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Some perspectives on Montana's economy.

On November 10, Governor-elect Marc Racicot met with Bureau director Paul Polzin and editorial coordinator Marlene Nesary to discuss state-level economic issues. Though shortened somewhat because of space limitations, the following addresses all the major points of the interview.

MBQ: What will be your first priority on taking office in January?

Racicot: The first priority is making certain we create jobs. Everybody in the food chain is dependent on it. We need jobs to provide a consistent source of revenue for needed and necessary services. How do you go about that? The first step ... has to be spending reform. And I'm not talking about some mindless scheme that's designed to simply pander to the public, or bash government. I'm talking about a value-oriented process where we look at governmental delivery systems and make certain they're providing a dollar's worth of service for every dollar invested.

Secondly, against the backdrop of a responsible government, we have to get on with tax reform. We want to equalize the tax burden in the state and make certain we don't any longer drive away entrepreneurial possibilities--most notably, in the area of personal property taxation and income taxation.

We've put forth a proposal |that will be~ critiqued and examined and scrutinized, |but which~ is designed to jump start the economy, address the budget deficit, and has true tax reductions. In my view, Montanans will not dispassionately consider tax reform unless it meets those criteria.

MBQ: What can you do to jump start the economy?

Racicot: |We need~ fertile soil upon which the seeds of economic development can drop. Extraction has been our history ... and the focus of all opportunity for jobs in Montana. The challenge of the future is to utilize resources in a steward-like way, add value, and ... sustain the yield year after year.

MBQ: Most of what you're talking about is a long-term process. I'm curious about the "jump start" part of it. What specific things can be done to jump start an economy like Montana's?

Racicot: It'll take very fortunate circumstances as well as a great deal of cooperation to get this issue to the fore quickly and have it addressed. But I don't think you're going to see any kind of meaningful economic development in the state of Montana until such time as we correct and bring some balance to our tax system and our Workers' Compensation difficulties.

MBQ: Montana's economy essentially went on the ropes about 1981, 1982. Since that time, we've had two administrations, one Democratic, one Republican. We've had umpteen Department of Commerce heads, a host of whom were bright and capable. They've all addressed development and Montana's economic doldrums, but none was successful in changing the events from 1982 to this date. What can you do differently?

Racicot: Well, I think the urgencies are different now. There was always a path of least resistance to be pursued ... and some relief valve. But the relief valves have disappeared. There are no more savings accounts. We can no longer prepare for the future using bandaids and bubble gum. So I think the extraordinary difficulty we're confronting presents a great deal of opportunity. What's changed is not necessarily the talent and leaders, but the circumstances in which they operate.

MBQ: Should privatization play a role in Montana's future? If so, what elements of state government do you consider likely candidates for that?

Racicot: Privatization hasn't always been viewed in a positive light over the last four years, but I believe there are definite possibilities. Some |recent candidates~ were rather unfortunate, however. Liquor |involves~ a very complex delivery system with a great deal of governmental intrusion built into it, and a great deal of investment by private people and entrepreneurs based upon that governmental control. As a consequence, privatizing |the liquor monopoly~ became very volatile.

A number of other areas could be looked at. For instance, various data processing companies and the Department of Administration are discussing |privatization~ proposals. They're talking about everything from assuming |government~ employees, to purchasing their own facilities, to utilizing the equipment that they manufacture. In addition, we have training facilities within a number of different departments. Could vo-tech schools, the university system, or the private sector provide less expensive, but still flexible training services? Some things are more difficult or controversial, |like~ corrections or other services in the institutional area. But I think things like motor pools offer tremendous opportunities.

MBQ: What do you anticipate will be your greatest challenge prior to the legislative session?

Racicot: There are two: get the Cabinet in place; and establish a meaningful relationship with the Legislature. Fortunately, I have a fairly long history with individual legislators, and personal relationships I can rely on. I've met with the legislative leaders, intend to meet with them again. Our tax reform proposals and budget proposals are presently being drafted. And we're going to sit down and discuss those collegially before the session begins.

MBQ: During the campaign, both candidates talked about reinventing government. Minimizing the layers in a bureaucracy is often cited as a useful reinvention technique. Assuming that actual consolidation of units is politically untenable, how would you apply that technique to Montana's higher education system? Specifically, what layers could or should be trimmed?

Racicot: Any decision like that must be made on the basis of facts. And from the data I've seen, consolidating units wouldn't produce substantial and significant cost savings. Obviously, when we're $800 million in debt, we have to look at it. But I don't perceive any savings there. Students still have to be educated someplace; that requires buildings and faculty no matter what the locale. Unless new facts emerge, I think it's time to put that discussion to rest.

As for duplication, some necessity--and certainly a demand--exists for more than one area or unit to offer degrees in certain disciplines. But the public also expects us to eliminate any unnecessary duplication of programs. Consolidation may be possible in the administrative arena, but the facts aren't in yet, so I don't think we ought to guess or speculate about that.

MBQ: What about the prospects for adding programs? For instance, no Ph.D.s in history are available in Montana.

Racicot: Reinventing government is not some sort of antiseptic, mindless process. Some arenas may be eliminated or reduced or reformed, but others will justify an increase or expansion. I don't think there's any question about that.

But economic development programs in seven departments or job training programs in three departments--those things are frustrating to the public. Our budgeting process doesn't make sense. You take last year's budget, add inflation factors, and that becomes this year's base, with no inquiry to determine whether the program's needed or necessary in the first place. Reversion of all funds at the end of the fiscal year doesn't make sense either. For instance, I can't move people or money around in this agency of 650 employees without the permission of the Legislature. I could produce more savings if they gave me the flexibility to manage this agency on a day-to-day basis, holding me accountable at the same time. Let's start doing things that appeal to people's incentive, their intuition and creativity.

MBQ: You mentioned how budgets are calculated--on last year's base plus inflation. In your scenario, who would make the determination that last year's budget was, or was not, the right base to begin with? Who would have the authority?

Racicot: Some attempts are made now. Ultimately, the Legislature has to be an intimate partner. But I believe agency executives have an obligation to report whether or not, in fact, they're performing their mission. The person sitting in that particular office, and the governor in conjunction with the Office of Budget and Program Planning must make intrusive inquiries and value judgments: Is this agency performing as designed? Is it still needed? Should it be expanded?

MBQ: But doesn't such auditing power, when it's in the Governor's Office, more directly politicize the process?

Racicot: Actually, it's there presently. That's why the requirement that everything be funneled through the Office of Budget and Program Planning.

MBQ: What would be the difference?

Racicot: I think we need more intrusive inquiries, more in-depth examination, more explicit value judgments about individual programs. Until adversity stares you in the face, the status quo is maintained. That's how it is with budgets. When I was a bureau chief and our budget was presented to me, I simply said, "Well, this is the base; these are inflation factors; we can live within that," and that went right back to the Budget Office. And the Budget Office pretty much accepted that as well. Well, adversity is going to require us to look at how we're doing business. Can we do it better?

We've had one striking example here in this department. Our vehicle-titling and registration system had not been altered since 1930. With the help of the treasurers' offices, we converted to an automated system that is more accurate, faster, and does all the accounting for the counties. We've been able to downsize this department by thirty employees through attribution and a million dollars in savings. That inspired people ... they were working toward the provision of a better service. It offered the opportunity for success and provided substantial savings. That's the kind of mentality we have to bring to government statewide.

MBQ: What is your principle goal for the upcoming legislative session? How do you propose to attain it?

Racicot: Our principle goal is, as I mentioned, the creation of jobs through tax reform, appropriate reductions in government spending, and addressing Workers' Compensation and other essential issues, like health care or education funding.

MBQ: What is your view of Executive-Legislative relations? Specifically, how do you perceive that your administration will work with the Legislature?

Racicot: I do have some history in that regard, having served as an elected official for the last four years. The person who sits in the governor's chair has an obligation to set the tone and to demonstrate the kind of attitude that allows for respect for diversity, patience, persistence, remaining sustained in one's principles, but at the same time, trying to marshall the kinds of consensus that are necessary to address the problems that confront us. So I'm looking forward to very open, and very personal relationships with legislators. In the past I've rolled up my sleeves and spent a great deal of time on the third floor. I listen, and recognize that one person does not unilaterally determine anything in a democracy. You don't keep accounts on people. Attitude is important. Patience is important. A respect for all involved is important and a recognition that this is a process of collaboration.

MBQ: What specific measures do you personally favor for fixing the Workers' Compensation disaster?

Racicot: There are two problems: The old fund and its unfunded liability; and the new fund |which~ possesses many of the same dynamics and is apparently confronting an unfunded liability. We've had some rather unusual proposals recently from a Swiss insurance company, which has made a proposal to take the old fund off our hands for $370 million dollars--substantially less than $450, but still the state would have to find $370 million. And obviously, they intend to make a profit in that process, although the proposal is new enough that I have not yet had the opportunity to review it in detail. Our first priority is not to see another payroll tax placed upon employers and employees; it's a matter of fairness. We would prefer, instead, that a portion of any tax reform proposal be utilized for that deficit.

In reference to the new fund, I think a number of things have to happen. One, we've got to drive down premium costs. And we've got to make the system stable and consistent enough to invite competition from the private sector. We need more aggressive safety and prevention. We don't even have a mandatory safety program in state government, |yet~ safety and prevention programs work. They prevent injuries and avoid costs. Fraud investigation certainly isn't the solution all by itself, but it should be more aggressive. Presently, we have one fraud investigator in the state, and that's it.

The central component of control is claims management. In many instances, there is some delay between claim filing and claim managing. As a consequence, the litigational atmosphere becomes irretrievable and very expensive. Also, we need to properly monitor and check injuries: Check with the employer, employee, and provider; monitor recovery and try to make early provision for people to return to work. I've examined programs within a number of private companies and overwhelmingly, proper claims management allowed them to achieve substantial cost savings. Workers' Compensation claims may, in fact, be a good candidate for out-sourcing, or private sector involvement.

Definition of injury and the rules of liability have to be examined as well. Have we gone far afield from the original intent of the program? Eighty years ago the intent was to take care of injured employees, nurture them back to good health or compensate them for a career-ending injury, in exchange for a promise that they would not sue the employer. Now we have those who may stop driving at day's end, pursuant to company orders or federal regulation, and then go out to eat--not in their truck or tractor--get injured and then receive Workers' Compensation benefits for that. Is that a part of the original understanding? Is that the definition of injury and rule of liability we think appropriate?

It will be necessary as well to look at legal reform. That sends up all kinds of red flags, and people tend to react very volatilely. But just like the area of university funding or any other problem, we have to make decisions on the basis of facts. And we have to determine precisely whether or not there are abuses in the system. We have to determine what underlying policies need to be made, and then make decisions based on policy.

MBQ: But the buy-out is really contingent on some new funding. What happens if that new funding source isn't found?

Racicot: Well, then we will have to turn to alternative mechanisms. We have stated plainly and precisely what our first priorities are, recognizing that circumstances will have to be right for ... them to be implemented. If that doesn't happen, then we must have alternative means, the variety of which, I think, is virtually unlimited.

MBQ: How do you propose to impact the University System before you have a chance to appoint new Regents?

Racicot: The Governor is an ex officio member of the Board of Regents, though not a voting member. I intend to be fully available and to participate as much as is possible within the bounds of law, tradition, and expectation. I'm simply not going to be part of any process that compromises quality. If that means the only solution, after we've taken an inventory, is to secure more resources then that's precisely what I'll do.

MBQ: The measure to have an Indian on the Board of Regents fell during the last election. But it does look like board composition, at this point, is fairly specifically constrained in terms of job, history, gender and race of Regents. I'm not asking about quotas here. I'm not necessarily recommending them. But shouldn't powerful boards reflect their constituency just as a principle?

Racicot: Are you asking whether or not political affiliation or allegiance would be a part of the selection process from my perspective? The answer is no.

MBQ: What are you looking for then? |And~ what role does diversity play?

Racicot: Diversity plays, I think, a very important part. Virtually every appointment requires the consideration of balance, regardless of what characteristic you're balancing, whether it's gender or race or professional diversity. But transcending all those |characteristics~, and assuming all should be rightfully considered and balanced, is the notion that you have to have competence and character and commitment.

MBQ: Montana has an arid climate and has suffered several years of drought conditions. Agriculture, the state's largest basic industry, is the state's largest consumer of water resources; some would say it's also the state's largest polluter of water. On the other hand, the state also has continuing pressures from both inside and outside for more and purer water. Is this a conflict? Does Montana have enough water?

Racicot: Montana is a watershed state. Water is and will continue to be our most valuable natural resource. It's coveted; it's the envy of downstream states and federal entities. We're presently negotiating water compacts with Montana's Indian tribes as well as other federal reservations like the parks and BLM. We're involved in suits with downstream states. We're dealing with the Columbia River system to make certain we can retain reservoirs that allow for the proliferation of our natural resources here. There's no doubt that water will be a topic of litigation and discussion and conflict for a long time to come.

I believe in the existing laws; I believe they ought to be enforced as written and as intended. Decisions must be factually grounded. Your question assumes, 'some would say' that |agriculture's~ the largest polluter. But in the area of water development or of any other natural resource, all decisions must be made on the basis of the facts as we see them. That's the process we've gone through with the Streamside Management Act. I think the timber industry has been a very responsible partner in the formulation of that particular act. Industry in Montana recognizes that they will not be around very long if they don't take care of their water. I've witnessed a lot of agricultural operations that have done marvelous things to protect the resource all the way from reconstruction of streams to managing cattle or sheep in a way that preserves the resources available to them.

MBQ: Is there a study underway or envisioned that would look at the state's largest water polluters? Examine pollution levels so that we would have a comprehensive sense of the facts?

Racicot: I'm not aware of one that comprehensively looks at it. There have been a number of inquiries by various entities, but |these are~ not taken from the same perspective and interpreted and integrated together.

MBQ: Would it be a worthwhile thing to do? Given the fact that water's going to be such a contentious issue?

Racicot: Well, we're certainly doing it in reference to quantification and with the Department of Natural Resources and the Reserved Water Rights Compact Commission. We know, based on the examination of each basin ... what resources are there. An inventory of threats that are posed would certainly be worthwhile. Whether or not it's something that we could afford is another question.

MBQ: What is your time line for informing the public, working with the legislature, setting up an election and implementing a sales tax, if it is approved by Montana voters?

Racicot: Our plan assumes a sales tax proposal would not be presented until June of 1993--earlier if there's proper dialogue and opportunity for public examination and comment. And by earlier I mean sometime within the legislative session, recognizing you'd have to have very fortunate circumstances to do that. So our plan is premised upon a June vote.

MBQ: And if it passed, following the June vote, when is the earliest it could be implemented?

Racicot: Early calendar year 1994.

MBQ: Over the past decade Montana's natural resource industries have contributed a declining portion of total state revenues--from about 24 percent in 1983 to about 11 percent in 1990. How much of the revenue from your proposed sales tax could be used to offset such declines? How much to fund existing levels of state government? How much to offset reductions in income or property taxes? How much to fund new or expanded services? And what happens if it doesn't pass? This is a 40-part question.

Racicot: (laughs) Our plan is based on figures provided by the Legislative Fiscal Analyst of, at base, about a $101 million deficit each year. Our plan would go toward reducing that deficit. We've talked about targeting $40 million in downsizing; obviously you have to dedicate $60 million to the rest of the unfunded deficit. Then we have provided, in my recollection, $202 million in tax reductions, broken down into the areas of personal property, income tax and real property tax reductions, as well as rebates for those in low-income brackets, retirees, and renters, because those are the people who most normally would experience any regressivity with a sales tax.

How much in new or expanded services? We have not proposed new spending pursuant to our tax reform proposal.

And what happens if Montana voters do not approve a sales tax? Well, I'm for Plan A. Plan B is going to have to be built around some very painful decisions involving everything from more serious downsizing to some increases in revenue.

MBQ: From where?

Racicot: The possibilities get very narrow; cigarette tax or excise taxes won't address the kind of deficit we're talking about. I believe the state is obliged in its agreement concerning coal severance taxes. And the taxation policies we've had with oil and gas, certainly haven't allowed that industry to prosper. I don't believe that gambling or hospital taxes provide true tax reform. We have to maintain the $10 million in cuts already made by the special sessions, downsize by the $40 million which we've proposed, then make up the remaining $50 million between revenue and additional cuts. Additional revenues? Probably income taxes.

MBQ: We've been monitoring people's positions towards a sales tax through the Montana Poll. We've asked the same questions, and over the years, there has been a slight increase in the proportion of people who say they would support a sales tax. But the degree of support depends on what kind of a sales tax you offer. Looking at our latest poll results, I think the possibility of a sales tax passing right now is very, very slim. Hence our interest in "Plan B."

Racicot: Well, I haven't heard anybody that's announced a Plan B. Obviously you're going to have to be open. You can't issue ultimatums that simply say regardless of how circumstances develop, some particular avenue of approach is totally outside consideration. That approach doesn't represent people very well. But the point you make is the very point I make: the earlier we consider this issue the better off we are, number one. Two, the people of Montana don't like balancing the budget with bandaid approaches. Three, we must determine what are needed and necessary services. Decisions must be made in the context of what's at stake, and the longer you go beyond the legislative session, the more you'll lose the context. Plus, if the session doesn't produce a lasting solution, you won't get dispassionate judgment at the polls.

MBQ: You talk about $40 million worth of downsizing as the best case scenario of the sales tax passage. How many jobs does that amount to? How many jobs would the worst case scenario entail?

Racicot: I don't know how you make that precise prediction. We're talking about conversions to technology, like interactive voice technologies, imaging, the automated titling system we converted to here.

MBQ: That was 30 jobs, you said.

Racicot: But that all happened through attrition. No one lost their job as a consequence of implementing that system.

MBQ: You can't count on that.

Racicot: No, you can't.

MBQ: I'm playing that against your stated major objective to produce jobs.

Racicot: Well, I'm not talking about government producing jobs.

MBQ: No, I know that. But jobs are jobs at a certain level ...

Racicot: In my judgment there's a vast difference. When we're talking about the foundation on which essential delivery systems rely, we are talking about private sector jobs. Government can't create jobs. The only place where jobs can be created is from the private sector.

MBQ: But jobs can be lost from the government sector and that counts in the unemployment rate. That counts as real suffering.

Racicot: That's true ... I'm not looking for the redistribution of the assets of a few. I'm looking for the creation of jobs that allow for an expanded economy in a revenue base that properly funds our services. And, you know, that's part of this whole debate. Your points don't fall on deaf ears, believe me. I'm just advocating my particular perspective.

MBQ: What are some of the appointments you'll be making to key positions in your administration? If you cannot name them specifically, what departments or positions are the top six priorities for you at this point?

Racicot: We've already made three key positions: the chief of staff, the budget director, and the department of revenue so that we can address systems, tax reform and budget. The next three that I hope to address will be in the area of human services delivery systems because those are the largest portions of the budget, probably SRS, Corrections, and Family Services.

MBQ: What criteria are you using to staff your administration and do you have a vision for the dynamics?

Racicot: The answer to the second question is yes. The vision is to have capable and competent people who are mission-driven and team oriented and want to serve well. Those are the criteria I'm utilizing to find competent administrators.

MBQ: How do you understand the term "sustainable economic development?" What role, if any, do you see for state government in furthering economic development, sustainable or otherwise?

Racicot: I think government has a valid and very legitimate role in economic development programs. Good, sound partnerships already exist between state and local economic development units. The problem is, as I mentioned before, the seeds of economic opportunity must fall upon fertile ground. Given our tax system and Workers' Compensation problems, I imagine that working in economic development in Montana is a very, very difficult process. To sustain economic development here, we must have a consistent, stable tax system that is competitive with those around us. And the future challenge for us is not to remain an extraction state ... I'm convinced the possibilities are there.

At some point, we also have to question how large we want to be. The industrialization of Montana is not part of my vision. But I do see further small business development. That's been our history, and it provides jobs we find suitable, both economically and environmentally.

MBQ: Do you envision additional or different program directions for your state level economic development projects?

Racicot: They've been quite innovative down there. And of course, we're always open to any suggestion for improvement. But the relationship between the state and the Department of Commerce and the local economic development units is, as I say, very sound and stable. We have to make certain there's a single point of service and we're getting the best value out of every dollar.

MBQ: Last question: To what do you attribute your win? What do you think Montana voters were saying with their votes for you?

Racicot: There were non-traditional coalitions involved in the campaign, and unpredictable elements. A Democrat proposing a sales tax is non-traditional. The issues too--gambling, private property rights, abortion, tax reform, government spending--were all very difficult and sensitive. So it's very hard for me to pinpoint what ultimately made the difference.
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Title Annotation:interview with Montana Gov. Marc Racicot
Author:Polzin, Paul; Nesary, Marlene
Publication:Montana Business Quarterly
Article Type:Interview
Date:Dec 22, 1992
Previous Article:The Rocky Mountain West: region in transition.
Next Article:An industry profile: professional services.

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