The public-sector environment has changed in the past four years. Reports from the Government Accountability Office (GAO) and other researchers note that all levels of government will experience fiscal shortfalls stretching far into the future, even assuming normal economic growth.
The GAO's study of state and local units of government forecast that the reductions will continue to grow by tenfold over the next 20 years if current policies continue. Furthermore, the transformation we are experiencing is so profound, with almost 40 percent of the economy coming from the global economy, that all levels of government face international challenges. Without new institutional arrangements, states and large regions will be left to forage in the global economy with an uncompetitive disadvantage. The convergence of these fiscal, demographic, and global stresses create four sets of challenges for federal executives:
- How will we meet current and future needs to build infrastructure to improve our living environment that competes in the global world?
- How can we leverage the public management lessons learned in the American Recovery and Reinvestment Act (ARRA) to work vertically in the intergovernmental system and horizontally with the private sector?
- How can we learn and benefit from the successes and failures of federally initiated public benefit corporations (PBCs) that combine the advantages of all the sectors?
- How will we accelerate coordination across federal and other infrastructure silos to increase development of transportation corridors to be used for transit, goods movement, energy grid development, the Internet, and communication?
To facilitate all levels of government to address the challenges of fiscal shortfalls and the transformations of the economy there is a need to create a range of not-for-profit PBCs. The PBCs can facilitate major investments and business plan development in infrastructure, parks, energy, transportation, and the like, with appropriate protections against moral hazard and other risks that prompted the financial meltdown of Fannie Mae and Freddie Mac. These new entities would be designed to solve the problems of combining publicly defined objectives with the private sector's bearing of financial risk in exchange for the chance of profits if public purposes are met.
PBCs use the authority of government for their establishment, the tools of the private sector to operate, and are generally administered in a not-for-profit format. There are numerous examples of PBCs that suggest varied designs for such an effort. One example is the Presidio Trust in San Francisco, which Congress established in 1996 to achieve financial self-sufficiency for the operations of a large budget item in the National Park Service's budget.
There also are examples of PBCs that have had mixed or poor results. An example of a PBC that has experienced difficulties was the U.S. Enrichment Corporation (USEC), which was created to privatize uranium for civilian use in 1993. In 1998, USEC issued public stock and today is struggling to remain in existence. The reasons for the financial difficulties are in part due to lack of transparency and problems in assessing and managing risk. A related example is the mortgage-bundling firms, Fanny Mae and Freddie Mac, which also ran into difficulties when public policy pushed them to operate at risk in the marketplace. In essence, the failures of the housing government-sponsored enterprises GSE's illustrate what can go wrong when a private corporation was charged with conflicting missions of achieving public benefits and private profitability. The structural and process recommendations of the panel are aimed at ensuring that each participant is responsible for the appropriate share of the risks.
The panel examined numerous reports of the best practices that should be followed and the pitfalls that should be avoided in operating PBCs. To get traction on partnerships while minimizing risks, the panel suggested that the decision-making process follow these principles:
- The starting point is outcomes and results. Focus on the outcomes that can be achieved from the partner relationships among sectors and levels of government. Outcomes should be beneficial to society and people: not specific prescriptions, but rather solutions.
- Shift from a cost analysis to aligning financing with decision making, not a post-decision-making step. Financing strategy should be an integral part of upfront planning, tying returns to realization of public-sector goals. Incentivize proper management of financial risks.
- Use an iterative process that does not specify static prescriptions, but rather accelerates the evolution of solutions. This process should include continued evaluations that bring the costs to the table, particularly the costs over time. Consider the full range of systems, not just one or two alternatives.
- Move the focus of decision-making processes from risk avoidance to risk identification, risk mitigation, and risk management with assignment of risk and investment among the parties.
Opportunities for PBC
The following are a range of opportunities for establishing PBCs that could accelerate current initiatives throughout the country.
- Create PBCs that would achieve multiple outcomes of security, transportation infrastructure development, and environmental mitigation at the several hundred ports of entry into the United States from Canada and Mexico. The transportation infrastructure, security, and safety operations are funded from increasingly limited federal departmental budgets, along with increasingly constrained state and local funding. California granted legislative authority to the San Diego Association of Government to form an entity to build a business plan-based port of entry that could be the start of a "North American Borders" initiative.
- Create PBCs that will achieve multiple objectives of parks, environmental management, conservation, and open space using the model of the Presidio Trust. Given the number of parks at all levels of government that are experiencing closures or declining operations, this could be a significant national initiative. To mobilize this effort as learning laboratory, additional federal, state, and local parks could be transitioned to PBCs by the National Park Service.
- Consider use of the interstate highway system prism for new integrated investments that could move people, goods, electricity, and communications. Currently, each infrastructure area, such as transportation, energy, or communication operates separately and independently.
As a result, the lack of coordination across investments fails to take advantage of potential efficiencies of an integrated investment program and multiple revenues. A range of large-scale investments consistently encounter environmental, jurisdictional, and financing obstacles in implementation. For example, the electric grid development in the northeast and southwest, high-speed rail throughout the country, and goods movement corridors throughout the country all have faced a series of challenges to moving forward. PBCs offer a mechanism to discuss new approaches, new partnerships, and shared outcomes.
ARRA Management Lessons Applied
The largest management experience with governmental action in recent time is the Recovery Act. The IBM Center for The Business of Government recently completed a set of reports that assessed a range of lessons for mobilizing federal executives to create partnerships and flexibility in program implementation while improving accountability and transparency. These practices are the needed prerequisites for PBCs, enhancing the use of a business plan and user-financed-based system.
Drawing from these lessons to capture the efficiency and accelerated coordinated action of governments at all levels and sectors operating differently throughout the country, a new partnership, the Council of Fiscal Sustainability (CFS) should be established. Members could include federal departments; public interest organizations at all levels; and business, labor, and other sources of expertise that are necessary to accomplish the objectives of the council. The process for establishing the CFS should not be mandated from the top-down but through voluntary participations in establishing contracts and agreements. The CFS would make recommendations on how to change the operating procedures of the governmental entities in the intergovernmental system so that the "rules of the game" provide not only incentives, but also a culture for the partnerships needed for the problem solving ahead.
The CFS could begin by adapting the lessons on flexibility and speed of response from ARRA cases and enable them to become part of the administrative processes of the federal system. For example, accelerate bidding and procurement processes, identify potential federal bottlenecks in contract awards, and develop a mechanism for technology evolution in the public sector.
A second initiative of the CFS could be to take the lessons learned from Fannie Mae and Freddie Mac to design appropriate risk-sharing and accountability incentives to protect the federal interest, while at the same time engaging private initiative and financing. The CFS would provide a forum for policy, coordination, and accountability for the discussions and development of PBCs and other new governance structures that can undertake the initiatives needed in the country.
A third charge of the CFS could be to facilitate real-time learning by requiring a CFS report on the experience of each PBC on a monthly basis. These reports should draw from the successful ARRA experience, which used readily available information technology systems that enabled progress to be geographically identified and Internet accessible. This report should be a high priority of the CFS, coupled with Internet access based on geography reporting to enable all the parties regardless of governmental level or sector to readily track progress.
Manage Financial Risk of PBCs
An additional recommendation is to create a Risk Management Identification, Assessment, and Mitigation Board (RMIAMB) to provide the capacity to review, assess, identify, and mitigate risk of each proposed PBC. The RMIAMB should have members from the financial, insurance, engineering, and governance areas capable of providing the ongoing technical assistance for risk identification and assessment.
While the market is the vehicle for making investment choices in financial decision making, a process is needed to both identify the range of risks and develop mitigation strategies throughout the decision-making and implementation phases.
While risk identification and mitigation are an essential part of the business plan development, an ultimate financial backstop mechanism will be needed. The federal government has experimented with such an approach in the Transportation Infrastructure Financing Innovation Act, which provides advantaged financing.
The original intent of a subordinated loan by the federal government was never fully realized. If shortfalls arise in the early years or because of unforeseeable market changes, processes should be developed for projects and initiatives to obtain needed credit enhancement based on the actuarial assessment by the RMIAMB.
In a turbulent fiscal environment, with increased global pressures that impact all levels of government, the United States is blocked from undertaking needed cost-effective public good initiatives because of fiscal considerations.
The recommendations identified above provide an opportunity to experiment and to gain traction on needed projects, as well as to learn over time effective practices that deal with significant public good issues. The changes recommended would couple institutional change with organizational cultural change among the sectors in our country, which would take a great deal of time.
This is not a short-run undertaking but rather a set of pilot demonstrations that can be launched by the next administration, and which shows we can satisfy societal needs by working together differently.