State of the States: A Q&A With the National Governors Association's Scott Pattison

The National Governors Association welcomed Scott Pattison as the organization’s new executive director last week.

A lawyer by training, Pattison served as executive director of the National Association of State Budget Officers for almost 15 years and, before that, as Virginia's budget director and counsel on finance issues in the state Attorney General's Office.

Neal Johnson, an organizational effectiveness analyst, sat down with Scott Pattison recently to address the challenges and prospects of the states in this next, new era.

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Neal Johnson: I think a lot of folks are interested in where the National Governors Association is going and where you and the executive committee are planning on taking it. First the big picture, reflecting back on your almost 15 years at NASBO, during which state finances have experienced 9/11, the tech and real estate bubbles, unprecedented revenue growth and volatility, the Great Recession and recovery, and health care reform.

Scott Pattison: You’re right … there are so many things that have occurred. And probably chief among them from a state financial management standpoint is the incredible roller coaster of volatility, particularly in income tax revenue. It was much more pronounced at the state level than either at the federal or the local level, just given the way that the tax systems operate and the fact that, of course, there’s the ability at the federal level to borrow a much different and higher amount—and for operating expenses.

So I think that it’s been fascinating how well states have been able to manage the up and down. As you mentioned—and not long after I started with the state budget officers—we had 9/11. And it was a very mild recession, but it was a huge crash in state revenue—very significant, very quickly. So they had to cut rather significantly and, in some cases, raise some taxes and fees.

Then, of course, you get to the mid-2000s. The real estate boom really carried a lot of states and they were doing very well. In some cases, there were other reasons, like agricultural commodities prices, so a lot of the ag states did well. There was energy that was certainly driving not only North Dakota, but some of the other energy states. So they were doing very, very well—you had a big “up” period.

And then we entered the Great Recession, which by all the data that is collected by NASBO, was by far the worst decline in state revenue, at least in decades. So the states having to manage that I think is rather significant. And there was a lot of pain in that there were cuts, in some cases tax increases.

But I think rather than looking at it in a real negative light, I think states should get, for the most part, kudos for being able to manage through that in a very difficult period. Now, granted, there was, especially in the Great Recession, some significant federal financial assistance through the [American] Recovery [and Reinvestment] Act. But, again, that had to be managed.

From a financial management perspective, I think states really were able to step up and manage two things. One was an incredible drop in their tax revenue, particularly on the income tax side, and therefore having to cut sometimes multiple times during a fiscal year. But at the same time, they had to manage a lot of federal money coming in—much of which was very specifically directed to certain programs.

I’m not sure this is appreciated, but the states’ administrative and financial management staff and resources in most states is fairly limited in number. They are great, thoughtful, and rather impressive, intelligent people—but there aren’t very many of them. And so, the fact that they were able to do that I think is important.

What we tried to do [at NASBO] was to quickly capture the lessons learned from the volatility, particularly [during] the Great Recession, and I think you’ve seen some positive lessons in terms of financial management.

One of the things was definitely an interest in trying to [establish and build up] reserves and rainy day funds. But, in addition to that, I think there’s some healthy caution on the part of states. Governors of both parties have financial management advisors and budget directors who certainly want to assist them to get their programs and their priorities through, but, on the other hand, are explaining the need to be cautious as you go forward, because what we’ve learned over the last 15-plus years is that revenue can be extremely volatile. It can turn rather quickly.

I don’t have to go over the fact that there are some pretty strong partisan feelings and some strong ideology in many different ways. And so, significant systemic changes are difficult, like major changes to a tax system. Therefore, they have to deal with the status quo in terms of how money is raised and spent.

Johnson: That’s really helpful. Moving forward, are you observing any new trends or anomalies, specifically in general fund revenue growth, as states continue to pull away from the disruptions of the past decade, either in terms of level of volatility or growth path?

Pattison: What’s been interesting the last few years during this recovery period, we’ve had six years of growth for the states in the aggregate—3 1/2 to 4 percent—and it’s been very modest, steady growth. So the good part is it hasn’t been terribly volatile. It mirrors the GDP and the modest growth in the economic front nationally.

The unfortunate part of it is, though, it’s below average—at least if you look at the data from the prior three or four decades, [when] average growth was more than 5 ½ percent year over year.

Now, because we’ve had six years of modest, steady growth, I think we are starting to see a bit of an upswing in both revenue and spending, as you would expect. And so, right now it’s not quite as tight as it was a few years ago, because before, you were digging out of a hole and you were having to replenish funds or restore budget cuts. Now it’s been long enough where you’ve had steady growth where they can start to do a little more, and you’re seeing that.

But that gets at something which I think is going to be very interesting for the states, and certainly the governors, as we go forward. And that is that we continue to be in a modest growth period. Therefore, resources are tight because there are certain areas of spending like healthcare that go up faster than the amount of revenue coming in.

So, no matter what, until the next recession, they have to manage very, very tight resources. There’s not enough money to do everything that most citizens or voters in constituency groups want. You can’t necessarily cut some taxes and put money into new programs and fully fund higher education requirements and things like that.

So managing very tight resources will continue to be an issue, [even among the] dozen states that were doing much better than average, when energy prices or commodity prices were higher a few years ago.

Now that commodity prices, energy prices are lower, you don’t have that. Those states, some of them are in particularly difficult shape, or at least they are more average.

But what’s really exciting is tighter resources breed innovation, creative thinking. And you are seeing that in a lot of states. What I’m hoping to do with the National Governors Association is continue to share the exciting, innovative, and creative types of things they are doing across the country. They are redoing business processes. They are creating more efficiencies and improving customer service. You are seeing things in the Medicaid area where they are trying to do things that cost less but still don’t impact quality. They might be putting more money into a preventative program, or they may be doing things that are keeping people from having to go to the emergency room, which we know is expensive.

Johnson: Are the data beginning to come in to show that those investments in innovation are actually yielding tangible programmatic outcomes and budget savings?

Pattison: Yes—but I think we’re at the very beginning of that. Part of the problem is I think you’re seeing a lot of exciting Medicaid pilot projects and ways to save money without compromising quality or sometimes even improving it. But, unfortunately, Medicaid grows so fast year over year, and will continue to do so, that you are not necessarily seeing some of the savings because they’re hidden.

I think governments are still nowhere near using data and evidence-based programs to the potential that they could. And that’s not a criticism. It’s just this is still new. Government doesn’t move quite as fast, but the potential is just amazing to me.

For example, you can do things that even a few years ago would have been too expensive and resource intensive to do. Technology changes so fast. Think about how exciting it is for [public health officials] to have data that almost in real time lets you know where there are outbreaks of flu because three Walgreen’s in a certain county had a huge spike in flu-related prescriptions.

And think about how government … can utilize that information and data to save money and be more efficient, but also to do policy that targets and gets the results they want. Which, in that case it might be the health department working at the state level with local health officials to very quickly try to limit the outbreak of a flu or make people more aware of the contagion and what they can do.

It will take a while at all levels of government for the states and others, to figure out how to utilize that, utilize it correctly. And I know there are many issues, such as privacy issues. But the potential is enormous.

Johnson: Looking back again to your time at NASBO, you clearly have a passion about the issue of education, especially higher education. You’ve been very involved in that work. As you take up your new NGA role, where are we headed on this critical issue for state and local leaders—and their constituents?

Pattison: K-12 will continue to get an enormous amount of attention. It always does. There are also a lot of underlying aspects to funding for K-12 that I predict will mean that it will continue to see increases year over year in almost every state, mainly because there are built-in formulas for funding. In many states there are court cases that require a certain amount of funding. And, frankly, it’s politically important and popular.

K-12 is very different than higher ed. Budget officers—and, I think, now even more so governors—are going to continue to be focused on higher education. It’s going to be tough within a tight resource environment with so many parts of government competing for funds—and higher-ed is one of them. It’s going to be tough to figure out how to continue to finance higher education within the context of tuition that’s risen pretty significantly over the last couple of decades, higher than inflation, and debt loads that are beginning to get a lot of public attention and concern by elected officials.

Frankly, I also think a big concern is about: What is the result? Not only the worry that some students aren’t even getting the result because completion is low. But I also think: Is it resulting in something that has been worth the investment? Are they getting to where the degree—not only was it worthwhile as an intellectual exercise—but does it lead to a decent paying job also given the level of debt that the student might have? So that’s all part of it.

You had a period of time, particularly during The Great Recession, where states cut higher ed, which you’ve seen in the past recessions. They are pretty much cutting every part of state government except for Medicaid and K-12; in some cases even K-12. And so, higher-ed is not really treated significantly differently. It’s cut like everywhere else. Now, in some cases it is cut more because they do have other revenue sources like tuition.

I think what’s happening at the state level now, which is exciting, is a realization on the part of governors and other elected officials: How do we try to work with higher-ed to get more to the results we want, which is higher completion rates, better return on investment?

Frankly, I don’t buy the argument that states have become such a small part of the overall funding that they don’t have an important role. I think, first of all, states still provide a significant level of the operating funds for the academic activities of higher-ed, and that’s very important.

People can use all kinds of data they want. But the state is still a very important partner, both financially and in a public policy way, to higher-ed. I think it’s important for higher-ed to realize that. In almost every case, I don’t think public universities want the states to stop providing funding. But I think the states are going to say, “Look. Money is tight for us. We want to still be an important partner with higher education. But we really expect that if we’re providing money, if we’re one of the many putting money in, we’ve got to see some more results. You’ve got to focus more on completion.”

And I also think in the higher-ed area, and I think states are really going to push this, I think it’s good for higher-ed to be pushed a bit on different alternatives. There are still plenty of students that should go live in a dorm and have the experience of being [part of a campus community], but I think there’s going to be an expectation that there are all kinds of other ways for students to get either degrees or certificates. And I actually think that’s exciting. It’s part of the creativity and innovation you are seeing at the state level.

It might be we’re talking about part of high school providing more in terms of credits for higher-ed, or community colleges working with industry to provide more of what might be needed in a state, like welders or plumbers, whatever type of career skills are necessary. So I think it’s actually exciting. But I think it’s time for higher education to realize that instead of butting heads with the state and being critical that they’re not providing enough money, is to understand the tight fiscal situation and partner with the states.

And frankly, I think if they demonstrate an improvement in outcomes, then I think the state will say, “Wow. We want to provide more funding because we’re getting more. It’s good for the state. It’s providing people coming out with skills and getting jobs.”

Johnson: That’s really helpful. And I’m sure you’ve been seeing some of the interesting innovations, in part spurred by the Gates Foundation and Federal innovation grants, where some of the public funded colleges and universities are even partnering with some of the nontraditional providers, such as business-led apprenticeship programs, MOOCs (Massive Open Online Courses), skill-focused boot camps. It really is kind of an exciting time.

Pattison: I think so. Speaking on behalf of state officials, I think sometimes people get too caught up in what are really the tools. They talk about MOOCs and virtual classes and stuff. From a policymaking perspective that’s not what they are focused on. They are focused on: How do you get to where we want to be, which is we want more people coming out with actual degrees or certificates that get them jobs? However you get there, given how society is and how people have different lives now, I think is what is important.

If online classes are a way to do that, that’s great. But it’s so much more than that. It’s just getting to the result. How do you make sure that you are getting students of all different ages and all different lifestyles in terms of their career and parenting, how are they involved with higher-ed and getting the benefits of higher-ed?

Johnson: Building on that, let’s talk about your new role and tying the K12, and higher-ed, and the workforce pieces together. Obviously, for decades NGA has been a leader—and the governors themselves have been leaders—in the standards-based reform movement from the ’80s and ’90s, really, moving forward. And NGA has been a convener and honest broker for the kinds of hard conversations—some of them very politically challenging, depending on states’ particular environments—that have laid the groundwork for broad consensus on standards.

Do you have some thoughts about moving NGA forward in this new environment—and obviously a politically challenging one, as you’ve mentioned before? Is there a new role that NGA can play, while continuing to leverage its capacity to showcase best practices and be a safe haven for difficult policy discussions?

Pattison: I’ve been talking already with governors and their staffs in various states. And what I’m finding on the education front is … what is so exciting and critical, and I think NGA is going to continue to play a real important role in this, is the breaking down of silos. There’s a real recognition that we’re not just putting a silo in K-12’s one place, workforce development and employment in another. It’s all really being tied together.

To me that’s really exciting. I think the National Governors Association can be a part of that. There’s definitely a role for other groups and entities as part of the political process. And there’s a lot of strong rhetoric about things like Common Core, whether it’s good or bad. NGA doesn’t need to get into that part of the process, because that’s very politically charged. And that’s fine. There’s a role for that. But the role for NGA is more the roll up your sleeves credible policymaking, definitely bipartisan, about what are things states can do, are doing? What can governors do together collectively in terms of figuring out how to deal with education policy and how education policy ties with all these other things related to jobs, employment? It even relates to things like healthcare.

I think you are going to start to see a lot more collaboration. And I think NGA can really foster that between various groups to say: How can we figure out policies that break these silos down?

And I think there are exciting examples. I know some community colleges have started to work with local businesses in saying, “What do you need? What do you want?” I know down in Virginia the community colleges were talking to some chambers of commerce and they said, “Restaurants are having trouble hiring and finding people with skills.” So, some community colleges expanded their culinary arts programs and increased the amount of students going in there. I know in Michigan they’ve had a shortage of certain skills like welding, which is important for auto manufacturing. And so, government is working with business to try to provide more of the welders.

I think NGA can play an important role, again, because it’s the bipartisan organization that has a lot of expertise in certain areas and I think is breaking down the division between K-12 and higher-ed.

Johnson: There really are some interesting new models, aren’t there? And, if anything, I think we see them kind of from the ground up, whether it’s where there’s a terrific leader either in the community college system or at an individual community college, and a really forward thinking and effective superintendent that are providing models for more statewide innovation. I’ve been seeing this in Florida, some of the Chicago-area superintendents and community college presidents, and elsewhere.

There’s so much more you’ll be involved in. For example, there seems to be broad agreement that infrastructure investment is woefully inadequate for the kind of robust economic growth that everyone agrees is our goal. There have been obviously some innovative state financing approaches—some of which have met with mixed results. It was a major topic at last month’s North America Governors and Premiers Summit in Colorado. Are you seeing some emerging new practices or promising innovations in that area that hold out some hope for the capacity to build new investment in infrastrucure?

Pattison: Yes, because, as they always say, necessity is the mother of invention. I think we’re going to continue to see that in the infrastructure arena. Across party lines, there is a belief that there needs to be some attention to infrastructure.

To me there are two parts. Some is just maintaining and fixing problematic things like bridges that might be unsafe. But more important than that I think is the tie to economic development and the importance of infrastructure assisting with attracting further economic development in the states, dealing with issues that I know are a concern to employers, like traffic, congestion, or certain shipping routes, and transportation, all that sort of thing.

What’s exciting to me is that states are really thinking about this. States were justified in being very wary coming out of the Great Recession, very cautious about spending and debt. Now that there’s more stability in state finances, I think they’re starting to think, “How can we utilize the federal funds that will be provided, but also, what can we start to leverage at the state level?”

I’m excited about NGA being able to study, inform, and share information on these infrastructure issues and on financing state infrastructure projects. I think what a group like NGA can do is say, “Hey, here are what other groups have come up with in terms of proposals and ideas.”

And not only domestically. I think there’s a lot going on internationally in how you approach infrastructure in terms of partnering with the private sector. Beyond the public/private partnership finance model, sometimes it might be figuring out how private sector wants a certain type of economic development in a certain area. How can states work with them leveraging all kinds of different funds? They might be federal funds. They might be state funds. They might be local private funds, private investment.

Johnson: Interesting. Where are you observing some of these new models? Germany?

Pattison: Really all over—Canada, Germany, Australia. There’s a lot going on across the [globe]. And what’s really important is that a group like NGA can talk not only about successes, but also to talk about failures and say, “An Australian state did some infrastructure financing and it was not a good idea and not the way to go. And you need to know that so that when you hear this proposal, we can learn from them.” So I think it’s finding out who has done all kinds of different things and avoiding their failures and mistakes as well as learning from their successes.

Johnson: There are so many other topics that we haven’t touched on. If you’re up for it, let’s do a quick lightening round on a few.

Pattison: OK, let’s go!

Johnson: I do think readers will be interested in how you you’ve been working closely with NGA Chair, Utah Gov. Gary Herbert. So, for example, in his recent National Press Club speech, he was talking about state solutions and pressing challenges. He highlighted Utah’s new anti-discrimination law providing new protections to LGBT communities and religious minorities, for example.

Might you be able to share a little—perhaps a preview of coming attractions—as Gov. Herbert’s initiative continues to ramp up over the next few months?

Pattison: Well, it’s really preliminary for me. But, with his initiative he’s really talking about a lot of innovation. And again, I keep using the word exciting, but it is.

A couple of examples that come to mind right now: Corrections and mental health.

In the corrections area you are seeing some really outside-the-box thinking. It’s how do we make sure that the violent offenders that we’re concerned will hurt somebody or do something really bad are kept from the populace and locked up. But are there less violent offenders or are there ways that we can deal with those who have broken the law and caused harm, but are there alternative ways to deal with them and prevent them from, whether it’s fraud or nonviolent drug offenses, how do we deal with those folks?

I think you are seeing across the country some exciting ways of states considering being innovative and creative in that area.

Mental health is another area. I think there is an understanding in the behavioral health area that government still has a ways to go to figure out how to deal with behavior health issues.

Also part of Gov. Herbert’s initiative is focusing on federalism and intergovernmental cooperation. Some of the most exciting innovations are going on at the state level and sharing those with the federal government is important. Plus, with the recent passage of the transportation and education bills, states have a critically important role in these areas in pushing for improvement and results.

Johnson: Is there anything we haven’t touched on, Scott, that is on your mind as you round the corner into this transition?

Pattison: Yeah. Well, there’s something that I think’s important to say. And what I want to point out, because it’s really true, is if you look at the data, certainly in the aggregate: States are well-managed. They are financially stable. And I would put up the states against any other government at any level across the world and they stack up, in the aggregate … I’ll put them up against any other level of government, whether it’s Länder in Germany, a city council in Hungary … I mean: are there huge challenges? Yes. Are there financial liabilities? Yes.

But as far as overall, as a level of government, they are in pretty good shape. They are stable. For the most part they are run well. I mean there are always exceptions to everything.

It’s too easy to make it sound like states are in terrible shape. They’re not. And all the data indicates they are stable. And again, I’m talking aggregate. States are in pretty good shape. They have tight resources, so they have tough decisions going forward, but … they are all going to be around in 100 years, even those with big challenges right now.

Johnson: Well, I can see the 50 flags waving right now, plus those of the territories! An excellent note on which we may conclude. Thanks again!

(Top photo by Nagel Photography / Shutterstock.com)