, we need that explosive address space that IPv6 will provide.”

Siracusa recommends that agencies develop a fi ve-year plan for making their networks essentially bilingual. “IPv6 is almost like a second language. You can enable your network to speak both IPv4 and IPv6 through an approach called ‘dual stack,’” he says. “By opening up that

Sometime in the near future, you may get a visit from your CIO to talk about IPv6, the technol-ogy industry’s remedy for the

world’s shortage of Internet addresses. Here’s why you should listen.

Right now, the Internet relies on IPv4, an international communications standard that directs traffi c across the sprawling worldwide network. It does that by assign-ing a unique numerical label, or address, to every device connected to the Internet. But as more and more devices link up, the current method, created in 1981, can’t keep up with demand. A new standard called IPv6 solves the problem by providing a huge number of new addresses—340 tril-lion trillion trillion, to be exact.

Even though the nonprofi t organiza-tions that allocate Internet addresses worldwide dished out their last batches of IPv4 addresses in February, shifting to the new standard will take much longer. Unlike the Y2K problem—where organi-zations spent an estimated $300 billion worldwide in a race to fi x date fi elds in computer software before the arrival of the year 2000—the move to IPv6 can be gradual. That’s because there are enough technological Band-Aids available to let IPv4 and IPv6 users co-exist for years.

Still, there are good reasons why gov-ernment agencies should start thinking about upgrading.

Because IPv6 creates trillions of new Internet addresses—and simplifi es the task of managing Internet-connected devices—it opens the door to innovative new technologies like sensor networks that could help communities tackle a range of public-policy concerns.

These networks, which would link together hundreds or even thousands of tiny, low-cost wireless sensing devices, could help emergency personnel automat-ically triage and track the status of large

avenue to communicate both ways, you can selectively deploy new applications that use sensor networks without rewrit-ing all of your existing systems.”

That doesn’t mean the IPv6 upgrades can be put off forever, and some industry experts worry that state and local govern-ments are ignoring the issue. John Curran,president and CEO of the American Registry for Internet Numbers, one of the groups that distribute IP addresses, warned state technology directors at a 2010 conference that states aren’t taking the IP conversion seriously, which could backfi re when citizens can’t access gov-ernment websites.

It may take several years to reach that point, but state and local leaders need to confront the issue now. Luckily investments in IPv6 won’t just make you compliant with the new standard, they’ll open some interesting new options for conducting the business of government. G



Adding trillions of new Internet addresses will enable unique IDs for thousands of objects—even bike helmets, which could transmit information when a cyclist is in an accident.

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THE PROBLEM: YOUR BUSINESS IS GROWING FASTER THAN THE SPEED OF T1s.

Comcast Metro Ethernet does what legacy technologies like T1 can’t. It’s completely scalable, allowing you to quickly and easily double your bandwidth without doubling your costs. So your total cost of ownership is lower and your budget goes further. nd the pri ate network is operated by Comcast from the rst mile to the last, gi ing your business reliability, security, and faster speed. Comcast Metro Ethernet is the choice of companies that realize outdated technology just can’t compare to Comcast’s Ethernet solution.

Restrictions apply. Not available in all areas. Call for details. Comcast © 2011. All rights reserved.

THE SOLUTION: COMCAST METRO ETHERNET.

877-558-7852 | BUSINESS.COMCAST.COM/ETHERNET


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By John E. Petersen

Anew wave of negative thinking is abroad in the land, a fear that state and local governments have piled up more debt than

they can pay off , and that there will be a cascade of defaults, such as occurred in the Great Depression of the 1930s.

Such thinking posits two things: First, the dire economic and fi nancial condi-tions of the 1930s are about to be repeated. Second, we haven’t learned much about forestalling a surge in defaults by state and local governments. Neither of those propositions is true.

Let’s start with the 1930s. During that decade, one state and hundreds of local governments—representing about 15 percent of outstanding state and local

debt—experienced a default. Individual bond issues that embodied actual mon-etary default (money that is late and not paid in full as promised) represented 7 percent of total outstanding debt. Of that amount, the ultimate monetary loss came to only 0.5 percent of the total debt. That’s because governments, after delays and refi nancing, actually paid back 99.5 percent of the principal and interest that was due—an extraordinary recovery rate.

Since then, default rates on municipal securities, especially tax-supported debt, have been trivial—and there are multiple reasons for that. Local governments, which represented most of the government sec-tor’s pre-Depression spending and taxing, are no longer the isolated, self-dependent entities they were in the early 20th cen-tury. Also, governments in the late 1920s and early 1930s relied heavily on short-term borrowing, so they were susceptible to rollover risk as the banks that lent them money either could not or refused to renew short-term loans. It’s no wonder the bank-ing crisis from 1931 to 1933 coincided with the sharp peak in municipal defaults.

Today, state and local debt is much less of a burden on both the national economy

and governments’ current revenues. In the late 1920s, state and local debt equaled 17 percent of the gross domestic product (GDP) and rapidly rose to 30 percent in the early 1930s. In contrast, in the late 2000s, such debt equaled 14 percent of the GDP. Accordingly, in the late 1920s to early 1930s, state and local debt was equal to two and a half times their annual current revenues. In 2008, total municipal debt outstanding was one times annual revenues.

Additionally, revenue collection is more stable than it was 70 years ago. Modern revenue systems stress withhold-ing at source (including taxes embodied in mortgage payments) and collecting at time of transactions (sales and excise taxes). While delinquency on property taxes skyrocketed to 25 percent in the early 1930s, delinquency rates the past few years—despite mortgage foreclosures—have increased only slightly from about 1 to 2 percent in the largest cities. That’s because of mortgage insurance restric-tions that require property taxes be paid in order for the foreclosing entity to keep the title to the property.

The makeup of bond issuers is also dif-ferent today. States with larger and more diversifi ed revenue sources than localities, are much larger players. In the late 1920s, state government revenues represented only 23 percent of the sector’s total rev-enues; in 2008, it was 61 percent .

Thanks to structural and policy changes that grew out of the 1930s, the nation’s banking system is much less inclined to the rapid, widespread failures that would lead to municipal defaults. This was just demonstrated during the recent Great Recession of 2007-2009, where extraordinary steps were taken quickly to maintain liquidity in the pay-ments system.

The Great Recession was a severe test of the fi nancial system. It bent but did not break. Yes, states and localities now face fi scal stress. But they are not nearly as indebted as in the 1930s, nor do they have heavy annual debt service burdens. Pain-ful adjustments are being made by these governments, but there is not the sudden unrestrained downward spiral in income and prices that occurred in the 1930s. Some hard lessons have been learned. G


The Debt DemonHave states and localities borrowed too much?

Problem Solver | PUBLIC MONEY


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ENERGYLEADERSHIPJOBSINFRASTRUCTURE

Building Sustainable 21st Century Communities

A GOVERNING leadership summit

bringing together public offi cials focusing

on unlocking new sources of revenue,

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strategies for 21st century communities.

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June 21 & 22, 2011New York, New York

Hosted in cooperation with:

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64

Player

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David C. BoydPosition: Minnesota Public Utilities Commissioner

Age: 51

Education: B.A., St. Olaf College in Northfi eld, Minn.; Ph.D., University of Minnesota

Nuclear plants in Minnesota: Monticello and Prairie Island

Notable Membership: Chair of the NARUC Subcommittee on Nuclear Issues-Waste Disposal

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When a tsunami wiped out the electricity at the stricken Fukushima Daiichi nuclear power plant in March, the resulting crisis in Japan caused many Americans to worry and ask: Could that

happen here? It is a question Minnesota Public Utilities Commissioner David C. Boyd has been asked repeatedly.

“We’re all getting [questions] from our friends and family,” he says. “It’s natural and reasonable, and [I have] no qualms about trying to engage the dialogue.”

Originally a chemistry professor at the University of St. Thomas in Saint Paul, Boyd applied to fi nish out the term of an outgoing utility commissioner in 2007. Boyd says that the industries he and his colleagues regulate—electricity, natural gas and telecommunications —tend to fl y under the radar until a crisis like Fukushima arises. As chair of a national committee on nuclear issues, Boyd’s role is to help his fellow state commissioners stay informed and connect them to nuclear experts and resources.

Recently Boyd co-moderated a webinar panel on the sta-tus of the Fukushima accident for several of his colleagues. He doesn’t expect the questions or conversations to subside anytime soon. “I’m reasonably sure that at [the National Association of Regulatory Utility Commissioners’ (NARUC)] summer meeting, the issues of Japan will become a fairly hot topic of conversation,” he says. —Tina Trenkner



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BOTTLENECK.GOV

SOLVED.

©2011 CDW Government LLC. CDW®, CDW G® and PEOPLE WHO GET IT™ are trademarks of CDW LLC.

Today, government agencies rely on optimized connectivity. We get it. With dedicated account managers, solution architects and partnerships with leading vendors like Cisco, SonicWALL and Symantec, we can help you design and build a solution that’s fast, flexible and secure. One network, reliable, with bandwidth and communication for all.

Get things moving at CDWG.com/networking


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In San Diego, our light rail system is getting commuters home faster. We’re powering a neighborhood in Anaheim with a substation that stays out of sight. And in Houston, we’re helping a hospital care for the youngest generation. All across the country Siemens is helping cities become

the kinds of places where both people and businesses can thrive. Somewhere in America, our team of more than60,000 employees spends every day creating answers that will last for years to come.

siemens.com/answers

Siemens answers are making cities more lasting, livable and prosperous.

Building cities worth building a future in.

© Siemens AG, 2011. All Rights Reserved.


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