A leading perspective.

State Legislatures gathered a group of legislative leaders to talk about the challenges and opportunities that lie ahead in the 2004 session. Recognizing that almost all states are struggling with weak economies, health care, education and myriad other issues, we asked the leaders how these challenges are affecting their states and legislatures. Are they seeing fundamental changes? Here's what they had to say.

CONSTITUENT REACTIONS

SL: Does the public understand the difficult budget choices you confront?

Vermont Speaker Walter Freed: Every year, regardless of the nature of your budget, there's always tradeoffs. The beauty of a recession is that even though your constituents don't always appreciate the tough decisions, their expectations are lowered. They recognize that times are tough, and they can't have all that they want. Sometimes the down cycle gives you an opportunity to reassess without the political pain of the public rising up against you.

Maryland Delegate John Hurson: I think there is a sense of anxiety. People are waiting to see if the tough decisions have already been made. A lot of them think that it's time to ratchet back. They're not sure how it can be done, but they expect us to do it and to live with it.

Minnesota Senate Majority Leader John Hottinger: I'm not convinced that the public, at least in our state, understood the complexity and the outcomes that flowed from budget decisions we made last June. Now they're hearing about it, and they're recognizing how it affects the community, how it impacts them, and we're getting a different reaction. I expect we'll have a much better engaged public debate about where we make our decisions in terms of allocating resources and whether or not we get enough resources.

Utah Speaker Marty Stephens: We're seeing the public's hesitancy to pay more taxes. And we're seeing a change in people's recognition that they can't have everything that they're asking for and still have a reasonable tax burden. And that's helpful to state legislators.

FUNDAMENTAL CHANGES

SL: Have the current fiscal conditions forced you to make fundamental and structural changes to your programs? Has partisanship played a role in your ability to implement change?

Connecticut Speaker Moira Lyons: This past session was one of the most contentious sessions we have ever had. And it was contentious with interest groups and within the caucuses because we made fundamental changes. We made changes in the delivery of our health care system; we reduced benefits; we changed the whole delivery structure for Medicaid and TANF recipients. We initiated copays all across the board on everybody. It was almost impossible to get a vote on them, because we were minimizing programs that worked.

Stephens: That's one of the things that's been the most surprising to me. There has been very little differentiation between the parties on fiscal issues, nationally. The majority party, whether Republican or Democrat, has to govern. I think as you look around the country, state legislatures have done what's necessary--we have balanced the budgets and made things work.

Kansas Senate President Dave Kerr: Budgets have been progressively tightened the past three years, but when the real crunch hit, most states knew where we could pull some rabbits out of the hat for at least a year or two. We've done that. To some extent, we appear to have delayed the onset of the needed fundamental change that is a lot harder to pass. Politically, it's much more difficult.

Hurson: In Maryland, we have a Republican governor and a Democratic legislature. The bipartisan way we've dealt with the budget over the years is slowly eroding away. We've done the gimmicks to try to fix the budget. We've had two years of cutting, but it's been all the things that really aren't going to hurt. Now we're at the point where we've got to do the structural things that are really going to make a difference in how we deal with fiscal issues in the next decade or so. Partisanship is making the structural decisions much harder. We all know what we have to do. And it will get done, but there's going to be a lot of blood on the floor before it's finished.

OVERHAULING THE TAX SYSTEM

SL: Do you think there's support out there for tax reform? And how will implementation of the streamlined sales tax initiative come into play?

Freed: It's almost a hopeless exercise. We're constantly looking to reform the system. This year for our education system, we shifted more from property tax to consumption tax. But real change comes about only if you can broaden the base.

Lyons: In Connecticut, reform means only one thing--property tax. It means nothing else. But we've tried to be innovative by encouraging some regional sharing of costs, whether it's the police force or trucks for clearing roads during snow storms. We've tried to provide relief in smaller steps since the revenues were not available for sweeping reforms.

Hottinger: Governor Ventura, for all his entertainment value, had a very substantive proposal on tax reform to shift additional costs for education to the state away from property taxes, and to broaden and reduce the sales tax. Unfortunately the budget problems hit, so education got whipsawed. There were reduced property taxes for homeowners and businesses, more dramatically businesses, but then we didn't have the funds to replace the money.

Kerr: I don't see a lot of interest in additional so-called tax reform. During the '90s we lowered property taxes. We actually lowered the statewide property tax for schools by 43 percent during the glory years of growing revenues. We replaced them with sales and income taxes because they were generating more money than was expected. But the trend in every state's economy is more toward the service economy. So one of the real questions is: Are we willing to take some of the exemptions off services and broaden that sales tax base? I don't see it. But the streamlined sales tax movement is enormously important. We must not allow it to fail.

Oklahoma Senator Angela Monson: Tax reform won't occur in a big way unless there's some catastrophic reason that necessitates it. However, the streamlined sales tax initiative is another matter. The focus is on creating needed uniformity and simplification in the sales tax system. It will help protect the sales tax base, but will not be the answer to revenue shortfalls. The streamlined sales tax initiative is also important because of what it means in terms of federalism and the protection of states' rights; the right to create our own tax base and govern ourselves in relationship to what the federal government might desire to impose upon us. It's one of the most important policy changes that we will implement in our careers.

COSTLY HEALTH CARE

SL: Health care costs are a big driver in the budgets. What types of structural changes or innovations are you looking at in your respective states?

Kerr: Half of our budget's made up of K-12 education, and it's not growing faster than inflation. Another 15 percent is higher education, and it's not growing faster than inflation. But the 15 percent for the six major social programs, including Medicaid, is growing by double digits every year, as much as 20 percent. There goes all of our flexibility for the entire budget. We have to zero in on the problem and make the fundamental changes. We don't have a choice.

Hurson: One of the fundamental problems we're facing in the health area is the rapid increase in costs. The genie is out of the bottle in terms of costs. Small employers are dropping their health care coverage all across the country. They simply cannot pay the premiums, and they can't force more of it onto their employees. The employees can't afford it. So I think states structurally have to start looking at systems of care for people who have no other means of getting it. The 15 percent that's coining out of every health insurance dollar that goes to administration is 15-plus percent that we can no longer afford.

Stephens: In Utah there has been a big debate on whether Medicaid benefits should be better than the typical benefit package that someone working in the private sector could have. We ended up cutting vision and dental services from the Medicaid budget because most small businesses don't offer these benefits for their employees. There was a concern that we would be offering a richer benefit package to Medicaid recipients than the people who were paying the bill. This has sparked an interesting debate about what the proper role of state government should be in providing services.

Freed: When you get into that debate, the question to ask is what constitutes fundamental change? We can talk about the changes that we all do every year, whether it's eligibility changes, adding a benefit, deleting a benefit or changing a copay. Those things are controlling our budget year after year. But we all recognize that there are some fundamental and structural changes that have to be made to the system if we're truly going to get cost containment.

Hottinger: There's some things we can adjust--copays, coverage and benefit sets. But I agree we aren't touching on the structural changes that need to be made. It's a demand-driven system. We have increased the things that people can demand in terms of technology and pharmaceuticals that have tremendous expense. At the same time, we're cutting back on some of the things that might have a long-term positive impact, such as getting people to stop smoking and getting them to wear seatbelts. But I am not very optimistic that creating opportunities and experiments is going to fundamentally change the health care system. It's got to be a national consensus. We're a long way from that because we aren't approaching the real long-term problems. How do we cut the overhead in the system? How do we reduce the demand?

Monson: We have to change the way we develop health care facilities, where we build them, and what services are provided. We also have to change the way in which we deal with health care costs, meaning we have to behave more like price setters and not price takers. More attention has to be given to health prevention and health promotion and we have to talk scientifically about what works and what does not work. These are difficult topics. I don't know if the political will is there to do these things.

COSTLY DRUGS

SL: Is the price of prescription drugs a factor?

Hurson: As legislators we've asked the pharmaceutical companies directly: Why do drugs cost less in Canada than they do here? And frankly I think they've been honest with us and said, "Because you are subsidizing the international cost of these drugs, because you want these companies to prosper, provide innovation and provide jobs in your country. That's why it costs more here." The fundamental question we have to answer as Americans is: Do we want this industry to be as robust and innovative as it has been? These are preventative drugs. They prevent diseases, they keep people out of hospitals. Do we want that? If we do then we can't undermine their financial ability to operate.

Freed: We have re-importation in Vermont because we share a border with Canada. So people shop there on a regular basis anyway. And I see no problem whatsoever with re-importation, it is strictly an economic issue. But if the federal government said tomorrow that you can re-import anything that's licensed and safe in Canada if you have a prescription, Canada would immediately move to shut it down. Canada would become 50 percent or 60 percent of the pharmaceutical companies' business instead of just 5 percent. Their immediate response would be to say to Canada, 'You want price controls? Here's our price. The price that we bid is the same price that we sell it for to the wholesalers in the United States.' Once re-importation costs Canada more, they will stop it.

Monson: We had pharmacies, which are now closed, that were in the business of re importation of drugs. It wasn't the pharmaceutical companies or FDA that initially moved to halt their sale of drugs, but other pharmacies that were upset because the price was being substantially undercut. In some cases, citizens were able to get drugs 15 cents on the dollar. I don't have any problem with re-importation, but that's not the real issue. The question is, if we want pharmaceuticals cheaper, what are we going to do to change the pricing structure?

Kerr: If you look at what a drug costs, 75 percent of what you pay goes to the manufacturer. You then break that down into how that money is spread out. About 21 percent of it is for research and development, 6 percent taxes, 15 percent profit, 29 percent material cost. But here's the one that I find really interesting. The advertising number is 29 percent compared to that 21 percent for R&D. So if we can use a tool like re-importation, maybe that gives us negotiating leverage for getting some of this consumer advertising for lifestyle drugs in a little more reasonable state. I think we're free to use any tool we can to drive down the price the same way they're using direct to consumer advertising to drive demand up.

EDUCATION

SL: Has implementing the No Child Left Behind Act been a difficult challenge?

Kerr: We resent the intrusion that the federal government has put upon us because we were refining our own outcomes' measures and our own ways of trying to bring along those schools that weren't performing well. No Child Left Behind was probably greatly needed about 15 years before it was passed. But by the time they got around to passing it, most states had already made moves toward accountability and toward looking at results of education instead of just looking at the inputs.

Hottinger: No Child Left Behind is a heavy federal hand that we have not welcomed in education in the past. It's an effort to make determinations on a national level that we think are better made locally and I think that's a uniform belief. It's a bipartisan issue in Minnesota.

Lyons: The biggest objections to No Child Left Behind are the many mandates and the questionable testing. Can testing determine the various abilities that children have? We all don't learn the same way. Can a test really show that kids know how to read, they know how to think, they know how to do math? The controversy is about all the testing aspects of the law and that there is no recognition of the differences that children have. There are at least two school districts in Connecticut that have refused to accept Title 1 money because they don't want to be unfairly penalized.

Freed: It's very hard to write a policy in Congress that deals with all areas of education. It may be great for larger, urban areas, but a third of our school districts have schools with less than 100 students. It is very difficult to tailor the federal policy to those small, rural schools. We've already had three schools opt out and basically just said 'We're not going to take the Title I money, and we don't want to be covered by this legislation. We'll just get the money from some other source.'

Monson: States are either going to comply or they're not going to comply with the act. What concerns me more than the question of compliance is the fact that, for many of our schools, these policies will probably only result in marginal educational improvement. Increased accountability is not the only path to increased learning and other changes must be made if our children are going to learn at optimum levels.

SL: For our final question, are you making fundamental changes in how we pay for higher ed?

Lyons: Connecticut is becoming an aging state but we want to keep our young people. So we decided to put money into the infrastructure of our institutions to make them more attractive for students and keep them in-state. And these improvements, not just to the University of Connecticut, but to our state colleges and our community colleges, have paid off. Our kids are now choosing to stay in Connecticut for college.

Hottinger: We've got a debate in Minnesota on whether or not the state subsidies should go to the institution or to the students through grants and loans. It's leaning more toward the students than it has in the past. Under state law the public higher ed institutions get about two-thirds of their operating revenues from the state and one-third from students. The practical reality is it's fallen to 50/50 and that's the ongoing debate. Do we want to provide the financial aid to students or to the institutions? Students can use that financial aid for private colleges. In fact most of the students who go to private colleges get a much bigger chunk of the financial aid than the students who go to public colleges. And that's been an under-the-radar kind of debate in the past. It's become very much at the front end of the discussions of higher education.

For more information on the big issues of the session go to www.ncsl.org/public/ issues04/keyissues.htm

Kansas Senate President David Kerr was elected to the Senate in 1985. A Republican, he became Senate president in 2000.

Utah House Speaker Marry Stephens became speaker in 1998. A Republican, he has been in the legislature for 15 years. Stephens is president of the National Conference of State Legislatures.

Maryland Delegate John Hurson, a Democrat, was elected in 1990. He is chair of the Health and Government Operations Committee. Hurson is president-elect of NCSL.

Connecticut House Speaker Moira Lyons became speaker in 1999. A Democrat, she has been in the Legislature for 20 years.

Minnesota Senate Majority Leader John Hottinger was first elected in 1990. Hottinger became majority leader in 2002. He is a Democrat.

Vermont House Speaker Walter Freed was elected speaker in 2001. Freed, a Republican, has been in the legislature for 11 years.

Oklahoma Senator Angela Monson was elected to the Senate in 1993. Monson, a Democrat, serves as assistant majority floor leader. Past president of NCSL, she now heads the Foundation for State Legislatures.