Consultant sees $531M in trims to NE state government

Nebraska State Capitol (Paul Hammel/Nebraska Examiner)

LINCOLN – A highly-paid consultant is projecting that Nebraska state government could cut $531 million in spending within a year if it more sharply focused on system-wide outcomes that better serve its customers, and tapped more federal and state reserve funds.

In a 57-page report after a year on the job, Utah-based Epiphany Associates said it has identified “an incredible capacity for change and improvement in Nebraska’s state government” that added up to more than a half-billion in savings.

It identified four areas in particular where changes would result “in the biggest return on investment.”

Those are the child welfare and Medicaid divisions within the Department of Health and Human Services, the Lincoln Regional Center, and the inmate rehabilitation and reentry program within the Department of Corrections.

Part of Pillen’s plan

About half of the projected savings — about $256 million — would come from removing financial “buffers” in state budgets, such as reducing fiscal reserves, eliminating unfilled staff positions and tapping additional federal funds to cover expenses now handled with state tax funds.

The rest of the projected savings would come from reduced indirect costs such as data analysis systems ($8.7 million), improved contracting with private suppliers ($73.5 million), better return on economic development grants ($22.4 million), improved return on information technology spending ($32.5 million) and better focus on system-wide performance ($138 million).

Gov. Jim Pillen, who made hiring Epiphany a key part of his plan to reduce local property taxes, has already begun urging state agencies to apply for more federal funds to displace state financing of services, and moved to eliminate hundreds of long-unfilled state jobs. The report said that Nebraska ranks very low, 40th in the country, in its “per-capita balance of payments” with the federal government.

Pillen spokeswoman Laura Strimple told the Nebraska Examiner on Friday that the governor is pleased with the work of Epiphany so far and looks forward to more of its work.

She said he supports the “systems approach” used by the consultant, and the idea that state government needs to improve its monitoring of state spending to produce “the best outcomes.”

“When state systems improve in quality, there’s the potential for saved resources to be repurposed in other ways, or to reduce overall expenses,” Strimple said in response to emailed questions.

She added that Pillen agreed with Epiphany that Nebraska has too much sitting in reserve funds — nearly $2 billion — “that could be put to better use.”

Reaction to the report from two key senators was more mixed.

State Sen. Rob Clements of Elmwood, who heads the budget-writing Appropriations Committee, said that one of his least favorite sayings is “we’ve always done it that way.” He said he encourages new employees at his bank to suggest ways to improve efficiency.

Clements said that while he had not yet read the report, he supported contracting with Epiphany with the assurance that its recommended budget cuts can occur “without a drop in services.” He added that he would have to review the suggestion that reserve funds should be cut.

Epiphany says results so far include:

— Assisted agencies in identifying $280 million in potential savings.

— By the end of fiscal year 2024-25, contract costs will be reduced by $84 million, without impacting services.

— Transferred $30 million back to the general fund, from the Department of Health and Human Services, by cutting indirect costs such as IT services.

— Significantly improved timeliness in sending out unemployment insurance checks, and the Nebraska Department of Labor now ranks in the Top 5 nationally for such performance. Appeals of claims were also reduced.

— Reduced average wait time for walk-ins at the South Omaha office of the Department of Motor Vehicles from 22 minutes to 5 minutes.

— Better defined direct and indirect costs of state agency tasks, which is expected to improve performance.

In its report, Epiphany emphasized that cutting spending does not necessarily mean a reduction in services and that increasing funding does not always equate to better outcomes.

Lincoln Sen. Danielle Conrad, who served several years on the Appropriation Committee, struck a more cautious tone, and said the report leaves a lot of questions unanswered.

She said that while it’s appropriate to “take a fresh look at ideas to reduce state budgets, most of (Epiphany’s) aren’t that fresh.”

“The ones that are will need a lot more analysis,” Conrad said.

For instance, she said that it’s already accepted that luring more federal funds to the state is a good idea, and that it can save money if prison inmates are better prepared to return to society — another Epiphany recommendation.

Conrad said she was most skeptical about a suggestion that Nebraska significantly pare back its cash reserve fund — the so-called “rainy day fund” — that is used when state tax receipts plummet in an economic downtown.

Doing that, the senator said, risks ruining the state’s reputation as a fiscally sound state. In its last rankings of best states, U.S. News & World Report rated Nebraska No. 3 in the nation as the most fiscally responsible.

$10 million consultant contract

A Lincoln think tank that monitors state budgets has seen the report, and Open Sky Policy Institute expressed concerns about straying from current state budget practices in which the State Legislature — not the governor’s office — determines how state tax dollars are to be spent. Rebecca Firestone, the executive director of Open Sky, said it raises separation of powers concerns.

Epiphany was hired for $10 million over four years to cut state spending and improve services.

In its report, it faulted past state efforts at “continuous improvement” of state programs as missing the mark by focusing on individual parts of a system, rather than the system, and its outcomes, as a whole.

That appeared to be a jab at the 26-employee Center for Operational Excellence created under then-Gov. Pete Ricketts that was eliminated by the current governor. Pillen opted instead for Epiphany, which Utah officials credited with improving efficiency of executive branch agencies in that western state by 35%.

Pillen, when he signed the contract, told the Omaha World-Herald that he was seeking “breakthrough change” in state spending. The contract calls for cutting at least 3% of state general funds in the first year, and 6% in the second.

The cost-cutting effort is part of his goal of reducing local property taxes by 40% – a goal which has prompted Pillen to suggest a special session of the State Legislature later this month.

Recommendations, observations

Among other recommendations and observations in the report:

— Draw down existing Cash Reserve Fund and General Fund unobligated balances. The report recommended reserves of between 4% and 8% of the general fund based on the stability of Nebraska’s tax base.

The state’s cash reserve fund is expected to hold $800 million by fiscal year 2027, about 14% of the general fund, the report stated, and unobligated funds in the budget are expected to be $700 million by that time, or about 12% of the general fund budget. The report said that two recent fiscal downturns — the Dot-Com recession of 2001 and the pandemic — saw state tax receipts drop by 3.7% and 8.6%, respectively.

— B etween 2021 and 2023, costs in the Nebraska child welfare program increased an inflation-adjusted 6% ($53.7 million), while the average number of children served per month decreased by over 4% and the average days it took to establish permanency for children increased by 108 days. That, the report said, is an example of how more spending does not improve services.

— Stop projects and resources that are dedicated to things that, although well intentioned, are not generating system-level results for the customers they serve.

True improvements must result in better outcomes for the primary customer — not the internal bureaucracy, the report stated. State staffers, it added, spent “significant time” on projects that do not have a defined result or outcome.

—  The state could save $73.5 million in the next year by improving its contract procurement processes. The state awarded nearly $20 billion in contracts for goods and services during the 2022-23 fiscal year, but procurements often are not held accountable for their impact (or anticipated impact) to system performance or outcomes. (Sen. John Arch, the Speaker of the Legislature, is leading an effort to improve contract selection and performance under a bill passed this year.)

— Improve return on investment for grants awarded by the Department of Economic Development by better targeting specific industries and identifying and tracking specific outcomes. That could save $14.8 million.

“In some cases,” the report said, “(DED) grants were awarded to large corporations who would have likely done business in Nebraska regardless.”

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