Innovative Ideas for Oklahoma’s Future by OCPA

OKLAHOMA POLICY BLUEPRINT 2011

An Action Plan for Advancing Economic and Educational Freedom

OKLAHOMA POLICY BLUEPRINT 2011

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Oklahoma Policy Blueprint 2011 is published by the Oklahoma Council of Public Affairs. Edited by Brandon Dutcher, the publicationâ&#x20AC;&#x2122;s contributors include Tom Daxon, CPA; Steve Anderson, CPA; and Bill Price, J.D. Research assistance was provided by former OCPA interns David Griffin, Robert Clements, Martin Ramirez, and Taylor Stair. iv

OKLAHOMA POLICY BLUEPRINT 2011

Table of Contents Introduction ....................................................................................................................................................... 1 The Goal of Economic Policy: Growth and Opportunity for Oklahomans ................................................ 4 Tax Policy That Continues to Grow the Economy ........................................................................................ 9 Modernizing the Workforce ........................................................................................................................... 13 Making Oklahoma’s Government Accountable to Oklahomans ............................................................. 21 Agencies Should Pay for What They Use .................................................................................................... 23 Innovative Ideas for Travel and Recreation ................................................................................................ 25 Getting There Safely, Quickly, and Comfortably at Low Cost ................................................................. 29 Building America’s Best Schools .................................................................................................................. 37 Building America’s Best Colleges ................................................................................................................ 45 Oklahomans Should Feel Safe in Their Homes, in Their Businesses, and in Public Places ............... 57 Let’s Actually Help the People Who Need Our Help .................................................................................. 63 Let’s Encourage Local Control ..................................................................................................................... 75

OKLAHOMA POLICY BLUEPRINT 2011

Introduction O

ur pundits, both left and right, regularly treat us to analysis with an “approaching doomsday” thread running through it. Federal deficits are at record levels. Entitlement liabilities are about to swell these deficits to even more perilous heights. We are at risk of becoming wards of our Chinese creditors. The proposed answer seems to lie in some combination of tax hikes, paring of entitlement benefits, and cutting spending on both national defense and domestic discretionary spending. This will not work. Raising tax rates will slow the economy, and the deficits will likely get even worse, not better. If we simply cut spending without attention to the method and purpose, critical needs may go unmet, resulting in even greater demands on the public purse. We might be able to pare entitlements, but the elderly are the part of our society with the least ability to respond to changes in programs on which they rely. In an era when terrorist threats are real and some nation states threaten parts of the world with looming nuclear programs, defense cuts are unrealistic at best, suicidal at worst. At this point, readers may be asking why a blueprint for public policy reform in Oklahoma is mentioning federal issues. In today’s economy, most programs are financed by a combination of federal and state or local money. Over the last quarter century, the federal government has increased its aid to states in both absolute and relative terms. Given the crushing burdens facing Washington, we are unrealistic if we expect federal aid to Oklahoma to continue to grow. It is more likely that a strapped Congress will allow governments at other levels to share in the pain of retrenchment. Oklahoma should get ready to live with less federal help and find ways to do it that maximize opportunities for its citizens. And, just as at the federal level, the lines here in Oklahoma are being predictably drawn. Some call for higher taxes. Others call for less spending. Just as at the federal level, this discussion will tend to turn into a debate between advocates of full-bore socialism and advocates of watered-down socialism. This is not a debate that conservatives should allow themselves to be drawn into, as there is no OKLAHOMA POLICY BLUEPRINT 2011

future in either proposition. If we think that we can do everything the way we have always done it, except that maybe we can “try harder,” “adopt a more positive attitude,” “get a cheaper version,” or just “cut back” to “get through this,” we are kidding ourselves. Doing the same things in the same way, except with maybe a smile or with cheaper office supplies, is not going to solve our problems. Our friends on the left seem mired in the past, wedded to policies and approaches that did not always work that well to begin with, but that are definitely being made obsolete by the ongoing changes in our society. But it is insufficient for conservatives simply to respond with “no.” Yes, sometimes it is necessary to say “no” or “we simply can’t afford it.” More often, conservatives must offer forward-looking approaches rooted in free-market principles and characteristically American values. This is especially crucial in the wake of the 2010 elections, when Oklahoma voters handed the entire executive branch, along with overwhelming majorities in both houses of the legislature, to conservative candidates. They must now deliver. That is the purpose of Oklahoma Policy Blueprint 2011, to awaken Oklahomans to options other than suffocating our economic prospects by raising taxes, hitting our seniors with cuts to which they cannot adjust, or cutting everything and guaranteeing across-the-board mediocrity. By considering new approaches and by adopting those that are most promising, Oklahoma will not only bring more prosperity for itself but will light a much-needed path for a troubled country. Concepts Rooted in American Values and Free-Market Principles Many of the proposals advanced in the following pages differ profoundly from current practice. However, they are guided by a few straightforward precepts: • Let the private sector work whenever possible. Our founding fathers had an almost innate distrust of central government power. The 10th Amendment was an attempt to provide some protection against an overreaching federal 1

government. While the amendment’s protections have been compromised since its passage, the idea of limiting government to what the people cannot do for themselves still has merit. The left looks to government to do those things it thinks need doing. These schemes invariably fail because socialism simply does not work. Even Bulgaria is going capitalist. • Give the intended recipients of public assistance control over their lives whenever feasible. Instead of helping people who need help, we often spend a lot of effort developing programs to provide services. We create bureaucracies. Often we do so to make sure the recipients of any assistance spend it properly. We certainly do not want public assistance recipients buying alcohol for themselves when they should be feeding their children. We have schools to help students learn. We have public assistance programs to help the poor escape the clutch of poverty. We often run these programs to please teachers and social workers. The left, not trusting individuals to run their own lives—or more darkly, carving out for themselves a comfortable living regulating the lives of others—likes government rules. Despite repeated failures, liberals inevitably hope that if we just do things better, we will get better results. We have not and we will not. • When government involvement is necessary, let it be undertaken by the level of government closest to the people with the most to gain from solving the problem. No one cares more about an individual’s problems than that individual. In the same vein, no one cares more about a community’s problems than the people who live in that community. And no one knows more about the community’s resources and challenges than its residents. The left often views local citizens as ignorant boobs desperately in need of their (the left’s) guidance. To paraphrase a popular song: They think their advice is a contribution, but if they would leave, that would be the solution. • Those who benefit from a government program should pay for the program when possible. We all like a free lunch—getting something 2

for which someone else pays. Too often, our politicians lead us to think that the government is providing free services when in fact we are paying the bill. Sometimes a program is designed to help those who cannot afford to pay (e.g., public assistance). Sometimes it is difficult to identify the beneficiaries of a program (e.g., public safety or economic development). However, for parks, roads, and many other services, we can clearly identify the individuals being served. They should pay for the services. The other advantage of this approach is that it focuses the attention of the service provider upon the recipient. Any successful business will pay close attention to the needs and wants of its customers. A government agency will pay closer attention to the wants of its citizens if it depends upon those citizens to choose its services and cover the costs. Of course, if people have to pay for the programs the left offers, leftists will get concerned that people will want less of what they are peddling or at least will insist on better quality and lower costs. We should welcome our friends on the left to the real world. • Harness the creativity and flexibility of the private sector. In those cases where government must play a role, it often makes more sense to contract with a private-sector provider to do the work. In most cases, a contractor can provide a better product at a lower cost. We have necessary bureaucratic protections to make sure a political figure cannot pad a state payroll with his or her cronies or buy things from relatives. These restrictions also make it more expensive for the government to operate, and the natural tendency to gravitate to the low bid makes introducing quality into government services difficult. The left is suspicious of profits for entrepreneurs. What they fail to realize is that those very profits keep the private-sector business focused on providing a quality product at a low cost. • When taxes are necessary, keep the rates low and the base broad. Especially when taxes get too high, taxpayers scream for relief. Unfortunately, instead of simply cutting the rates, our politicians often resort to special-interest credits to quiet critics. OKLAHOMA POLICY BLUEPRINT 2011

The Purpose of Government Programs Sometimes we lose sight of the purpose of a particular program. In many cases, we forget why we were doing a particular thing in the first place. Too often, a well-meaning initiative morphs into a self-indulgent agenda to protect a special interest created by the program. Do we have schools for the sake of children or for the sake of teachers and administrators? Do we help the less fortunate for the sake of the poor or for the sake of social workers and bureaucrats? Do we build and maintain roads for the sake of travelers and shippers or for the sake of those who build and maintain roads? And, of course, politicians and bureaucrats seem always to reap a generous harvest from any government action. Schools should benefit the children, and public assistance programs should help the truly poor escape the cycle of poverty. This does not mean that we should not care about those displaced by proposed changes. However, our caring should be directed toward helping displaced people land on their feet rather than toward holding onto jobs we no longer need done. Is This a Realistic Approach? This Blueprint contains many new ideas, not all of which will be accepted at once. Some proposals put forth here may not work as effectively as initially envisioned because of unin-

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tended and unforeseeable consequences. Some proposals may work even better than anticipated. However, we cannot simply reject new approaches because they seem different or because they may not be perfect. The approaches of the past clearly have not workedâ&#x20AC;&#x201D; of that much we are certain. We must encourage a vigorous and thoughtful debate in order to move forward without repeating the mistakes of the past. Every idea in this Blueprint is put forward in that spirit. Each one attempts to solve a problem in a way that makes things better and, to use a currently fashionable idiom, bends the cost curve favorably. The American way is to look for new ways of doing things. It has been the foundation of our countryâ&#x20AC;&#x2122;s birth and success. Those who will oppose some of these proposals and simply offer up the status quo as alternatives will only damage this great state. We should welcome the opportunity to debate policy with those who have counterproposals, especially since those states that are the early adopters of successful policies will create more opportunities for their citizens. What we at OCPA will not do is consign us to a future of limited prospects, more poverty, less learning, and greater intolerance by supporting processes and systems that have already shown themselves to be flawed.

The Goal of Economic Policy: Growth and Opportunity for Oklahomans Should Oklahoma be content as a mere economic satellite to Texas, or should we compete with Texas economically as vigorously as we do on the football field? We should exploit our state’s natural advantages and continue to enact pro-growth policies—the most important of which is our continued phase-out of the individual income tax.

or many years, Oklahoma seemed mired in a downward economic spiral. Despite much of its recent reputation and record of electing conservatives, Oklahoma’s past is clouded by socialists, Klansmen, and outright crooks. One need look no further than to one important state facility, the J.D. McCarty Center, named after a convicted felon. Oklahoma’s Speaker of the House a halfcentury ago, McCarty devised a scheme of making bribery more efficient and effective. Rather than stand by while lobbyists paid legislators for their votes, McCarty seized the opportunity to become the vortex of the corruption. He prevailed upon certain lobbyists to pay their bribes to McCarty personally with the understanding that Speaker McCarty would pass enough money to other legislators to secure the votes needed for the passage of legislation. Pay for play indeed! After the practice was revealed and McCarty was sentenced to prison for the scandal, McCarty won the undying loyalty of many former colleagues when he refused to provide the names of those to whom he had paid the bribes. No other legislators were ever prosecuted in the scandal because McCarty went to the grave with his secrets. McCarty had been a supporter of better care for the disabled and was rewarded for his silence by having his name placed on the state’s premier center to provide services to the disabled. The story of J.D. McCarty, who also pushed for higher taxes and expanded state services during his years in the House of Representatives, is a prime example of what has ailed Oklahoma’s economic development efforts. Unfortunately, he was far from the only powerful official to promote leftist policies while engag4

ing in corrupt practices. After McCarty left office, Oklahoma endured the tenures of Governor David Hall and Senate President Pro Tem Finis Smith. Other scandals have touched the Oklahoma Supreme Court and county governments. However, McCarty is the only convicted felon whose name adorns a major state institution. It is against this unfortunate backdrop that Oklahoma must launch its efforts at economic development. We also launch them while the state shares its longest border with the nation’s top economic juggernaut, Texas. Texas excels at consistently increasing the income of its citizens and the size of it congressional delegation. Texas does this because it gets many of its policies right. Texas has no income tax. Texas has had a right-to-work law since 1947. Texas colleges are generally superior compared to other states. Texas has even passed some meaningful tort reform, turning what had been a weakness into a strength. Granted, to make up for its lack of an income tax, Texas, in addition to simply spending less, also levies some very high property taxes. Many voters hate the property tax. But when it comes to economic development, if forced to choose, most modern growth industries would live with higher property taxes before an income tax. Should Oklahoma Compete, or Be Content as a Texas Economic Satellite? Most Oklahomans reflexively want to assert their independence and go head-to-head with Texas. Perhaps this is the natural result of decades of gridiron rivalry. But to compete successfully, we must understand that Texas’ dominance is no accident and that Oklahoma will need more than luck to best its neighbor economically. OKLAHOMA POLICY BLUEPRINT 2011

For instance, for many years, legislators thought that a sure formula for helping rural communities was to impose taxes and use the proceeds to fund state payrolls in economically declining rural areas. In fairness to that strategy, most of the money spent in rural Oklahoma finds its way to Oklahoma City or Tulsa. However, what many Oklahoma policymakers do not seem to understand is that the money does not stop in Oklahoma City or Tulsa. Just as money flows from, say, Pryor to Tulsa or from Geary to Oklahoma City, it also generally continues from Oklahoma City or Tulsa to one of the cities ringing Oklahoma that rank higher on the economic hierarchy, especially Dallas, Denver, Kansas City, or St. Louis. In the same way, too many Oklahoma families work and save to educate their children, only to see them leave for Dallas, Denver, or one of the other cities with seemingly better opportunities for the best and brightest. Fortunately, changes Oklahoma has made over the last 15 years have had a positive impact. Oklahoma still has an income tax, but the rate is not as high as it once was. Oklahoma has passed right-to-work legislation. Although much remains to be done, Oklahomaâ&#x20AC;&#x2122;s colleges are becoming distinguished for their quality in the classroom. Oklahoma has even taken some halting steps toward reining in the abuses in its legal system. Oklahoma has a base from which it can compete with and even surpass Texas in economic growth. Headquarters vs. Branch Plants While most observers agree that the goal of economic development should be to create more economic opportunities for citizens resulting in higher personal income, there are many strategies that could be employed to achieve that goal. For instance, most communities would love to see a new employer with well-paying jobs locate a facility in their area. Most would also love to see a local entrepreneur establish and grow a thriving business. However, the policies that attract branch plants and corporate headquarters are not always the same. The best jobs are usually near the corporate headquarters and often are not even on the payroll of the company itself. A large corporation will need the help of attorneys, accountants, personnel experts, and so on. It may employ OKLAHOMA POLICY BLUEPRINT 2011

some of these individuals directly but will often turn to professionals in the local business community not on its own payroll to meet some of its needs. Unless it has a separate research and development operation, it will probably employ most of its engineers and scientists at or near its headquarters. Consider a company developing software. The engineers, marketers, accountants, and attorneys it needs are all well paid. The fact that they are well paid automatically makes them sensitive to the income tax rate, and the absence of an income tax is a powerful asset in growing, attracting, or retaining a corporate headquarters. Further, wealthy investors are more likely to invest seed capital where they live and have greater interaction with potential entrepreneurs. These investors will also be sensitive to the income tax and especially to the death tax. It goes without saying that highly compensated corporate executives will also be sensitive to income tax rates. Almost without exception, the highest-paid employees in any company are found at the companyâ&#x20AC;&#x2122;s corporate headquarters. Many correctly note that the families of these executives and professionals generally want opportunities for quality shopping and entertainment nearby. Governments are sometimes tempted to develop these amenity assets themselves. However, an area with a large number of well-compensated people will automatically constitute a compelling market for upscale vendors. The ability of a government to create a strong environment without a strong underlying economy is very limited. The need for government to do so with a strong economy present is dubious. However, the company developing software probably has little interest in the presence of a right-to-work law; it will be unlikely to face union organizers in any case and may not even manufacture anything. Since most of the companyâ&#x20AC;&#x2122;s investment is in people, higher property taxes, while not an asset, are not usually a critical factor. The company is going to be much more attracted to a location with no income tax and with outstanding colleges and other quality-of-life assets nearby. The priorities for a company considering the location of a branch plant are different. Since the company will not locate its most highly 5

compensated people at the branch plant and is unlikely to need a bevy of professionals nearby, the absence of an income tax is not such a major factor. The company considering a branch plant location will likely be as or more interested in the availability of technical training as higher education. Conversely, the presence of right-to-work legislation where unions often try to organize workers will be a larger factor. If the branch plant contains valuable equipment, property tax rates will also be a larger factor, as will access to efficient transportation if quantities of items are to be shipped in and out. Much of the industrial recruiting in the United States focuses on attracting out-of-state companies to locate branch operations. In fact, any larger concern considering an expansion probably has consultants and even employees versed in site selection. The competition between states and cities is often fierce, with generous inducements being offered. Oklahoma, with its Quality Jobs Program, is often rated well in these competitions. Both branch plants and corporate headquarters can contribute to economic vitality. While corporate headquarters can usually provide the higher-paying jobs, they also usually provide many jobs further down the economic ladder, both clerical and technical. Oklahoma’s Natural Advantages In any competition for employers, Oklahoma must consider its natural advantages and also its disadvantages. For instance, on the one hand, Oklahoma’s labor force generally gets high marks for its hard work and initiative. On the other hand, a company needing immediate access to the ocean would not find Oklahoma attractive. Other advantages may not be so readily evident, but in economic development, a state or community must bring into play as many assets as possible. Many traits that are somewhat unique for Oklahoma may be able to be exploited as assets for development purposes. A quick examination of the following features may reveal some promising strategies. • Church activity. Oklahomans go to church more than people in most states and often participate in foreign missions. (Some observers have intimated that this is an economic 6

disadvantage. The purpose here is not to argue pros or cons but to note that Oklahomans tend to have socially conservative attitudes.) While Oklahoma’s conservative mores may be a turnoff for some, Oklahoma’s churches are heavily involved in mission activity around the world, much of it in the developing world that needs the expertise Oklahomans have in energy, agriculture, and construction. This is not to say that the state should attempt to manage mission activity for economic development purposes. The state should let churches go about their business. However, we should determine if we can appropriately establish or strengthen some contacts. After all, Oklahomans have presented themselves as honest, caring people— traits often highly valued in developing countries. These unique international connections can serve as an economic development advantage. • Native Americans. Many people around the world admire the culture of Native Americans and would welcome the opportunity to learn more. This is especially true in Japan. If more Oklahomans spoke Japanese, we might find ourselves with a lot more visitors, bringing commercial opportunities for our state’s businesses as well as tourist dollars. Indian culture also appears to have an especially strong appeal in Germany and Korea. And we should not dismiss the ability of many Oklahoma tribes to offer strong tax and other incentives to prospective employers. • Music. Oklahoma City and Tulsa may not supplant Nashville and Austin (both located in states with no personal income tax) in the immediate future, but Oklahoma has more than its share of successful musical entertainers. Many people would find the cities’ seemingly ubiquitous live music scenes very alluring in considering a place to live. • Climate and outdoors. There is a reason the military located so many flight training installations in Oklahoma during World War II—clear skies and good weather. Combine our mild climate with bountiful outdoor and recreational resources, and a company from snowbound Minnesota has a reason to take a good look at Oklahoma. These are all “quality-of-life” enhancers for the economic development recruiter’s quiver, but OKLAHOMA POLICY BLUEPRINT 2011

the biggest arrow of them all is, and must be, the bottom line. How do we make our state more attractive? Exploiting Oklahoma’s Advantages By far the most important factor in economic development is to get Oklahoma’s policies aligned with business needs. Among our policy options to make Oklahoma a go-to destination are these: • Get rid of the personal income tax. Bringing the rate down is great, but the biggest bang for the buck is to eliminate the last percentage point because the taxpayer saves not only the tax but also the expense of preparing the return. • Encourage excellence in higher education. • Build roads that take advantage of natural corridors. • Curb abusive lawsuits. • Promote efficiency in the delivery of state services. • Replace policies that discourage family cohesion and personal initiative. We may also be able to promote the state through better marketing. For instance, given the history of the state government, changing the name of the J.D. McCarty Center would be a symbolic but important step. Other steps Oklahoma could take with respect to economic development would include the following: • Maintain regular contact with important employers in basic industries. If there are problems, Oklahoma leaders should know about them so that they can address them before the company decides to move away. • Maintain contact with venture-capital firms that work with early-stage enterprises. However, we must take care not to become a dumping ground for new ventures that may be starting to experience trouble and that venture capitalists want to unload before the problems become too evident. • Cut the red tape required to start a new business. While it is great to attract entrepreneurs from elsewhere, we will do best when Oklahomans start their own firms. • Encourage more Oklahomans to learn to speak Japanese, Korean, and the national language of Brazil, Portuguese. German may not be as important as most German professionals and executives can speak English, but OKLAHOMA POLICY BLUEPRINT 2011

all of these languages are probably more important to Oklahoma’s economic development than French or Spanish, the two languages most commonly promoted in Oklahoma’s public schools. • Perhaps the most important tool for economic development is an engaged governor. State business leaders should be confident that they can call the governor’s office with a good lead and that the governor will act. No individual can consistently make a bigger impact than the state’s chief executive, who should be our primary salesperson. Avoid Costly Initiatives with Little Return Many observers are highly critical of tax credits and similar inducements to those considering locating in Oklahoma. These critical observers will maintain that we give state money for actions that would most likely have occurred in any event. Doubtless, this is true in many cases. Any inducements provided should, at a minimum, be given only to employers in basic industries, i.e., industries that sell most of their products out of state. Such inducements should focus on encouraging activity in the more economically struggling areas of the state. They should attempt to avoid subsidizing activity that would likely occur in the absence of the inducement. In some cases, we may substitute government action for private action to our disadvantage. In the areas around Silicon Valley, the University of Texas, and Route 123 in Boston, a number of professional firms have sprung up to serve the needs of entrepreneurs. Most provide their services at a substantial discount in return for a piece of the action with the firm they are assisting. Naturally, most entrepreneurs will balk at sacrificing a significant ownership stake or even paying anything at all when it can be avoided. When Oklahoma attempts to substitute the action of a state agency for these consultants, it risks discouraging much of the vital activity it needs for strong growth. In a contest between a salaried employee of a state agency or contractor and a Silicon Valley consultant who sees an opportunity to profit if he or she can be successful in helping a client, most people would bet on the private consultant, who is likely to work around the clock to achieve success. However, the inventor of a new product or 7

service, especially one with limited business experience, will find the “free” state service very tempting. The state should not interfere in this marketplace and should allow the private sector to develop to meet the needs of the fledgling businesses. When it comes to economic development, quite often the best thing we can do is to stay out of the way—once we have put in place attractive public policies.

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Tax Policy That Continues to Grow the Economy Reducing the individual income tax rate will put money back into the hands of Oklahoma’s private sector, thus spurring economic activity and providing offsetting revenues for the state. Oklahoma should continue to phase out the individual income tax.

uring the last decade, Oklahoma has made some difficult decisions regarding its approach to the individual income tax structure. Even as the country slid into recession, Oklahoma was in the process of enacting significant taxpayer relief. Those who view the state’s revenues as a “closed economy” have decried the cuts as the major driver for the budget challenges the state faces. Nothing could be further from the truth. A simple look to our north gives us some insight into how those income tax cuts may have saved our economy. A Tale of Two States: The Real Effect of Individual Income Tax Cuts Kansas and Oklahoma are states with much in common. They share not only a border but also economies and demographics that are in many ways mirror images of each other. They have similar populations made up of a couple of large urban areas but otherwise are largely rural states. The states’ economies are both rooted primarily in agriculture and mineral extraction. The business landscape is populated by some large companies, but overall small businesses predominate. At the turn of the new millennium, the three major tax revenues for the states—individual income tax, corporate income tax, and sales tax—were also near duplicates of each other. In

FY-00 Oklahoma was collecting slightly more individual and corporate income tax revenues, and Kansas was roughly offsetting those amounts by collecting more sales tax. However, these two states made decisively different decisions regarding tax policy over the next 10 years. This diverging of the states’ policy decisions provides the closest thing possible in the real world to a controlled experiment in liberal-versusconservative tax policy: Does cutting individual income tax rates generate economic activity that will provide revenues to offset the rate reductions, or will those rate reductions simply result in the state having that much less revenue? Kansas began the decade with a lower individual and corporate tax rate, but with a slightly higher sales tax rate. Through the decade Kansas chose to raise sales and corporate tax rates while standing pat with a relatively high individual income tax rate. Meanwhile, Oklahoma decided to begin a program of reducing the individual income tax rate significantly, interrupted only by a two-year period during which the rate went back to prior levels due to statutory triggers. Oklahoma’s sales tax and corporate income tax rates were kept constant throughout the decade. The following chart shows the rates of taxation over the last decade for each state in the three major tax categories.

Three Major Tax Categories by Rate (top rate used for comparison) Individual Income Tax Rate Kansas Oklahoma FY-00 FY-01 FY-02 FY-03 FY-04 FY-05 FY-06 FY-07 FY-08 FY-09

6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45%

6.75% 6.75% 6.75% 7% 7% 6.65% 6.65% 6.25% 5.65% 5.50%

Corporate Income Tax Rate Kansas Oklahoma 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4% & 7.35% over $50,000 4% & 7.35% over $50,000 4% & 7.05% over $50,000

6% 6% 6% 6% 6% 6% 6% 6% 6% 6%

Sales Tax Rate Kansas Oklahoma 4.90% 4.90% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30%

4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%

Source: http://www.taxfoundation.org/taxdata/show/228.html

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Liberals have long argued that a reduction in the individual income tax rate would simply result in the state generating that much less in revenue. This static analysis assumes that funds left in the hands of the taxpayers will not stimulate the economy or build wealth. In this view, the net effect of an individual income tax cut will be to leave a hole to fill in the state budget. By contrast, fiscal conservatives have maintained that a cut in individual income taxes would stimulate the economy. Those in the private sector would take the funds left in their hands and build real wealth, with the result being an uptick in economic activity. This economic activity would then generate new tax revenues, mitigating the decrease in the state’s revenue. Those who endorse this concept of a dynamic model of the economy maintain that the government cannot build wealth, and that leaving too much money in government hands slows the economic cycle. Economists refer to this speed as the “velocity of money,” which— using the dynamic model of individual income tax cuts—should manifest itself in increases in corporate sales and profits, thereby generating increased sales tax and corporate tax revenues for the state. Because the few exogenous variables between Kansas and Oklahoma are so small, these two states’ differing tax policies provide a perfect opportunity to test these competing models of conservative and liberal tax policy. Let us use the top individual income tax rates for comparison. In both states the top rate is the rate paid by the majority of taxpayers. Homestead and sales tax exemptions move many people in the lower brackets into credit or notax-owed positions. I also excluded from this

examination the wellhead taxes that oil and gas producers pay; even though these revenues doubtless have some impact, I believe an examination of the actual structure and composition of the wellhead taxes reduces their influence to acceptably low levels. (An explanation of the wellhead taxes in Oklahoma and Kansas and the rationale for their exclusion is included later in this chapter.) Oklahoma reduced its top individual income tax rate from 7 percent in 1999 to 5.5 percent over the course of 10 years, with the largest cuts in 2000 and 2007 through 2009. This is a 21 percent reduction in the top rate. Meanwhile, Kansas left its top individual income tax rate unchanged over this time period. Oklahoma’s individual income tax collections grew by 19 percent while Kansas’ revenues grew by 44 percent. So at first glance, it appears that the static-model crowd could declare victory. But there are other factors to consider. First, part of the growth in Kansas’ individual income tax revenues in FY-07, FY-08, and FY-09 is driven by the change in operating structure by many Kansas businesses to avoid the increase of the top corporate rate from 4 percent to more than 7 percent. In the three years prior to Kansas’ huge corporate tax increase, Kansas collected $110 million more than Oklahoma from corporations. However, after increasing the tax rate from FY-07 through FY-09, Kansas collected $149 million less from corporations for that three-year period than Oklahoma. That is nearly a quarter-billion-dollar increase in Oklahoma’s favor. It would appear that raising taxes can have exactly the opposite effect of increasing revenues, just as the dynamic model would predict.

Individual Income Tax Collections

FY-00 FY-01 FY-02 FY-03 FY-04 FY-05 FY-06 FY-07 FY-08 FY-09

Rate 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45%

Kansas Revenue $ 1,854,726,000 $ 2,214,065,000 $ 1,829,609,000 $ 1,750,054,000 $ 1,888,434,000 $ 2,050,562,000 $ 2,371,253,000 $ 2,709,340,000 $ 2,896,653,000 $ 2,682,000,000

Rate 6.75% 6.75% 6.75% 7% 7% 6.65% 6.65% 6.25% 5.65% 5.50%

Oklahoma Revenue $ 2,134,506,071 $ 2,279,364,387 $ 2,286,110,394 $ 2,113,947,132 $ 2,319,213,479 $ 2,468,608,717 $ 2,755,776,194 $ 2,784,301,983 $ 2,787,444,853 $ 2,544,576,061

KS vs. OK Collections () indicates KS collected more $ 279,780,071 $ 65,299,387 $ 456,501,394 $ 363,893,132 $ 430,779,479 $ 418,046,717 $ 384,523,194 $ 74,961,983 $ (109,208,147) $ (137,423,939)

All revenue numbers are from Consensus Revenue Estimate table in 2002–2010 Kansas Governor’s Budgets, http://budget.ks.gov/gbr.htm, and table D-1 in Oklahoma Governor’s Executive Budget books 2001–2010, http://www.ok.gov/OSF/documents/bud11hd.pdf.

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However, the most important tax-revenue component in dynamic scoring is the sales tax. Sales tax revenues are an undeniable measure of economic activity. When the decade began, Kansas had a 4.9 percent sales tax for the first two years but then increased it to 5.3 percent for the last eight years. Meanwhile, Oklahoma kept its rate constant at 4.5 percent. In FY-00 Kansas’ sales tax collections exceeded Oklahoma’s by $88 million, but by FY-09 Oklahoma’s sales tax revenues exceeded Kansas’ collections by $283 million.1 While Kansas’ sales tax revenues grew by 17 percent over the last ten years, Oklahoma’s increased by 46 percent. The majority of the individual income tax rate reduction in Oklahoma occurred in the last three years of the decade while in the middle of a recession, but surprisingly (at least to the static-model crowd) Oklahoma’s sales tax revenues grew by 18 percent while Kansas’ fell by 3 percent for the same period. Kansas’ sales tax rate is nearly 18 percent higher than Oklahoma’s, which in the theory of liberals and their static model means that Oklahoma would have had to generate 18 percent more activity just to stay even with Kansas’ collections. Yet in the last three years of the decade Oklahoma generated over $540 million more in sales tax revenue than Kansas. Can there be any question which state’s economy is healthier? Did the income tax cut in Oklahoma really drive this economic activity? Rather than listen to competing economists argue tax theory, it is far more instructive to see what happened in a real-world situation. The following chart shows the year-to-year relationship of the top individual tax rates to the sales tax revenues in

each state. Note that in FY-03 and FY-04, when the statutory trigger increased Oklahoma’s individual income tax rate back to 7 percent, Oklahoma’s sales tax revenues compared to Kansas’ fell. However, in FY-05, when Oklahoma’s individual tax rate started to fall, sales tax revenues began to increase in relation to Kansas’. FY-07 was the first time that Oklahoma’s top individual income tax rate was less than Kansas’ top rate, and it began a trend of increasing Oklahoma sales tax revenues that amounts to a reversal of nearly a half-billiondollar difference in Oklahoma versus Kansas sales tax collections between FY-03 and FY-09. Now we have an “apples to apples” comparison on which to draw, and it seems that individual income tax cuts do not impair revenues for state services. In fact, it appears to be quite the contrary: Tax cuts that spur economic activity and build wealth can increase revenues to the state, as evidenced by the increases in sales and corporate income tax collections. In FY-00 Oklahoma collected $135 million more than Kansas in combined individual, corporate, and sales tax revenues. After a decade in which it reduced its individual income tax rate by 21 percent, Oklahoma collected $248 million more in FY-09 than Kansas in those same three tax revenue categories. It is time that more states (and our federal government) took note by putting funds back in the hands of the private sector so it can generate the sort of economic activity that will allow us to end this recession. Now some might argue that differences in the two states’ Gross Production Taxes (GPT) are an additional major driver of the change. Oklahoma does collect more than Kansas by a substantial margin, but in FY-08, for example,

Sales Tax Revenues

FY-00 FY-01 FY-02 FY-03 FY-04 FY-05 FY-06 FY-07 FY-08 FY-09

Rate 4.90% 4.90% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30% 5.30%

Kansas Revenue $ 1,440,295,000 $ 1,423,059,000 $ 1,470,599,000 $ 1,567,722,000 $ 1,612,067,000 $ 1,647,663,000 $ 1,736,048,000 $ 1,766,768,000 $ 1,711,398,000 $ 1,689,516,000

Rate 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%

Oklahoma Revenue $ 1,351,803,097 $ 1,441,929,046 $ 1,443,427,590 $ 1,404,275,611 $ 1,496,238,185 $ 1,546,621,382 $ 1,677,854,488 $ 1,804,313,384 $ 1,930,951,193 $ 1,972,769,753

KS vs. OK Collections () indicates KS collected more $ (88,491,903) $ 18,870,046 $ (27,171,410) $ (163,446,389) $ (115,828,815) $ (101,041,618) $ (58,193,512) $ 37,545,384 $ 219,553,193 $ 283,253,753

OKLAHOMA POLICY BLUEPRINT 2011

FY-00 FY-01 FY-02 FY-03 FY-04 FY-05 FY-06 FY-07 FY-08 FY-09

Kansas Individual Income Tax Rate

Oklahoma Individual Income Tax Rate

6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45% 6.45%

6.75% 6.75% 6.75% 7% 7% 6.65% 6.65% 6.25% 5.65% 5.50%

KS vs. OK Sales Tax Collections () indicates KS collected more $ $ $ $ $ $ $ $ $ $

(88,491,903) 18,870,046 (27,171,410) (163,446,389) (115,828,815) (101,041,618) (58,193,512) 37,545,384 219,553,193 283,253,753

All revenue numbers are from Consensus Revenue Estimate table in 2002–2010 Kansas Governor’s Budgets, http://budget.ks.gov/ gbr.htm, and table D-1 in Oklahoma Governor’s Executive Budget books 2001–2010, http://www.ok.gov/OSF/documents/bud11hd.pdf.

GPT represented only 14 percent of total tax revenues for Oklahoma.2 In Oklahoma oil and gas producers pay a top rate of 7 percent and in Kansas 10.37 percent at the wellhead based on market price. These revenues are largely tied to the price of oil and gas (since they are taxed on the gross value of the oil and gas) and hence fluctuate wildly. The market price of oil and gas is arguably wholly independent of the movement of the tax rates in either state. When we examine the relationship between sales tax revenues and GPT in Oklahoma over the last 10 years, we find very little consistent correlation.3 For example, a large GPT revenue increase occurred in 2006 with a subsequent large GPT decrease in FY-07 and then an even further reduction in FY-08,4 but there was opposite movement in Oklahoma sales tax receipts. In fact, GPT revenues grew rapidly from 2002 to 2006, but sales tax revenues did not mirror their increases and only began their rapid increase when the tax cuts at the individual income tax level occurred. There are factors that I believe explain this lack of a positive correlation. The relationship of GPT revenues to business activity and/or sales tax revenues is not what those outside the industry might think. Much of the money from production after the wellhead taxes is paid to out-of-state recipients and, as such, does not generate sales taxes for Kansas or Oklahoma. Market price spikes will not add jobs or stimulate supporting industry in general, simply because regardless of the price the industry has the personnel and facilities in place to handle what is essentially only a slightly higher volume 12

without any additional need for growth. The oil and gas drilling industry typically lags price increases, and if the price of oil and/or gas falls rather quickly the new drilling activity may actually never occur. Oklahoma’s production has grown at a much faster rate than Kansas’, which is not a surprise to conservative tax policy analysts who would note that a taxing differential of nearly 48 percent—which Kansas’ higher rate of 10.37 percent provides—influences choices. Oklahoma has greater oil and gas reserves than Kansas thanks largely to nature, but it is unknown to what extent the production difference is created by the tax disparity disincentive to drill in Kansas for deeper reserves or to employ costly secondary recovery techniques to enhance field production. It would also be naïve to believe that from 2007 to 2009, when Oklahoma’s top individual income rate fell 17 percent and the Oklahoma corporate rate became less than Kansas’ top rate, there was not some movement by oil and gas companies to produce more in Oklahoma than in Kansas. While it is true that “shutting in” wells to wait for higher prices is not practical, there are some wells that limit their production to less than maximum output during price depressions. It is common sense that net profit will be the determining factor in what wells are produced and where new drilling will occur in general. In other words, income tax rates influence GPT—not vice versa—and the reduction in Oklahoma’s rates in comparison to Kansas’ drove more drilling and production to Oklahoma. In conclusion, Oklahoma should continue to reduce the individual income tax rate to further prime the pump for a faster economic recovery. Our ultimate goal should be to completely eliminate the individual income tax to allow Oklahoma to be more competitive with those fast-growing states like Texas that have no individual income tax at all. Endnotes 1 All numbers for tax collections numbers and used in calculations are from Consensus Revenue Estimate table in 2000–2010 Kansas Governor’s Budgets, http://budget.ks.gov/gbr.htm, and table D-1 in Oklahoma Governor’s Executive Budget books 2001–2010, http:// www.ok.gov/OSF/documents/bud11hd.pdf. 2

Oklahoma Policy Institute, “Fact Sheet: Oklahoma’s Gross Production Taxes and Exemptions” (April 27, 2009), 1–3.

Oklahoma Policy Institute, figure 2, “Oklahoma Gross Production Tax Revenues, FY ’82–FY ’08 (in Millions),” in “Fact Sheet,” 1. 4 Oklahoma Policy Institute, table 2, “Summary of Oklahoma Gross Production Tax Exemptions, as of FY ’09,” in “Fact Sheet,” 3.

OKLAHOMA POLICY BLUEPRINT 2011

Modernizing the Workforce Policymakers can reduce costs and guarantee long-term solvency by defusing Oklahoma’s pension bomb, giving employees greater control of their health care, and more.

key element to making Oklahoma government more efficient is in realigning how Oklahoma provides services. Modernizing the workforce is essential to that end. One of the drivers of cost increases in providing services is the cost of labor. Government labor forces carry an unusually high cost because of the approach that is used to acquire and retain workers. The Coming Explosion of Oklahoma’s Pension Bomb For example, consider Oklahoma’s two largest pension systems. Some of the problems in the Oklahoma Teachers Retirement System (OTRS) and the Oklahoma Public Employees Retirement System (OPERS) are well known and widely reported. Others are not as apparent but have their own negative effects on the fiscal stability of our state. State Treasurer Scott Meacham has said that “a significant infusion of money” is needed to offset more than $12 billion in current unfunded liabilities. According to Mr. Meacham, “if this problem is left unaddressed, the systems will eventually require a cash infusion of staggering proportions to meet current payment obligations. This could result in the need for the state to raise taxes or dramatically reduce funding to vital state programs.” Lest we are tempted to say, “It’s not my problem,” we should consider that Attorney General Drew Edmondson opined in AG Opinion 96-20 that this debt is an absolute obligation of Oklahoma taxpayers. That means that future generations of Oklahomans are on the hook for this problem if something is not done soon. The retirement fund for Oklahoma’s public school teachers is one of the most underfunded plans of its type in the nation, even though it reported a 17 percent return on investments last fiscal year. The OTRS pension fund as of June 30, 2009, was carrying $9.5 billion in unfunded liabilities. During the last fiscal year, its pension plan was funded to 49.8 percent—a far cry from the 80 percent that experts prefer. A recent Public Fund Survey ranked the OTRS as having OKLAHOMA POLICY BLUEPRINT 2011

the fourth-lowest funding ratio among the 126 state pension plans it reviewed. Unbeknownst to most people, the “cash infusion” that Treasurer Meacham warned about has actually already started. OTRS receives 5 percent of the state’s revenues from sales taxes, use taxes, and corporate and individual income taxes. These are collected as a dedicated revenue stream that goes directly to OTRS. OTRS also receives 1 percent of the cigarette taxes collected by the state and 5 percent of net lottery proceeds collected by the state. OTRS received approximately $257 million in 2009 and $267 million in 2008 from these dedicated sources. The cost of the pension systems to taxpayers does not stop there. The systems also require large employer contributions—far larger than most employer contributions in the private sector. The contribution rates for employers—us, the taxpayers—covered by the Education Employees Service Incentive Plan (EESIP) is now 9.50 percent. For employees not covered by the EESIP— those working in the comprehensive and regional four-year universities—the contribution rate for fiscal year 2009 was 7.55 percent through December 31, 2008, and increased to 8.05 percent on January 1, 2009. This rate increased to 8.55 percent on January 1, 2010. While the other major state pension system, OPERS, carries only $3.1 billion in unfunded liabilities, the system has a hidden impact on annual state budgets that serves to reduce the amount of funding available for actual services. State employees contribute 3.5 percent of their salaries for their retirement benefits, but the state (i.e., the taxpayer) contributed 14.5 percent of the employees’ salaries to OPERS in 2009. This exorbitant employer rate resulted in over $240 million in employer contributions to the system last year, and is actually scheduled to go to 16.5 percent next fiscal year. Since 1989, OTRS liabilities have grown by an average of 15.5 percent annually while OPERS has experienced a 9.2 percent average 13

become fiscally insolvent. Defined-benefit plans, such as the state uses in each of its systems, have flaws that are almost unavoidable. In a defined-benefit plan, the employer guarantees a certain benefit payment to an employee for his or her lifetime, no matter what. The collapse of Bethlehem Steel, the crisis at General Motors, and dozens of other examples have spotlighted the inherent problems with defined-benefit plans. A pension crisis that can help bring down one of the worldâ&#x20AC;&#x2122;s largest industrial concerns can do the same to the Oklahoma state government. Unfortunately, the flaws of defined-benefit plans are even more pronounced in the public sector. For years a perverse incentive existed wherein Oklahoma politicians could use the plan to buy votes but hide their actions from all but the most knowledgeable financial wizards. For many years the unfunded liabilities were hidden, thanks to governmental accounting rules that allowed politicians to cover their tracks. Fortunately, recent rule changes enacted by the Governmental Accounting Standards Board (GASB) have required government entities to reveal these debts to the public in their annual financial statements. However, those numbers are buried in places in the financial statements that still require a sleuth to find them.

annual growth of its liabilities. When we compare that to the assumed rate of investment return in OTRS (8 percent) and OPERS (7.5 percent), it becomes clear that even if the systems invest wisely they are doomed to implode at some point in the future. In 1989, OTRS had an unfunded liability of $2.4 billion, and OPERS carried only $490 million in unfunded liabilities. However, despite two decades of predominantly exceptional market returns on the systemsâ&#x20AC;&#x2122; investments, high employer contributions, and a growing cash infusion of our tax dollars, the systems carry $9.5 billion and $3.1 billion in unfunded liabilities, respectively. Actual cash benefit payments from OTRS to current retirees have grown at a rate of 9.3 percent since 1981 and in 2009 topped $950 million. The nearby chart shows the projected growth in benefit payments based on the average rate of growth since 1991 of actual payments for both OTRS and OPERS combined. By 2054, the state would be paying an incredible $60 billion in payments just to retirees! Obviously, this is not sustainable without impacting state services. How did we get into this mess? The simple answer is that the state embraces a type of retirement plan that has shown a tendency to

OTRS/OPERS Projected Benefit Payments $70,000,000,000 $60,000,000,000 $50,000,000,000 $40,000,000,000 $30,000,000,000 $20,000,000,000 $10,000,000,000

2051

2047

2043

2039

2035

2031

2027

2023

2019

2015

2011

2007

2003

1999

1995

1991

Prepared by OCPA research fellow Steve Anderson

OKLAHOMA POLICY BLUEPRINT 2011

In addition, the defined-benefit plan structure favors older employees, who can accumulate benefits much faster in the public systems than would be available through the more common defined-contribution plan type that private businesses favor. This tilt toward older employees creates an employee demographic whose health costs are higher. This compounding effect creates ever-increasing employee costs that serve to reduce the amount of tax dollars available to address service needs and longterm capital projects, such as roads and bridges. The fundamental questions are: (1) Can Oklahoma legislators finally muster the courage to address the problems, and (2) Can they find a way—short of bankrupting the state—to extinguish the debt while providing the promised benefits to teachers, support personnel, and government employees? Often in government affairs it takes a crisis in order for politicians to muster the courage to address a difficult issue. The recession has helped to put Oklahoma in just such a situation. And if the answer to the first question is yes, the answer to the second question is also yes. How to Defuse the Pension Bomb If we act now, there are ways not only to eliminate the debt but also to reduce current state employment costs. OCPA has developed a plan1 that will: • Pay off the debt over time without a need for an infusion of new money; • Free up more than $300 million immediately for state services; and • Promise every current member of OTRS and OPERS his or her full retirement plus a guaranteed 2 percent Cost of Living Adjustment every year. How is this possible? First, and this is the most important point, all new teachers, support personnel, and government employees will begin their employment in a defined-contribution plan instead of the defined-benefit plan that OTRS and OPERS currently use. This move will immediately begin the process of reducing liabilities to the systems, as no new members (and the accompanying liabilities) enter the old system. Without taking this essential step, nothing else will correct the funding issue. The unions and old-guard politicians underOKLAHOMA POLICY BLUEPRINT 2011

stand that they lose control when their members and voters are not beholden to them for retirement funds. They will resist this change even in the face of a fiscal meltdown. Why would new teachers, support personnel, and government employees want to enter a defined-contribution system? How about more money in their paychecks immediately, complete ownership of their accounts, and a definedcontribution plan more generous than almost anywhere in private industry? The average state worker, for example, pays 3.5 percent of his or her wages to OPERS, and the worker’s employing agency makes a 14.5 percent contribution. Teachers and educationsupport personnel on average pay 7 percent of their salary (some school districts pay it for them), and the employer pays 9 percent. (In addition, as I pointed out last month, OTRS also receives dedicated revenues from various taxes and from lottery proceeds.) OCPA is proposing a defined-contribution plan that requires no matching payment by the employee. Under the OCPA plan, the contribution made by the state to the new employees would start with 4 percent directly to a defined-contribution plan in the first year, with the amount increasing by 1 percent each year for five years after the first year of employment until employees are receiving in their accounts a full 9 percent of payroll in employer contributions. Employees can also opt to make voluntary contributions to this account to enhance their retirement savings. This account would be fully owned by the employee from day one, unlike the OTRS and OPERS defined-benefit plans, in which the employees do not gain retirement benefits until they have been contributing to the systems for eight years in OPERS and five years in OTRS. Prior to that, if employees leave service all they receive are their contributions to the system and not the employer contributions or the earnings on any contributions. This lack of portability and ownership really punishes those who may have to leave service for pregnancy, family issues, or career changes. Additionally, it means that they do not have access to the funds for things like family medical emergencies, and no portion of their retirement benefits become part of their estate should they die. Additionally, the OCPA plan would offer those 15

who are currently in OPERS and OTRS the opportunity to “cash out” of the plan by providing a full payment of the present value of the benefits accrued to date. This would allow those who prefer to have portability and ownership of their retirement account to transfer those funds in a tax-free exchange to a defined-contribution plan. In this exchange there is an advantage to OTRS, OPERS, and ultimately the taxpayers because lump-sum transfers will allow the state to hold the amount of debt constant and issue bonds if necessary to fund them. The OCPA plan goes even one step further in making the defined-contribution plan attractive to potential and current employees. OCPA would suggest that the defined-contribution plan participants have the option to leave their funds in the investment pool of the definedbenefit plan instead of making their own investment choices. This is a win-win for both parties. The employees gain the benefit of the professional investment management and the clout of the size of the investment pool of OTRS and OPERS, while the two systems benefit from the monies remaining in their pool and keeping their economies of scale in place as the definedbenefit plan shuts down over the life of those still in that plan. We would also encourage legislators to consider guaranteeing a rate of return near the plans’ assumed return to further incentivize the number of participants exercising the option to convert. There may also be an opportunity to access federal funding for some of those funds that are converted. Federal regulations regarding pension liabilities typically result in states’ being stuck with the unfunded liabilities that accrue to retirees because of rules regarding the lag time between federally funded employees’ liabilities and the payment of those liabilities. However, by converting these liabilities to bond indebtedness, the state should be able to bill the federal government for its share of those liabilities. We would also encourage OTRS and OPERS to merge administration and investment funds when the defined-benefit plans are closed to new employees. The investment funds would experience some additional economies of scale, and the removal of bureaucratic redundancies would provide direct savings. The conversion to the defined-contribution 16

plan also would allow Oklahoma to stop pouring tax dollars directly into OTRS. This change would free up nearly $260 million in dedicated funding and another $40 million in reduced benefit costs in the first year of plan inception. OCPA believes this funding source should be eliminated immediately and the savings used as a funding source for eliminating the individual income tax. Over time, the OCPA plan would also result in a significant decrease in operational costs for every school and government agency, with a corresponding reduction in employee benefit costs. This amount would grow every year as more and more employees joined the definedcontribution system. For example, if this plan had been in place in 2009 long enough to replace all employees in the defined-benefit plan with defined-contribution members, state agencies would have realized more than $150 million in operational savings. The schools would have realized more than $200 million in operational savings. (These calculations are based on 2009 covered payroll from 2009 actuarial reports for OTRS and OPERS, assuming benefit loads of 18 percent for OPERS and 14 percent for OTRS.) During the years it takes to bring these defined-benefit plans to an end, OCPA proposes directing these savings to OTRS and OPERS. The hidden effect of this fiscally conservative approach will be a large gift to our grandchildren sometime in the future—instead of the mountain of debt the current plan guarantees them. What about that mountain of pension debt that remains even after the voluntary conversions? How does changing to a defined-contribution system remove this burden from the shoulders of Oklahoma taxpayers? The short answer is: It does not remove it immediately. OCPA proposes to “cash-flow out” the debt. We estimate it will take well over 30 years using conservative projections—even longer if the pension systems’ assumptions are realized—before the benefit payments to retirees exceed the available cash flow with which to pay them. The good news is that if one uses the rates of return of the two major pension funds, the present value of a dollar will be only approximately 15 cents by the time this occurs. During OKLAHOMA POLICY BLUEPRINT 2011

the approximately 30 more years after this “negative” cash flow point that it will take to bring the system to closure, there will be a steadily declining amount of benefit payments. Oklahomans have a choice to make for the future of this state. Do we want to leave our grandchildren a fiscally solvent state with no pension debt and a low tax base? Or do we choose to ignore all the warning signals and leave our problems (and higher taxes) to the coming generations? Improve Health Insurance Coverage with HSAs The nature of public benefit plans tends to create a workforce that is, on average, older than those of most private companies. One of the by-products of this older workforce is a relatively high cost of health insurance. It is not just the state workforce that is included, since many of the county and local government employees are also members of the state health insurance plans and share similar demographic characteristics. Oklahoma law provides for a benefit allowance to be paid to state employees, and some counties and local government units follow suit. The amount of the benefit allowance is set by statute. Employees use the benefit allowance to purchase a variety of insurance benefits, including health, life, and disability. Employees select the amount of coverage, types of coverages, and providers they prefer within the plans offered. If an employee selects a level of coverage with a price in excess of the benefit allowance, the employee is charged the difference. Conversely, if an employee selects coverage costing less than the benefit allowance, the unspent amount is forwarded to the employee as gross income. With respect to health care coverage, employees have three basic choices. Employees can choose to receive unused portions of the benefit allowance as gross income, secure insurance from a number of approved private health care providers, or elect to be insured by the Oklahoma State and Education Employees Group Insurance Board (OSEEGIB). The state then forwards the appropriate monies to the various providers as directed by the employee. OSEEGIB is a creation of Oklahoma statute. Basically, OSEEGIB is a state-run, self-insured OKLAHOMA POLICY BLUEPRINT 2011

provider of health care benefits. State employees are just one group of employees eligible for coverage through OSEEGIB. Employees of school districts, local governmental entities, and other groups are also eligible. OSEEGIB competes with various private insurers as a potential recipient of benefit allowance monies. Premiums from employees who select OSEEGIB as their health care provider are deposited into the OSEEGIB reserve fund. This reserve fund pays for medical claims and the expenses of administering OSEEGIB. OCPA believes that changes in health care options for state, county, and local employees can provide additional benefits while reducing the cost. Currently, employees have an additional benefit option called a Medical Reimbursement Plan (MRP). We believe that a Health Savings Account (HSA) would be more appropriate both for the state and for state employees. Currently, the MRP is funded with a “loan” from the state, and employees then reimburses the account with monthly payments from their paychecks with pretax money. The MRP amounts to an added benefit for state employees that is not computed in the public versus private employment cost comparisons, and the state receives no health care savings from the MRP. The primary benefit to employers of an MRP is that they are tax-deductible. Clearly, that does not apply to the state; therefore, there is no advantage to the state in providing a MRP. HSAs work in a slightly different manner, with some additional benefits for both the employees and the state. The employees fund the accounts themselves in fundamentally the same way traditional Individual Retirement Accounts (IRAs) are funded and with the same tax incentives. The investment options for the HSA funds are similar to IRAs, and they grow tax-free while they are idle. The HSA, however, must be in conjunction with a High-Deductible Health Plan (HDHP). This provision allows the state then to increase the deductible amount while potentially eliminating co-pays. This provision reduces the cost of the health insurance policy to the state. These savings to the state are immediate and will help bring down the costs of government while at the same time providing some benefits to the employees that are not present in the MRPs. The MRP must be spent in the course 17

of a tax year, or the balance is lost to the employee. With an HSA, the balance rolls forward, and the account balance can grow over time. Another advantage to the HSA is that it becomes an asset that transfers to the designated beneficiary. HSA funds are tax-deferred, and deposits for any given year are allowed up to April 15 of the following year. The employees have some flexibility in where they spend the funds, allowing them to cover some expenses outside of their health insurance coverage with these pretax dollars. Following are some examples of HSA qualified expenses: • Doctor visits and tests not covered by one’s insurance policy • Surgical procedures and hospitalizationrelated charges not covered by one’s insurance • Prescription drugs and over-the-counter (OTC) drugs, but not vitamins or supplements. OTC drugs may be taken off the list in the near future because of the language included in “Obamacare.” • Acupuncture and chiropractic care • Eye exams, glasses, and laser surgery • Hearing tests and hearing aids • Dental exams, dental work, and dentures • Alcohol and drug abuse treatment • Insulin and diabetic testing supplies • Expenses related to long-term care • Wheelchairs, hand rails, or other disabilityrelated home improvements. Move Jobs to Rural Areas Every session legislators look for ways to help Oklahoma’s rural areas cope with the loss of population, jobs, and tax base. The poorly conceived and operated Rural Economic Action Plan (REAP) has been a primary venue for those attempts. OCPA has a better plan that will actually send good-paying jobs (with benefits) to those areas without the need to subsidize them. OCPA proposes that existing state agency functions should be examined for their suitability for remote-office environments. In this day of server-based operations, many private firms have moved jobs not only around the country but overseas. Through the use of Virtual Private Network (VPN) systems, we can move state jobs into rural areas. The VPN technology is safe, economical, and 18

battle-tested by tens of thousands of private companies that have used this ability to place their support functions wherever it is most economical. The placement of agency jobs in rural towns would provide an instant economic impact on those communities that received them. State jobs have insurance and retirement benefits that exceed those normally available in the rural counties of Oklahoma. State wage scales are quite good compared to rural per capita incomes and would go a long way toward propping up the economies of those rural communities receiving the jobs. Not only would rural Oklahoma benefit, but all Oklahoma taxpayers could expect a savings from such a move. After all, rural Oklahoma counties contain many fine buildings on their main streets that are either vacant or underutilized. The rent on these buildings is significantly less than that of equivalent office space in Oklahoma City—and might actually be obtained rent-free by asking rural towns to compete for these state jobs. It is time to stop paying lip service to helping the rural areas, and to start moving state jobs out of the major urban areas where there are already plenty of other options for employment. Consider Consolidations and Outsourcing Consolidation is a poorly understood term when it comes to government entities. Oftentimes constitutional and statutory conflicts are the first line of defense used to block discussions about making government smaller and more efficient. Fiscal discipline and good management techniques do not necessarily require that Oklahoma eliminate agencies, boards, and commissions, although there are good arguments that the state has too many of each. However, what can be said with some certainty is that the state has too many accountants, lawyers, information technology specialists, and human resources employees. These are typically high-salary job categories that carry with them the related high benefit costs. For example, in the area of Medicaid there are multiple agencies that supervise various aspects of the program. This approach obscures some of the inefficiencies in this structure, such as administrative costs. A more efficient structure would be to consolidate these support functions into the central Medicaid agency, the OKLAHOMA POLICY BLUEPRINT 2011

Oklahoma Health Care Authority, while still allowing operational control of the separate programs within the different agencies. This approach needs consideration across the board in Oklahoma. Smaller agencies, along with commissions and boards, need to consider shared support functions with other agencies to limit overhead and allow a greater percentage of their expenditures to focus on programs and services. Moreover, Oklahoma needs to consider applying the “Yellow Pages test” to many of the functions and programs that government performs. That is to say, if a service can be found in the Yellow Pages, then government should not be competing with Oklahoma’s private businesses. More Oklahoma state agencies need to look at this approach for things such as payroll functions, as well as services and programs. There are many reasons to consider this approach: • Lower costs. The competition of the bid process drives prices down as businesses must compete for the contract. • Reduction in agency FTEs. The hidden benefit costs of government employees drive operational cost increases that are unrelated to an increase in programs or services. • Greater transparency and accountability. The assignment of a contract delineates who is responsible for a particular function and exactly what it costs, unlike current operations where a taxpayer knows only the supervising agency that provides the program or service, not who is responsible and the total cost. • Greater flexibility. In hard economic times, government typically struggles to downsize while business tends to react quickly or cease to operate. • Stimulates the economy more than government expenditures. Private businesses not only generate tax revenues for the state but tend to reinvest profits quickly, which moves the money through the economy with greater speed than government agencies. The fundamental flaw in most governmental outsourcing solutions is that government fails to structure their contracts properly. A good contract stipulates the exact nature of the contracted service, the requirements to meet acceptable service levels, and the financial repercussions if that level is not met. This latter OKLAHOMA POLICY BLUEPRINT 2011

component is a very important concept that is nearly always overlooked in outsourcing versus in-house comparisons of functions. When a government employee commits grievous errors or fraud, taxpayers have very limited opportunities for their government to recover the damages from that employee. However, a properly written contract with a private business would provide for recovery under those circumstances. OCPA suggests that Oklahoma consider the formation of a special commission to consider functions and programs for outsourcing. The nature of bureaucracies makes it difficult for them to evaluate their own functions and programs for outsourcing. Management pay bands in government are not dependent on efficiency of expenditure and outcomes, but more often on the number of employees supervised. Business executives drawn from the leaders of the Oklahoma business community should be commissioned not only to provide recommendations on which functions and programs should be considered for outsourcing but also to provide a concrete, step-by-step plan to accomplish the outsourcing. Often our elected officials overlook the fact that citizens, including the captains of industry, will freely give their time to help establish a more efficient government. Take a Hard Look at What Government Is Doing While many functions performed by state government are essential, it has often been too easy in past decades to create new agencies, boards, commissions, task forces, and other entities that then take on a life of their own. OCPA is encouraged by the stated intentions of many incoming victors of the 2010 elections to take a long hard look at how state government is structured, and to begin the work of streamlining that structure. Here’s an example: Oklahoma has two separate state government institutions that license and regulate people who cut hair—the Board of Cosmetology and the State Barber Advisory Board. The Board of Cosmetology is a free-standing agency with 12 employees and a governing board. The Barber Advisory Board is attached to the professional licensing section of the State Department of Health. While both institutions are no doubt at least partially selfsustaining through licensing fees, their employ19

ees are still covered by state insurance, pension, and other benefit programs; may often drive state-owned vehicles; and incur other costs that cost the taxpayers money. It makes sense to ask two fundamental questions about this example of how Oklahoma state government spends our money, and about many other examples as well: First, do we really need two separate state agencies that license and regulate people who cut hair? And second, is the licensing and regulating of hair cutters something that state government should be spending public money and time on in the first place? The answer to the first question is very likely no. The answer to the second depends on whether one believes that a shave and a haircut for two bits is really comparable to, say, brain surgery, which most people agree should be subject to fairly stringent educational and licensing oversight. There are many means to modernize our state workforce. It will not happen overnight, but if we do not begin this work we are virtually certain to face future crises similar to those currently plaguing states like California and New Jersey. Endnotes 1 For a detailed spreadsheet, write to OCPA research fellow Steve Anderson at ocpa@ocpathink.org.

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Making Oklahomaâ&#x20AC;&#x2122;s Government Accountable to Oklahomans Governmental accounting can be difficult to understand, even for seasoned experts. Oklahoma can become a pacesetter among states by producing an annual report consistent with the best practices employed in the private sector. This would impress business leaders looking for a location where state government is run in a businesslike fashion.

hile we often want government run more like a business, we must realize that government is not a business. For one thing, it does not exist to maximize profit or even to make a profit. However, government can benefit from the adoption of many sound business practices. Clear and Intelligible Accounting Thomas Jefferson once complained that government accounting in his day was mired in what seemed like impenetrable fog. It has not improved much since. Accounting standards for government are often difficult to fathom, and can confuse even experienced accountants and financial experts. Generally accepted accounting principles (GAAP) for government are largely distinct from GAAP used in the private sector. Accounting in the private sector features the full accrual of assets and liabilities, a focus on profitability, and consolidated reporting so that several divisions of a single company are consolidated (with inter-divisional transactions eliminated in preparing financial statements for review by investors and other financial-statement users). However, government treats each fund used for financing operations as a selfbalancing entity. The financial statements do not consolidate the overall operations but simply add them up, leaving inter-fund transactions reported more than once on the face of the statements. Defenders of the system point to the primacy of the budget in governmental affairs and maintain that the focus of GAAP in government should be in compliance with the legally adopted budget. This misguided focus results in some assets and liabilities that are important to understanding the overall position of the government being left off the balance sheet completely or reported in ways that do not render their impact readily apparent. If a particular item does not require the use of budgeted OKLAHOMA POLICY BLUEPRINT 2011

financial resources in the coming cycle, it is often all but ignored, even though its existence presents a long-term threat to the fiscal health of the government. For instance, Oklahoma sponsors one of the worst-funded retirement systems in the country, the Oklahoma Teachers Retirement System. The unfunded liability of the system is more than equal to the stateâ&#x20AC;&#x2122;s annual general revenue. However, one would not know that anything was amiss apart from a diligent reading of the comprehensive annual financial report (CAFR). A note to the financial statements does mention the unfunded status of the system but then instructs readers to consult a completely separate report for relevant information. The purpose of this Blueprint is not to attempt to fix all that ails GAAP for government. Oklahoma should continue to publish its annual CAFR using existing GAAP. Grantor agencies and various underwriters are accustomed to receiving the CAFRs, and to discontinue publication would invite scorn and withdrawal of federal funding. However, Oklahoma can and should prepare a separate financial report that documents the achievements of state agencies, the cost of their activities, and the stateâ&#x20AC;&#x2122;s financial position. Most of the information such a report would require is already collected. Oklahoma was one of the first states to produce a comprehensive annual financial report and the first to do so using its own staff. It was also the first state to produce a set of financial statements in accordance with Statement #34 of the Governmental Accounting Standards Board (GASB). GASB Statement #34 introduced some needed reforms to government GAAP. Oklahoma can once again demonstrate its leadership by producing an annual report that is consistent with the best practices employed in the private sector. Such an achievement would 21

catch the favorable attention of business leaders looking for a location where state government is run in a businesslike fashion. Public companies that register with the SEC are required to publish their financial statements within 90 days of the end of their fiscal year. Most major companies can close their books within 48 hours! Meanwhile, most state and local governments adhere to a six-month standard. By the time much of the information is made available, it is already stale. With proper planning, every state agency could and should report its results within four weeks of the end of the year. If the state has an additional four weeks to prepare its statewide comprehensive annual financial report, the public will have access to much more timely and relevant data. Contents of Oklahoma’s Pacesetting Report In addition to its financial statements, Oklahoma should also produce a more meaningful report on its position and its operations. Like the regular financial statements, this report should be examined by the Auditor and Inspector, and his or her opinion should accompany the report. The new report should contain the following: • A report on the mission, goals, and objectives of the agency. Management of each agency should be required to set out measurable goals and provide data indicating the extent of its achievements. The legislature should consider whether an agency incapable of identifying its own goals and measuring its progress toward achieving those goals should continue to exist. The Governor’s Executive Budget contains some performance measures for most agencies. However, too often these measures simply measure the agency’s inputs rather than its output, which should be the focus. While Oklahoma’s efforts to date have made it a leader among the states, far more can be done. • A consolidated balance sheet that clearly shows the financial position of the state, considering all assets and liabilities. Earned pension and other retirement benefits should be included among the liabilities. The state should track all significant assets, including infrastructure, with a reasonable amount for depreciation or amortization included as a current operating cost. 22

• A statement on the cost of operations. This statement should reflect the cost of providing the services noted in the report on the agency’s mission, goals, and objectives. In the private sector, where profit and equity are the goals, a reader has only to compare revenue and expense to gauge the results of the year’s operations. However, government is not in business to make a profit but to provide needed services effectively and efficiently. A more relevant comparison than one between the cost of operation and revenue is between the cost of operation and the extent and quality of the services provided. The statement should be prepared on a consolidated basis using accrual accounting common in the private sector. This step alone will make the statements more pertinent to many users. • Appropriate notes providing additional detail and information accompanying these basic statements. One important item would be a reconciliation of the statement of the cost of operations to the data provided on Oklahoma’s OpenBooks website. Oklahoma currently provides a considerable amount of data to the public through this website. Unfortunately, this data is rarely organized so that a user can easily place a transaction in the overall context of the state’s operations. A reconciliation would remedy this deficiency. Consistent Professional Auditing Oklahoma’s constitution provides for an elected Auditor and Inspector. While some maintain that placing the selection of the office in the political arena makes possible the election of an unqualified auditor, as has happened in our recent past, the election also helps maintain the auditor’s independence. An elected Auditor is not beholden to a governor or to legislative leaders who made the appointment.

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Agencies Should Pay for What They Use Putting an end to cross-subsidization of state agencies would increase transparency and reduce costs.

klahoma, like most states, divides its budget into what often amounts to a series of fiefdoms, where the stakeholders of each agency think that the agency is entitled to its “share” of the state’s resources regardless of how the agency’s activities benefit the public or how those activities might be performed more efficiently. The standard model for government is to set up an agency, fund it, and direct it to provide services, with only minimal accountability or oversight. This approach is inherently inefficient and inflexible, and often fails to respond even to the basic needs of those the agency is supposed to serve. Oklahoma can greatly improve the quality of its government services if it exposes state agencies to the same market forces that cause private businesses to constantly adjust to the wants and needs of their customers—or risk going out of business. This becomes especially apparent when we look at the central services in Oklahoma government. Consider the services to other agencies provided by the following: • Department of Central Services — Purchasing — Risk management and insurance — Building management and leasing — Motor pool and fleet management • Office of State Finance — Accounting and payment processing — Telecommunications — Information technology consulting • Office of Personnel Management — Hiring and retention — Consulting on personnel matters — A separate Merit Protection Commission adjudicates employment disputes • Attorney General — Legal advice and representation In most cases, a state agency has no choice but to use the state-designated agency for certain services. Of course, since the central service agency is usually funded out of approOKLAHOMA POLICY BLUEPRINT 2011

priations, the services are “free.” There is also the aspect that the state may appropriately want certain transactions handled in a particular manner and, therefore, have control over the service, but this still does not promote superior service. However, this system also gives the agency getting the service little incentive to use the resources of the central service agency efficiently. For instance, a private firm will take care to use its legal counsel and CPA only when necessary because it knows that a consultation will invariably be followed by a billing for professional services. Costing Methods and Grants Because of the manner in which the state provides central services, it must set up an indirect cost model when it applies for a federal grant. Most reasonable observers realize that when a state agency provides a service on behalf of the federal government for which it will be reimbursed, a part of the cost of providing the service is the cost of central services (personnel, purchasing, payment processing, etc.) used by the agency providing the service to the federal government. Accordingly, Oklahoma (and every other state) calculates an indirect cost rate that agencies requesting grants add to the amount they seek for reimbursement. However, when the federal government provides reimbursement for indirect costs, the state does not place the money at the disposal of the central service agency, but with the agency providing the service to the federal government. Hence, a grantee agency recovering for indirect costs it did not incur now has a “profit” on its grant. The agency may use this profit to expand its programs. This may or may not be consistent with the wishes of the legislature or in the public interest. Once the program gets started or expanded, the legislature may find it very difficult to terminate, especially if people have 23

become dependent on the new or expanded service. Realizing that this method lends itself to abuseâ&#x20AC;&#x201D;if not fraudâ&#x20AC;&#x201D;by states wanting to maximize their federal reimbursements, many grantor agencies restrict the amount of indirect costs that can be recovered. Of course, this means that the state as a whole may come up short if the real cost of the indirect services is more than the indirect cost recovery allowed. Among the states, only Oregon charges other state agencies for the cost of the central services provided. Oregon administrators report that their system works smoothly and avoids some of the disputes that invariably arise over allowable indirect costs.

found that an office suite arrangement works well. The business pays only when it uses conference rooms, equipment (such as copy machines), and the reception and secretarial services. As a result, several small businesses share the overhead. It will often make sense for very small agencies to share personnel and resources. The state does this now for its motor pool without too much grumbling from user agencies. It should expand this approach.

Direct Costing Offers Advantages The state should provide resources to each agency to cover its cost of central services. The agency should then pay the central service agencies for the services they provide. For instance, the agency would pay the Office of Personnel Management an amount for each employee hired and for each employee on staff during the year. The agency would pay the Office of State Finance for each claim processed. This would allow the state to discontinue funding the central service aspects of several agencies. The administrative costs of billing would be more than offset by the more efficient use of central services, and the state would gain better control over federal cost reimbursements. We should also note that the state requires agencies to use state-designated agencies in many instances. This policy may help ensure compliance with state regulations, and it may also be necessary to get a better deal in the aggregate from a vendor. While the legislature may want to review the appropriateness of continuing to direct the agencies to the central service agencies, this Blueprint is not recommending changes to this policy. The State Should Consider Office Suites for Smaller Agencies Most state agencies operate autonomously. Even smaller agencies that have only two or three employees may have their own facilities, equipment, and so on. Many very small firms and individual businessmen and women have 24

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Innovative Ideas for Travel and Recreation State government should not be operating a third-rate motel chain that competes with Oklahoma’s private businesses. We should preserve Oklahoma’s natural and historical assets, while unleashing entrepreneurs to boost Oklahoma tourism like never before. The Purpose of State Parks and Museums Which of the following is the principal purpose of Oklahoma’s parks and museums? 1. To preserve unique natural and historical assets for the education and enjoyment of Oklahomans. 2. To provide additional recreational opportunities for Oklahomans. 3. To create government jobs in enterprises that compete with taxpaying private entities. Most Oklahomans would agree that the correct answer is number one, and very few would choose number three. Yet, historically, our parks have too often been managed as though the goal is to provide a third-rate motel chain for citizens regardless of whether they are willing to pay for it. Oklahoma is blessed with an interesting array of historical and natural attractions. Yet the preservation and enhancement of these attractions is often subordinated to managing a series of lodges, cabins, and campgrounds. The state should emphasize the basic reason for the park’s existence, not use the park as an excuse to operate a series of government-run enterprises. A well-designed and well-run park will create opportunities for taxpaying entrepreneurs to provide lodging, food, and other services. Unfortunately, too frequently our parks have presented an excellent example of why we should look to the private sector rather than to government to provide services whenever possible. Government should play a limited role, doing only those things that people, or their local governments, are unable to do for themselves. Unfortunately, the prevalence of politically placed parks, the neglect of needed maintenance, and the lack of entrepreneurial attitude have all played a role in allowing parks often to be embarrassments rather than the jewels they should be. Many Oklahomans have had the experience of checking into an aging, poorly maintained state lodge to find threadOKLAHOMA POLICY BLUEPRINT 2011

bare carpeting and no hot water. The state should focus on the major attractions where a state presence can provide the resources and emphasis to make a viable park. Others should become local parks or even private facilities. Focus on Major Attractions Rather than attempting to run 56 parks and several golf courses, the state should get out of the golf course business altogether and cut the number of parks managed at the state level by half or more. A state park or museum should encompass a major attraction of historical, scenic, or natural significance. Once designated, the state should devote the resources needed to make the park an outstanding attraction that provides unique value to visitors. While we may think of attractions as being found at a single location, historical trails are also popular with many vacationers. Two of the most prominent run through Oklahoma: Route 66 and the Chisholm Trail. In the cases of these attractions, the whole is of greater value than the sum of the parts, creating a situation where state involvement is warranted as the state can do something, or at least facilitate something, that an individual community could not. Properly presented, both Route 66 and the Chisholm Trail could attract many people to Oklahoma for visits that could benefit many communities. Meanwhile, the Oklahoma Historical Society operates 21 sites, including 9 museums, 5 forts and battlefields, and 7 historic homes. These sites are much more appropriate and sustainable state-level facilities than are parks. This Blueprint does not propose localizing stewardship of any historical sites. If Oklahoma is to reduce the number of parks to a more manageable level, how should the state go about identifying those parks that should remain state parks and those that should become county parks? It is beyond the scope of 25

this Blueprint to recommend a detailed list of recommended parks. However, the state might use a process similar to that used by the Defense Base Closure and Realignment Commission at the federal level, which was able to facilitate the closure of surplus military installations. Use Leisure Opportunities to Create Jobs At least two state parks appear to have the potential to create new wealth and opportunity for our state: McGee Creek and Lake Murray. Both present long-term opportunities to develop nearby areas economically and preserve environmental amenities. Both would be excellent candidates for sale or long-term lease to a private developer. This Blueprint recommends that the state proceed with a plan for McGee Creek with a view to another initiative at Lake Murray once McGee Creek has proven the concept. Following the sale or lease of the property, the area could see an infusion of wealth and the construction of many upscale vacation and retirement homes, especially if the state eliminates the personal income tax, as OCPA has long recommended. The new homeowners would bring with them significant wealth that would translate into invigorated economic activity for area businesses and additional sales and property taxes. Sale to a single developer should ensure the highest attention to aesthetic detail and environmental quality. The beauty of the area and the attendant wildlife and flora are the principal assets that would be selling points to potential homeowners. A single developer would have a strong incentive to preserve and enhance those assets. A beautiful, clean lake with abundant opportunities to fish and enjoy wildlife would doubtless attract many prospective buyers. While multiple developers might be tempted to cut corners so long as the downside impacted development elsewhere, a single developer would not face such conflicts. For instance, one of many developers might be tempted to build in areas that would lessen the scenic value for others. A single developer will care very much about those “others” and would not develop in a way that might depress property values elsewhere. At the same time, the state could retain an easement for public use so that citizens could have access to the lake and part of the shoreline. In fact, the presence of new homeowners 26

under the umbrella of a single developer is likely to lead to more lake concessions useful to those who do not live at the lake—concessions that would not be present without the development of vacation and retirement homes. The status of McGee Creek as a water supply source for Oklahoma City could lead to a draw on McGee Creek water to the extent that declining lake levels become a problem for homeowners at the new development. The state may have to provide a creative solution, such as the purchase of water rights at Sardis to replace any water lost to Oklahoma City at McGee Creek. Of course, the state would need to combine the purchase of water rights at Sardis with assistance for local citizens to develop for their own use the remaining water. We should note that this development would create new value for the state. This will make it easier to address the competing interests for water in ways that benefit all the stakeholders. In addition, the state will need to secure federal cooperation to bring this development about. However, if the development proceeds in a way that enhances the environmental and recreational value of the lake, the state should be able to get that cooperation. Transfer State Parks to Local Control If the state transfers 20 to 40 state parks to local control, it must prepare those parks for the transfer. This will include several steps: • Develop, in cooperation with local leaders, a formal business plan for the operation of the park in local hands. • Bring all major deferred maintenance current. • Provide needed improvements that would enhance the value of the park in local hands. A budget to implement these ideas would provide $200,000 per park for this purpose, allowing the local government to determine how to spend the funds to maximum advantage. In making the transition, the state would entertain bids from interested parties who would agree to continue the access of the public to the area. The state would prioritize the bids as follows: 1. Nonprofit organizations that want to own and operate the park 2. Outright sale to a private developer, provided that the purchaser maintained the park as an OKLAHOMA POLICY BLUEPRINT 2011

entity available for the recreational use of the general public 3. County government in which the park is located 4. If no one expresses interest in the park, the state would sell the land at public auction. We would not expect any parks to fall into this category. In addition, the state would provide severance benefits for employees not offered comparable employment by the new owner and not wishing to transfer to a park that remains in the state system. Enhancing the Value of Parks That Stay in the State System The purpose of shedding the state affiliation of many parks is to focus the attention of the stateâ&#x20AC;&#x2122;s resources more effectively on the major park assets that remain in state hands. Accordingly, the state should take bold steps to improve the experience of visitors to state parks. First, and most important, the state should limit its role to those areas where state action is clearly needed: general management, ranger activities (including those that preserve and enhance the underlying public assets), and law enforcement. The state should take on additional roles only after very careful consideration of the alternatives. This approach will lead to the employment of many seasonal workers by the state. At present, the state often attempts to provide year-round jobs when there is insufficient demand outside of the peak tourist season. We could expect many students to fill these positions while on summer recess. Southwestern Oklahoma State University has in place a successful program to teach the art of park management and operation. This is an excellent asset for the Oklahoma park system. This Blueprint recommends providing adequate funding to ensure scholarships for this program. For other activities, such as providing lodging, food service, campgrounds, and landscape maintenance, the state should employ independent contractors whenever possible. Several generic recreational activities, e.g., horseback riding, should also be provided by independent contractors when possible. The park superintendent should supervise the performance of all contractors carefully. OKLAHOMA POLICY BLUEPRINT 2011

While this approach will frequently lead to lower costs and improved service for the state, it also sends a clear signal to local businesses that the state is not trying to compete with them. After all, what motel operator will build additional units when he or she thinks the state will soon build subsidized units to serve the same potential market? This Blueprint recommends money for the parks to contract with the Wildlife Conservation Commission to provide wildlife management services at the parks as needed. Many visitors to state parks are disappointed when they visit a park and do not see any wildlife. With proper attention, this could become a rare occurrence. This Blueprint also recommends that all parks charge entrance fees. At present, only two parks do so. The entrance fee for any state park would be $5 per person or $10 per family per day. In addition, the fees would not be subject to political interference on behalf of certain groups. This is not to say that the state should not offer discounts to some customers and offer special promotions such as yearlong passes, but only when it makes economic (rather than political) sense to do so. All fees charged would stay with the park where they were collected in order to address another severe need facing Oklahoma parks: the need for consistent, timely maintenance. Since there is invariably greater hoopla associated with the creation of a new park than the maintenance of an existing park, maintenance has often been neglected in the appropriations process. By charging fees and keeping the fees within the park, each park becomes an economic entity where the superintendent has a clear incentive to act in the best interest of the overall park operation. This Blueprint suggests providing appropriations beyond the fees collected for operations. Each park could also solicit contributions for its projects and activities. The fees for admission to all historical sites would be $5 per person per day except where they are already higher, e.g., at the Oklahoma History Center. All fees collected would stay with the facility where they were collected. Similar fees would be charged for both the Will Rogers Memorial and the J.M. Davis Memorial, with the fees staying with the respective institutions. 27

Welcome International Visitors Many Japanese know well the many similarities between Bushido, the code of honor of the Samurai, and the cultural practices of the Plains Indians of North America. Many of these tribes are headquartered in Oklahoma. Though perhaps not to the same degree as the Japanese, many Europeans are also interested in Native American culture and tradition; however, the Trail of Tears and the Woodland tribes may receive more attention in Europe. Oklahoma has a unique opportunity to attract international visitors because of the special significance accorded Native American culture. Many of those who come as tourists to learn more about Native American culture may also be decision makers in industry. Favorable impressions Oklahoma and Oklahomans make can have a significant bearing on the state’s ability to attract plants of companies headquartered overseas. One important way to make such a favorable impression is to learn to speak the language of our visitors. A high percentage of European executives and professionals are fluent in English. Oklahoma should endeavor to provide rangers who explain the wonders of our history and natural attractions in Japanese and German at as many parks and museums as possible. It may also be worthwhile for our hosts to speak Korean. Oklahoma schools are geared to teaching Spanish and French as foreign languages. A few schools offer German, but Japanese and Korean classes are almost unheard of in Oklahoma schools. However, rather than gearing up for special classes, it may make more sense to simply pay a generous stipend to rangers and summer rangers who speak Japanese, German, or Korean and can pass an appropriate test confirming their literacy. These speakers should be concentrated at the locations that appeal most to international visitors. This Blueprint suggests providing funding to pay a $1,500 stipend to a seasonal ranger and $2,000 to a year-round ranger who can pass a test indicating fluency in Japanese, German, or Korean.

good musical venues in the city. The Bricktown area is starting to offer a similar ambiance for Oklahoma City. At the same time, Indian dancers are popular with many people and could provide a colorful backdrop to the downtown areas of Oklahoma City and Tulsa. As both Oklahoma and Tulsa counties have access to the resources necessary to sponsor bands and dancers, this Blueprint does not recommend additional funding for them. However, we should recognize that the things many Oklahomans consider part of our quality of life may also help attract more people to our state. Road Signs Can Promote Oklahoma Attractions In the section on transportation, this Blueprint recommends using intelligent highway signs that are attractive to motorists and can convey current information that can be changed on short notice. The transportation section also contains several other recommendations that will make Oklahoma more appealing to visiting motorists, including: • Smoother rides due to reducing the number of overweight trucks • Modern rest stops at frequent intervals along well-traveled routes • Roads and bridges free of ice in the winter months Distinctive Clothing Can Emphasize Appealing Ambiance Both Route 66 and the Chisholm Trail can become marketing corridors. By banding together, merchants along these corridors may be able to identify themselves with an experience that many visitors find pleasant. This Blueprint recommends funding for two contests, one for Route 66 and one for the Chisholm Trail, wherein the winner will design clothing motifs and architectural highlights that could consistently pull together merchants along these trails. While this Blueprint does not advocate subsidizing the purchase of clothing by Oklahoma merchants, it does make sense for the state to sponsor an effort to develop an effective marketing approach for businesses along both of these trails.

Music Can Help, Too Many people report settling in Austin, Texas, because of the presence of what they consider 28

OKLAHOMA POLICY BLUEPRINT 2011

Getting There Safely, Quickly, and Comfortably at Low Cost Linking Oklahoma’s road system with our natural transportation corridors would boost our economy and better link us to the outside world. That means thinking nationally, not just locally, as we plan new highway routes. Build Roads Along Natural Transportation Corridors We should start with a simple question: Why do we build roads? Most people would answer that we build them to help us get where we want to go. However, a look at an Oklahoma roadmap might lead one to think that we use a different rationale. Too often, we see a few miles of modern divided road change into a two-lane road for no apparent reason, except that perhaps the state ran out of money—or did not always plan wisely with what it had. We should focus our resources to build roads until they are completed, and we should build major roads along the natural transportation corridors that run through the state. What are those corridors? Some are obvious: • Chicago/St. Louis–Los Angeles, or the old Route 66 that today encompasses I-44 and I40 west of Oklahoma City. • Atlanta/Nashville/Memphis–Los Angeles, or I-40. • Mexico/Houston/Dallas-Ft. Worth–Kansas City/Minneapolis, or I-35. • Mexico/Dallas-Ft. Worth–St. Louis/Chicago, or U.S. 69 and I-44 east of Vinita. Other corridors are less obvious. Consider the linking of enormous markets in Florida and the Gulf Coast with those in Denver and the Pacific Northwest. The main route connecting these markets at present runs just outside the Oklahoma border. I-20 runs from Shreveport to Ft. Worth, where U.S. 287 takes off for Amarillo and then follows U.S. 87 to Dalhart, Clayton, and Raton, where it links with I-25 for Denver. With the building of a four-lane highway from Shreveport to Texarkana and another in eastern Colorado, a route through Oklahoma would make more sense for truckers and motorists. The route could rely on parts of the Oklahoma road system already built as modern expressways but would also require some new construction. The ideal route would run from the Red River south of Idabel to Hugo, Antlers, Ada, OKLAHOMA POLICY BLUEPRINT 2011

Pauls Valley, El Reno, Watonga, Woodward, Guymon, and on to the border with Colorado. It should skirt Oklahoma City rather than add to congestion in the metro area. Especially if built as a new generation road, this route would greatly benefit Oklahoma and cut time off travel and trucking between Seattle, Portland, and Denver and Florida and the Gulf Coast. While the Oklahoma communities near the road would benefit, the anchor traffic would be that traveling through Oklahoma. For instance, when the state expanded U.S. 69 from Texas south of Durant to the junction with I-44 near Big Cabin to four lanes many years ago, commerce boomed along the new route. The driving force was not people using the improved road to go from Pryor to Atoka but people going from Texas to St. Louis. Previously, the most efficient route went through Little Rock—around Oklahoma. However, the best natural route for this corridor ran through Oklahoma. A very similar situation exists with what is sometimes called the Northwest Passage. What would make this road work is not linking Woodward with Purcell, but providing a better way to get from the Southeastern United States to the Rocky Mountains and the Pacific Northwest. Yes, Woodward and Purcell would benefit and trade may even develop between them, but the real gain is opening up access to points outside our borders. Civic boosters in communities across Oklahoma invariably push for better four-lane access to the Interstate system. We should help as many communities as practicable achieve that access. But the big economic gains result not from just looking at a map of Oklahoma, but at a map that shows how Oklahoma communities can link up with markets outside Oklahoma. Another corridor that could be improved would link Tulsa and the Dallas–Ft. Worth area. The state could achieve this by building a modern road from Henryetta through Ada to 29

Sulphur. From Sulphur, it would be an easy link to I-35. Two other routes deserve further study. The first would better link Ardmore and Lawton with other locations by completing the alreadyplanned four-laning of U.S. 70 and extending it from Waurika to Lawton and then to I-40 West of Sayre. The second would better link Bartlesville, Ponca City, and Enid with other markets by completing a modern road from I-44 near Afton to Enid and then Southwest to I-40 between Clinton and Elk City. By running a spur from I-35 near Braman to the main road, the state would also provide better access from Enid to Wichita, Kansas City, and Chicago and even lure some Kansas truckers headed to California through Oklahoma. Historically, another major route ran through the state linking Kansas City and Houston, roughly following the current route of U.S. 59 from Siloam Springs to Sallisaw and Poteau before running east through Arkansas and heading to Houston. However, buoyed by WalMart and the presence of right-to-work law in Arkansas for many years, the route has effectively changed and now follows I-540 through northwest Arkansas. Oklahoma would probably find it cost prohibitive to try to win this route back in the near future. The most important factor is to develop new roads one at a time and build them along natural corridors. Too many of our resources have been dissipated on modest short improvements while our neighbors have tended to build more of the important roads that bring prosperity. Does this mean that we do not balance construction throughout the state each year? Yes, it does. We should quit treating our roads as parochial pork barrel and look at them as engines for economic growth. If Oklahoma is to take best advantage of its location, it must build roads that get people and goods from place to place quickly and safely. This means putting aside strictly local considerations and building truly modern roads that move Oklahoma dramatically forward. Bypass Every Town The first rule of building truly modern expressways independent of the Interstate system is to spare drivers the need to slow down and 30

navigate through various towns and hamlets. While each town along the route will provide motorists with opportunities to stop and possibly explore, we must afford swift passage for those not wishing to stop or even reduce their speed. This means that the maximum speed can be maintained while bypassing the town. Some civic leaders may think that it is to their advantage to force motorists to plod through their business districts in the hope that they might be enticed to stop and buy something. However, it is difficult to favor any one community in this way. If more than one or two communities can slow traffic, motorists will avoid the route altogether. It would be better to get part of the traffic from a busy motorway than to get nothing. Not every town welcomes the additional traffic. Oklahoma City and Tulsa are both large enough that something that might add to congestion would hardly be welcomed. In fact, congestion is already even a problem in smaller cities like Enid, Muskogee, and Lawton. Both the towns and the traffic might benefit from additional bypasses along U.S. 69. Muskogee and Pryor present obvious opportunities. Those concerned about the impact on commerce should consider Durant, where motorists can travel though town without slowing appreciably. Durantâ&#x20AC;&#x2122;s economy is doing very well. Build Roads and Bridges That Are Free of Ice in Winter New technologies are enabling us to build better roads than previously. One promising approach, being developed at Oklahoma State University, is to use a geothermal process to heat a road or bridge sufficiently to keep it ice free during winter. The state should devote resources to perfect and deploy this technology. Every new multilane highway in the state should be built so that motorists never have to slow for ice. Such a prospect will make routing a trip through Oklahoma especially appealing to truckers and motorists in the coldest months and will save shippers, especially those based in Oklahoma, considerable delays from inclement weather. Oklahoma is setting the pace. We should pounce on the opportunity to capitalize on our progress. OKLAHOMA POLICY BLUEPRINT 2011

Put Intelligent Signs Along the Way Another new aspect of modern roads is intelligent signage—i.e., signs with an electronic display that can be changed as circumstances dictate. When needed, the state can make the motoring public aware of weather, road, or other conditions that merit attention. The state might sell advertising. No more than three miles should separate the signs. The purpose of these signs is not to harangue the motoring public with a series of public service messages, but to provide them with information that will help them travel more quickly and confidently. The state can also consider making these signs interactive with onboard navigation systems becoming more commonplace in today’s vehicles. Use Rest Areas to Promote Oklahoma’s Petroleum Marketers and Convenience Stores Oklahoma can further stand out with modern rest areas for safety and convenience. The Interstate system provides primary rest areas in the roadway. A better alternative is to encourage motorists to patronize outstanding facilities run by taxpaying businesses near expressway exits. The state should set minimum standards for qualifying facilities such as fuel, food, drink, and medication offered; lighted parking and restroom facilities; and access to emergency assistance. The facilities should also make available information about road and weather conditions as well as information about Oklahoma tourist attractions. These facilities should be open 24 hours The state should regularly inspect the facilities to make sure they meet high standards of cleanliness and that required items are available. No more than 50 miles should separate these facilities. This means that any traveler on a major corridor highway will be assured that he or she will always be within 25 miles of emergency assistance at any time. Many convenience stores along Oklahoma’s major roads already meet high standards. Where one is not available within the required interval, the state could offer competitively bid opportunities for a vendor to remain open 24 hours and meet the other standards required, contracting with the low bidder for doing so. OKLAHOMA POLICY BLUEPRINT 2011

This approach ensures that truckers and other motorists on new generation Oklahoma roads can be assured that they will always be in easy reach of needed facilities, have access to information important for safety, enjoy efficient travel, and not be concerned with delays or hazards due to ice in winter months. Oklahoma will begin to have the most modern roads in the country. Place Weigh Stations Strategically and Let the Trucks Keep Moving If Oklahoma is going to make a significant investment in upgrading its roads, it needs to make sure that the ride on those roads does not unduly deteriorate from overweight trucks. The state’s current practice is to locate weigh stations on the major highways and designate part of the Oklahoma Highway Patrol to focus on identifying trucks operating over weight. Fortunately, the vast majority of trucks operate within the legal weight limits, which ensures that the road surfaces retain a smooth ride much longer. Unfortunately, road surfaces are engineered to withstand a particular load, and even a modest violation by a single truck can cause extremely expensive damage. There have been a very few rogue trucks that intentionally run over weight, often taking routes that allow them to avoid the weigh stations or to travel past them when they are not staffed. The state must guarantee complete compliance with its weight limits. Once again, technology being developed in Oklahoma may come to our assistance. Engineers at the University of Oklahoma have developed technology that will calibrate and measure vibrations as a truck passes over a bridge to determine if it is traveling within legal limits. The fact that this technology operates on a bridge offers an additional advantage. While a driver with an illegal load may be able to drive around a regular weigh station, that driver will find the alternative to driving over a bridge is fording a river. As a result, the state could place detection equipment on bridges over major rivers and ensure that weighing cannot be avoided. When combined with a wireless transmission that can be picked up by a nearby enforcement vehicle, the new technology presents a formidable challenge to any trucker operating illegally. 31

Initial indications are that the new measuring technology is much less expensive than a conventional weigh station. The state could likely cover all crossings of a few major rivers— e.g., Red, Kiamichi, Canadian, Cimarron, Arkansas, Grand, and Illinois—and virtually place the state off-limits to overweight trucks. The bridge units would need to be operated in cooperation with an enforcement officer, and suspected overweight trucks would need to be flagged down and weighed, but most legal trucks could continue without stopping for a scale. The state could also train and equip county sheriff personnel to provide additional surveillance, which they would likely do enthusiastically, especially if the state allowed the county to keep a portion of the fines generated by its enforcement activities. The state could combine bridge enforcement with other emerging technology on inspections to confirm that trucks on Oklahoma roads are operating within legal weight limits and cargo rules without the trucks having to stop except in unusual situations. As a result, the trucker makes better time. The traveling public is better protected and needs to spend less on road maintenance. Can We Afford a New Generation of Modern Roads? Yes! Some may look at the new generation roads proposed here and assume that the state would need to impose higher taxes to pay for them. This is definitely not the case if the state follows some simple rules for financing its road construction and maintenance. Perhaps the most important rule is to keep in mind that the purpose of the funding is the building and maintaining of modern roads that get us where we want to go safely, quickly, and comfortably. Too often, roads become political footballs—good patronage where a legislator wants to show that he or she has done something for the folks back home. Construction crews actively putting in a few miles of four-lane within the district is often viewed as a good visual example of a legislator’s effectiveness. We should view our roads as a whole network rather than focus on the individual parts. It is probably unrealistic to expect that parochial politics will not intrude into road-building debates, but we should be vigilant to keep it out 32

to the extent possible. Another distraction is that many view road building as the perfect “stimulant” for a dormant economy. The Department of Transportation should walk a fine line, keeping in mind the goal of a better road network along with the opportunity to put federal dollars to work in Oklahoma. While some states were caught flatfooted, Oklahoma’s Department of Transportation did a good job with pre-planning so that Oklahoma had several projects “shovel ready” when the federal government opened the money spigots. Regardless of the general failure of the federal government’s efforts at stimulating the national economy, Oklahoma leaders, while always being prepared to take advantage of unexpected windfalls, should remember the state’s purpose is not to create jobs through construction, but to build and maintain a firstclass road network. Great roads will help job creation for years to come, long after the stimulus has been forgotten, except for the additional debt we now service as its result. End the Diversion of Money for Roads to Transit Schemes Central planners are notorious advocates of large, cumbersome public transit systems. Almost every system in the nation, despite what may have been the initial expectations of its proponents, loses money. Although some retain their devout users, few view them as the preferred means of travel. Elsewhere this Blueprint proposes turning over responsibility for some state programs to local government along with some state funding. Nothing should prevent a community from taxing itself to operate a local bus service at a loss. Of course, another alternative is to charge fares to riders that will pay for the service provided. However, if too many riders quit taking the bus, the system will still lose money. This is another way of saying that the service just is not worth the cost. Some may complain that a major purpose of public transit is to help low-income citizens who are otherwise unable to get to work or make necessary trips without public transit. Once again, another section of the Blueprint addresses this need, funding a reformed public assistance effort that will make sure that all Oklahomans have the means to OKLAHOMA POLICY BLUEPRINT 2011

pay for basic necessities. But not all of Oklahoma’s spending on transit is designed to help the poor. The state also subsidizes the Heartland Flyer, an Amtrak train that runs between Oklahoma City and Ft. Worth. Despite the losses this venture imposes on Oklahoma taxpayers, some want to expand the service north to Kansas and beyond. The state should stop funding the Heartland Flyer and quit entertaining ideas of doubling down on our losses. Once again, there is nothing to prevent local communities from banding together to subsidize this service in their area or from charging fares that will cover the operating costs. However, asking all state citizens to finance a train that only a minority ride is not a good expenditure of funds. Avoid the Excesses of Federal Regulations Another strategy for keeping costs under control is to avoid federal regulation whenever possible and certainly not to introduce similar regulations at the state level. The federal government enforces the Davis-Bacon Act on federally funded construction. This effectively requires all contractors to pay union-scale wages, which are generally much higher than amounts normally paid. Again, we have to ask ourselves if our purpose is to build modern, safe roads or to create a limited number of higher-paid jobs. In addition to Davis-Bacon, the federal government requires conformity to environmental and esthetic mandates that are often more robust than is suitable for Oklahoma. A recent example suffices: As stimulus money was spent on road projects in Oklahoma, federal mandates also had to be satisfied, leading to the construction in some communities of wheelchair ramps alongside roads that had no sidewalks! We used tax dollars to build wheelchair ramps to nowhere. The state should attempt to mitigate these requirements whenever appropriate. Privatize Every Time It Makes Sense We find repeatedly that it costs government more to do things than it does the private sector, despite the fact that the private firm must make a profit in addition to covering its costs. Many of the rules that drive up costs in government are necessary to prevent fraud and unwarranted favoritism or political patronage. The simple solution is to limit the government’s activity to OKLAHOMA POLICY BLUEPRINT 2011

those areas where its involvement is absolutely necessary. In many cases, the state can better provide the funding to accomplish important goals, such as building and maintaining roads. However, the actual work of building and fixing the roads is usually best left to the private sector. The government’s roles should be to plan at the highest level, coordinate, and inspect the work done. Use Toll Bypass Funding Oklahoma has a turnpike authority and a separate network of free state roads. While recent years have seen more coordination, these still operate independently of each other. The rule has been to use tolls only to build and maintain self-funding roads. If the tolls are projected to be insufficient to meet debt service on the bonds issued for construction, the decision has been to wait until we accumulate enough money to pay for construction or finance the bonds in part with tolls from more profitable turnpikes. This approach should change. Suppose the state wants to build a road from point A to point B or perhaps from the Red River in McCurtain County to the Colorado border in Cimarron County. What are the state’s options? Despite the huge long-term economic potential of developing this route, it is a new route that will likely not generate sufficient traffic in its early years to permit the tolls to pay for the cost of construction. Even using parts of the existing system consistent with the new road standards, it might well cost $1.5 billion or more to build the new roadway and bridges required. A realistic estimate of the debt that could be serviced initially from tolls on the new route might not exceed $500 million. Does this mean that the state should wait until it has $1.5 billion in the bank to begin construction, or that it should build little segments as free road each year? A better approach would be to implement tolling on the new road and issue bonds for the amount it could support, say $500 million. We are now only using $1 billion of tax funds to build a $1.5 billion road. Of course, this would require some changes in the structure of the turnpike authority, but we should welcome those changes. A modern transportation system costs 33

money—a lot of money. We are going to have to do without or find ways to pay for that system. Many would look first to general tax revenues or increases in gasoline, diesel, and other taxes dedicated to roads. However, the approach most consistent with conservative economic principles is to let those who use the road pay to build and maintain it. Note that this is not a call for those who use any road to pay for the new road but for those who use the specific road to pay up. This proposal has the added benefit of tempering the enthusiasm of civic boosters for roads that are not economically feasible. “Economic feasibility” is a term often difficult to define, but when civic leaders realize that, while the state will help them with a new road, the community itself will eventually pay most of the cost, they will be forced to ask if the proposed road is really worth the cost. After they think about bearing the brunt of that cost, they likely will give a more realistic assessment. It Is OK if Tolls Only Pay for Part of the Cost This approach introduces the concept of using tolls to pay for only part of the cost of a new road. If applied, this concept will allow more funds to be available for maintaining other roads in better condition. A principle of road funding has been that the users should pay most of the cost. This principle is sound. However, many road users wind up paying a lot for roads they do not use. Given the nature of the transportation network, this will likely continue, but the effect is reduced significantly while needed roads can be added to the state’s system. Share Part of Toll Revenue with Bypassed Towns Many towns will voice opposition to a new modern road bypassing their business districts. By placing emphasis on privately operated convenience stores in lieu of rest areas, part of this opposition should be placated. In addition, the state may also consider sharing up to 10 percent of the tolls collected with the city governments of the towns that are bypassed. This will compensate the affected towns for any additional services the new road might oblige them to provide. The approach advanced here anticipates that tolls would only be placed on new sections of 34

road that bypass towns. In other words, a motorist who wishes to avoid any tolls may simply drive through the towns along the way as they do presently. The frugal motorist making a leisurely drive is not paying anything extra for driving most of the way on a modern road. However, the motorist to whom speed is paramount can avoid unnecessary stops and delays en route. Move to High-Speed Rail Without Creating a Boondoggle Not all the talk of new trains is centered on nostalgia or fear of airplanes. Many wonder why we cannot have high-speed trains like Japan and Europe. Unfortunately, many of those promoting high-speed rail are promoting it based on a model of government operation. This will inevitably result in poor service and taxpayer subsidies. A more enlightened approach would limit the state’s involvement to helping a private interest willing to finance and operate a project to acquire the right-of-way for construction. If an entrepreneur wants to operate a train, the state could simply use its power of eminent domain as it does for roads once the entrepreneur posts a bond to reimburse the state. We are on the verge of being able to send trains at speeds of 200 miles per hour or more over tracks from one place to another. However, few existing tracks can be modified to support this type of travel. After all, we are not talking about enabling a 40-mile-per-hour train to achieve the 70 miles per hour that many of them did a half century ago, but much higher speeds. One can make a strong case that if it is best for the state to build the roadway over which trucks operate, the state should also build the roadbed for high-speed rail. However, the fact that through taxes on fuel and various fees, trucks pay a large part of the cost of building and maintaining highways negates much of that argument. Under no circumstance should the state attempt to operate a transit system, even a modern one. If a private entrepreneur does not think he or she can profitably operate such a system, there is probably a reason. Consider Multi-Modal Developments In addition to high-speed passenger rail, the state may also consider playing a role in the OKLAHOMA POLICY BLUEPRINT 2011

development of multi-modal facilities for freight. These facilities ease the movement of freight from air to truck to road to barge, allowing shippers to take advantage of the best each mode of hauling can offer. If shippers find they can get goods in and out of Oklahoma cheaply and efficiently, they will find our state a more attractive location for their new facilities. The area near Sallisaw presents very promising elements for multi-modal development. It is near the Kerr-McClellan waterway with access to barge traffic, both the Kansas City Southern and Union Pacific railroads, and Interstate 40. Keep the Gas Tax Low Many who advocate for better roads often support raising the taxes on fuel. Oklahoma’s gas taxes are lower than its neighbors, as the chart below shows: per gal per gal STATE GAS DIESEL Oklahoma 17 ¢ 14 ¢ Arkansas 21.8 ¢ 22.8 ¢ Colorado 22 ¢ 20.5 ¢ Kansas 25 ¢ 27 ¢ Missouri 17.3 ¢ 17.3 ¢ New Mexico 18.8 ¢ 17.3 ¢ Texas 20 ¢ 20 ¢ Source: The American Petroleum Institute. The rates shown include related taxes and “fees” such as the underground storage tank tax of 1¢ in Oklahoma.

Some observers look at the numbers above and conclude the situation gives Oklahoma policy-makers room to increase our tax rates. And there is certainly latitude to do that and remain competitive with bordering states. However, things are more complicated. As proposed in this Blueprint, Oklahoma would get more of its money to build and maintain roads from tolls than most states. In terms of the cost to motorists, this would offset some of Oklahoma’s advantage on fuel taxes. However, consider the options facing a motorist traveling from Dallas to Kansas City. Driving around Oklahoma to avoid tolls is simply not practical or cost efficient. However, given that taxes on gas are considerably less in Oklahoma than in either Texas or Kansas, the knowledgeable motorist will fill his or her tank immediately after entering Oklahoma and again, just before leaving. Why? The tax on gas is simply less, and the motorist saves money. OKLAHOMA POLICY BLUEPRINT 2011

When we consider also that most stops include a purchase of gas but probably food, other refreshments, and possibly additional items—all subject to sales tax—we can see the advantage of low gas taxes. Oklahoma not only collects its tolls, which it will collect regardless of where the motorist stops, but also collects some gas tax and sales tax. Oklahoma should keep its gas tax where it is and even remove the extra tax for underground storage tanks that, like most temporary taxes that upon meeting its original purpose, did not disappear but simply morphed into another type of tax. (And liberals wonder why we do not always trust the government!) Budget Summary Oklahoma has made some progress in repairing its most embarrassing roads, but it still has more to do, and it has major corridors to develop. This Blueprint does not propose cutting transportation funding with so many evident needs. At the same time, some of the major initiatives, such as design and engineering on the new corridors, will require some lead time. Accordingly, this Blueprint recommends focusing more of existing resources on maintenance until new construction can begin efficiently. In addition, consistent with other recommendations in this Blueprint, the state should shift more responsibility and funding to counties for local roads. Much of this occurs already, but the state should perform a study to determine which roads now part of the state system would more appropriately be county roads. The state should also invest up front in research to bring technologies for ice-free roads, intelligent signage, and weigh-in-motion to reality. The state’s universities are capable of doing the research, but we need to make sure they are compensated for doing so. Some have suggested that the state sell its turnpikes. There are many advantages to this course, including bringing the resources of the private sector to bear on economic development along the route. However, with major additions planned, it may make more sense to consider such a sale after these additions are completed. This should not prevent the state from consulting with prospective purchasers to ensure that new roads are built in ways that will maximize 35

their value to an eventual bidder. This proposal also contemplates that funds currently spent on county projects, industrial access, park access, lake access, and rail passenger service would be directed to the counties for county decisions as to its disposition.

OKLAHOMA POLICY BLUEPRINT 2011

Building America’s Best Schools Choice, accountability, innovation, and the use of technology can make Oklahoma’s public schools among the best anywhere. But to achieve this we must dramatically rethink old practices.

klahomans realize the central importance of outstanding schools and better education to our future. Almost 20 years ago, Oklahomans willingly raised their own taxes to provide more funding for public schools. Since then, legislators in both parties have been careful to solicit the support of Oklahomans for their schools. The debate over SQ 744 in 2010 exemplified this ongoing concern, and brought into play two differing points of view—an old one that claims more money is the answer, and a new one that emphasizes reform. Oklahomans seem instinctively to know that outstanding schools are important to our future and our well-being. However, despite the wishes of the electorate and the consistent support of Oklahoma’s political leaders, state policy has failed to deliver the great schools that Oklahomans covet. Rather than simply tweak the policies that have not worked, this Blueprint lays out a bold promising direction to improve our schools and allow them to be the centers of learning and progress that Oklahoma needs. However, reaching this lofty goal will require that state policy-makers admit past mistakes and show a willingness to embrace new strategies more likely to get the desired results. The Money Should Follow the Child For decades, the legislature has micromanaged local schools, dictating from the Capitol teacher pay and benefit scales, hiring practices, and curriculum requirements while using a byzantine system of funding that is difficult to understand and that often thwarts desired ends. The entire top-down system of running everything from Oklahoma City should be scrapped in favor of a simple funding principle: The money should follow the child. The state should set some basic policies and require that schools receiving state aid report on their effectiveness at teaching students and that all aspects of those reports be independently audited. Parents should have much greater OKLAHOMA POLICY BLUEPRINT 2011

latitude in selecting where their children attend school, including having the option of sending their children to schools not run by the government. The venerable Thomas B. Fordham Institute published a brief essay pointing out the advantages of this approach for the state of Ohio in 2008. The points made in “Fund the Child: Bringing Equity, Autonomy, and Portability to Ohio School Finance” are largely applicable to Oklahoma’s situation. A Student-Based Funding Formula This Blueprint proposes to allocate a basic amount of money to each school district to ensure that needed reform will not lead to the closure of any existing district. In fact, the basic funding, together with other recommended reforms, will ensure that even small districts can compete with any other district. Too often the debate about school reform centers on the fact that Oklahoma has more than 500 school districts, many of them very small. This situation presents obstacles to maintaining a lean administrative structure. However, many of the small schools (not all) are much closer to the ideal of local control that conservatives covet than their behemoth brethren. The goal of this Blueprint is not to close small schools but to foster excellence in all schools and a favorable learning experience for every Oklahoma child. After funding a basic amount to secure basic operation, including the tracking and testing of participating students, the remaining money will be allocated to each student according to a formula that considers the following: • More money will be allocated to students in the upper grades, where the cost of providing competent instruction in more advanced courses is often greater and where more is often needed for supplies and other expenses. • Federal aid and the related state match for free and reduced lunches would continue. • Schools that must cover a larger area to 37

transport students to and from school would receive more money to carry out this responsibility; however, parents would be responsible for the extra cost of transporting their children to schools outside their local district. • More funding would accompany students for whom English is a second language. • More funding would accompany especially gifted and talented students with additional funding for distance from the Oklahoma School of Science and Mathematics (OSSM) although these students would not be required to attend OSSM. • Students would be independently tested for learning disabilities, and more money would accompany students with learning disabilities to schools serving them. When considering school funding, we should consider the different circumstances in which schools operate in urban areas versus rural areas. The societal problems of high crime, delinquency, poverty, and drug use seem more prevalent in our metropolitan areas although these problems are not urban phenomena exclusively. Rural schools face many of the same problems, and in some cases a rural district will match or exceed its urban counterparts in the prevalence of societal issues that impede discipline and order. At the same time, schools in rural areas may lack ready access to resources that can help them succeed. They will generally incur more travel expense to visit museums or zoos or to compete with rival schools in athletic and academic contests. They will also face more costs in transporting students to and from school for the simple reason that the students are spread over a larger area. Rural areas usually have fewer financial resources with which to fund their local schools. While having the state assume 100 percent funding as this Blueprint proposes lessens this problem, it does not address the matter of recruiting teachers when the need of a desired recruit’s spouse finding suitable professional employment becomes the central issue. When we also consider that the options to take advantage of the choice this proposal offers are likely to be greater in our metropolitan areas, it should not seem unjust that the additional funding contained in this proposal flows mostly to schools outside the metropolitan areas. 38

Under this proposal, families living in metropolitan areas get immediate benefits of being able to send their children to schools that are better or more targeted to meeting their needs. At the same time, the ability of rural schools to compete and thrive is strengthened by providing added funds. Make no mistake—a rural school that fails to meet the needs of its students will face greater pressure to improve. However, no community will face the prospect of losing their school through a program of consolidation. Parents Decide Where Their Children Learn In all cases, parents would decide where their child attends school, and the funds allocated for the education of their child would follow that child to the school the parents select. Parents would be able to choose schools not run by the government as well as government-run schools. Those schools not run by the government would be subject to the same general rules as those that are run by the government including providing publically available audited financial statements and testing results. While any schools receiving state funds must meet strong uniform requirements for evaluation and disclosure of results, they would be permitted significant discretion in establishing educational practices. For instance, schools would be given the option of supplying textbooks and other learning materials as at present, or of providing parents with vouchers with which to purchase these items—allowing students the option of selling their textbooks at the end of the year or keeping them for future reference. This option would allow a school to adopt policies consistent with those generally followed at the college level. However, a nongovernment school would need to present evidence of financial viability in order to receive state funding through the students whose parents choose that school. The State Board of Education will set the specific requirements, but those requirements will include providing an irrevocable letter of credit to ensure that the school completes operations for the academic year. While parents will have wide latitude in determining to which school to send their child, they will be encouraged to leave that child in the school they select for at least an entire OKLAHOMA POLICY BLUEPRINT 2011

semester. Students who move from school to school often significantly underperform their peers who remain in the same school. Accordingly, parents who move their child between schools more than once a semester would be assessed a fee for each move. Schools Will Be Transparently Accountable to Parents and the Public Each school that receives any state funds will publish an annual report. The report will conform to criteria set by the State Board of Education and prominently display an overall letter grade (A, B, C, D, or F) on academic progress. The report will contain a set of financial statements as well as performance data, specifically: • Comprehensive financial statements prepared according to generally accepted accounting principles (note that in school districts with multiple schools, one set of financial statements for the entire district would suffice). • Reports on results of standardized testing prescribed by the State Board of Education with every student being tested appropriately. • Reports on other indicators of educational progress as prescribed by the State Board of Education, such as the number of graduates who go to college and the number that require remediation. • Courses offered, noting those that are required for advancement and graduation. • Extracurricular activities sponsored by the school. • Policies with respect to hiring and retention and the number of hours taught by substitute teachers versus regularly assigned teachers. • General policies with respect to homework, textbooks and other learning materials, attendance, discipline, dress, and significant exceptions to those policies that occurred during the year. • An auditor’s report on the effectiveness of controls in place to guarantee the consistent application of the school’s policies. While students may be appropriately grouped for evaluation purposes, every child will be tested appropriately. The State Board of Education will establish a rigorous system of reporting by schools, with both public and private schools reporting on the same basis so parents can make informed decisions about OKLAHOMA POLICY BLUEPRINT 2011

where their children should attend school. The State Will Assume 100 Percent of School Funding A major change proposed in this Blueprint is for the state to assume 100 percent funding of basic education, freeing local property taxes for other purposes as discussed in other chapters. This Blueprint greatly expands the role of local decision making, repeatedly taking power from Oklahoma City and placing it in the hands of people nearest to the actual needs that state programs are meant to address. Needs differ from locality to locality and from family to family. State programs, including those for education, should have the flexibility to address those differences effectively. Nothing can be more local than allowing parents to determine what kind of school their child will attend. This also has the advantage of ensuring that equal funding will accompany similarly situated students. While Oklahoma has been successful thus far in defending itself against assertions of unlawful inequality in the level of funding between students, the policies outlined in this Blueprint should remove any concern about the state’s exposure. Failing Common Education Programs Terminated and Others Localized Most existing statewide programs would be terminated. Current programs for adult and alternative education will be retained, and the state will honor its commitment to those teachers who have already obtained National Board Certification, but no additional teachers may become certified with state support. Most other major statewide initiatives should be discarded, including the state’s failed program for early childhood education and special remediation. Other programs, such as staff development, will become the responsibility of local schools that will be free to tout their own approaches to improving the quality of instruction. Most of the responsibilities of the Commission for Teacher Preparation would devolve to the local level that would oversee the professional development of its instructors. Responsibility for accreditation and tracking of suspensions for substandard teachers would transfer to the Department of Education. The Commission for Teacher Preparation would cease to exist. 39

CareerTech Oklahoma’s Career and Technology Education system plays an important role in providing direct instruction to many Oklahoma high school students. Over 95 percent of Oklahoma students participating in the program go on to obtain high school diplomas. Oklahoma schools would be able to contract with CareerTech to continue the classes they offer currently. However, the funding for these classes would be run through the student first, then through the school the parents select, and then to the CareerTech. Of course, other providers would also be able to offer similar classes to Oklahoma schools. Oklahoma School of Science and Mathematics The Oklahoma School of Science and Mathematics (OSSM) would remain open as a private nonprofit school. It would be able to attract especially gifted and talented students with a higher weight attached to them. The weight for especially gifted and talented students would apply to the top 1 percent of students in each junior and senior class with at least one student per class from each district. In addition, the especially gifted and talented students located the farthest distance from the school would receive special funding to offset at least some of the additional cost of travel involved. However, the additional weight would be attached to the qualifying students irrespective of the school their parents select. No student would be required to attend OSSM. In addition to receiving the regular basic amount for a school district, OSSM would get a double amount to encourage its continued role in providing math and science teaching for other schools. OSSM would be able to contract with any school to provide instruction via OneNet’s distance-learning capabilities. New Initiatives Implemented In place of the existing programs, the state would initiate or expand the following: • Students who complete an Advanced Placement examination with a score of 3 or better would receive a check for $200 to use for any purpose they desire. An additional $50 would be paid to any student scoring 4 or higher. Some may complain that the money should 40

only be allowed to be used for college tuition, but students who successfully complete AP tests usually find college scholarship offers coming their way. • The state will promote a series of competitive science and engineering fairs with cash prizes awarded to the winners. At present, too few students take the courses necessary to pursue engineering careers with detrimental impacts on both the students and their prospective employers. The state will sponsor a series of five fairs annually, one for residents of each congressional district. Students will compete in teams of three or more with a project in one of eight different disciplines: — Biology — Chemistry — Physics — Geology — Electrical engineering — Mechanical engineering — Civil engineering — Aeronautical engineering Prizes of $6,000 or more would be paid to 15 winning teams in each category in each district. (Members of a winning team would divide any prize won among them.) Assuming three members of each team, this would allow at least 1,800 successful entrants to win prizes each year. A modest prize would also be paid to the sponsor-teacher of the winners. Contestants would be allowed to spend classroom time on projects to the same extent currently permitted for competitive athletics. Some reimbursement for travel expenses will be made for teams that travel over 50 miles to attend a fair. This will be especially important for those fairs held at sites other than Oklahoma City or Tulsa. Each subject at each fair will be judged by a paid team of independent professionals active in the appropriate professional association. These fairs will not only promote science and engineering as academic and career paths for students but also spotlight Oklahoma’s commitment to excellence in this important field to companies with interests in these fields. • The state will also promote other appropriate academic contests and award cash prizes to the winners although they may be more modest in scope. Fields for competition might OKLAHOMA POLICY BLUEPRINT 2011

include: — Debate and public speaking — Vocal and instrumental music — Vocational arts such as woodworking, metalworking, and graphic art. • While the support of a close-knit community often provides a positive support mechanism for a smaller school, a small school faces a daunting task in developing the critical mass necessary to support more specialized courses such as in advanced literature or science. However, the state’s OneNet system gives small rural schools the opportunity to offer almost any class to its pupils through distance learning. Courses in calculus, physics, economics, and almost any foreign language are within the reach of any school. While many courses are already offered in this manner, too few rural schools take advantage of the opportunity. A reason sometimes cited by local administrators is their inability to obtain equal exchange agreements whereby they export a class for each class they import. This should be the last priority of an administrator, and the competition encouraged by the new policies set out in this Blueprint should change the focus to where it belongs: what helps students learn. Interactive learning with the suitable participation of classes in other states and countries is possible and should be encouraged. Intel Corporation, a maker of much of the equipment used in distance-learning systems, has run televised ads showing a virtual field trip to China as a routine staple of the classroom. Any Oklahoma school can offer such a classroom experience now. More should do so. A part of the state’s effort funded in this Blueprint would be to find potential school partners in other countries with the right fit for Oklahoma classrooms. Oklahoma might also benefit from a closer examination of Florida’s efforts in this area. • As noted above, the state will eliminate its existing early childhood education initiative because it simply has not worked, or, to the extent that it has, it has done so at the expense of initiatives with more powerful influence for favorable results. However, the problem may not be with the theory itself, but with how the theory is applied. Therefore, the state will provide a limited number of demonOKLAHOMA POLICY BLUEPRINT 2011

stration grants to develop new approaches to early childhood education, realizing that the best approach may not even involve a school or a classroom, but training for parents such as that offered through an expanded Children First initiative—through which services are provided not by certified teachers or social workers but by uniformed nurses. • Oklahoma has had one of the nation’s best capabilities of offering outstanding instruction to distant classrooms via OneNet. The ability of rural schools to offer upper-level courses is important not only to the future of students but to the prospects of the community in attracting new businesses and residences. Rural schools will have the opportunity to offer classes provided through the Oklahoma School of Science and Mathematics and other providers with whom individual schools would be able to contract. Oklahoma schools would be able to contract with providers to offer courses in science, math, foreign languages, and other subjects through distance learning. Additional funding is provided to allow for additional upgrades to the OneNet network. Oklahoma might also benefit from a closer examination of Florida’s progress with online learning. Florida’s Department of Education maintains a clearinghouse for virtual learning materials and invites content providers to participate. Courses are graded for effectiveness to help schools and parents make good selections. Homeschoolers also take advantage of the Florida program and often incorporate virtual classes into their schedules. • Capital expenditures would be funded through the regular process by each district. Repayment of all current bond issues would remain in place, but over time new facilities would be financed by debt that is serviced from routine cash flow. An additional $50 million is added to the per-pupil payment initially, and this amount would need to be regularly increased in coming years. However, funds would no longer be earmarked for capital expenditures as at present. New Workforce Development Policies for Educators Conservatives have repeatedly called attention to the woefully underfunded status of the 41

state’s Teachers’ Retirement System with proper alarm. However, what is often missed in this debate is that we do not always do a good job of providing a compensation package that gives Oklahoma the best chance of hiring and retaining the best teachers. Once again, local flexibility to address local needs will help in this regard. Under the policies advanced in this Blueprint, most personnel and compensation issues become issues for the local school boards. However, the state will provide access to a retirement system and to health benefits that are outlined in another chapter. Considerations for Homeschoolers Many Oklahoma families successfully homeschool their children. The limited regulation Oklahoma places on homeschooling families is often cited as a reason for its success. The Blueprint maintains the ability of homeschooling families to continue their highly effective practices and specifically rejects any efforts at imposing stifling regulation. However, homeschoolers would be welcomed to participate in any academic contests the state promotes and could be paid for passing any Advanced Placement examination, just as would students who attend a government-run school. Repeal the Blaine Amendment Oklahoma’s state constitution has a so-called Blaine Amendment that prohibits any state funds from flowing to sectarian institutions. Unfortunately, churches operate many of Oklahoma’s best schools. Legal experts disagree about the degree to which Oklahoma’s Blaine Amendment could withstand a challenge as contrary to the U.S. Constitution; however, it could be an impediment to allowing many Oklahoma students to attend what for them would be the best educational option. The Blaine Amendment has a racist and bigoted history. In the early 20th century, the Ku Klux Klan and many of their allies sought to restrict the freedom and progress not only of black citizens but also of Catholics. At the time, the vast majority of the country was Protestant, and Ku Klux Klan sympathizers had little trouble working their versions of religion into the curriculum. Oklahoma was one of several states to enact a Blaine Amendment that restricts any 42

public money from flowing to religiously affiliated schools. Oklahoma should repeal its Blaine Amendment. Alternative Approaches Many of the proposals put forth in this chapter represent a radical departure from existing practice. Major reforms such as this are often difficult to enact. Therefore, this Blueprint also contains some alternative proposals that stop short of the complete overhaul suggested above. These proposals include the following. Tax Credit Scholarships Tax credit scholarships work in the following fashion: Companies or individuals can donate to a scholarship-granting organization of their choice up to a certain amount, often several thousand dollars for individuals and even $100,000 for a company. A scholarship-granting organization is a 501(c)(3) organization that is subject to audit by the state, and almost all the money received must be spent on the scholarships. The donating company or individual receives a tax credit for state taxes owed that year. The scholarship-granting organization then selects children to receive scholarships to attend a nonpublic school. Most states using this system impose a dollar limit on the amount of the tax credits that can be granted each year. However, in most states, this limit has started small but has grown due to the great demand and success of the program. Under legislation that has been proposed in Oklahoma, any child may qualify for a scholarship if the family income is less than 300 percent of the eligibility requirement for the free- and reduced-lunch program. A child’s family may then use the scholarship to attend the school of their choice. However, any school receiving a scholarship student must be accredited and must publish their students’ test scores. The tax credit scholarship program offers many advantages. First and most importantly, the experience throughout the country with tax credit scholarships is that great scholarship schools are formed to meet the demand, and parents and the private community are highly involved in creating innovative schools. In Pennsylvania, 200 scholarship-granting organizations have been formed by a wide range of business and community groups, and OKLAHOMA POLICY BLUEPRINT 2011

many schools with kids from the most disadvantaged homes are experiencing small dropout rates, high test scores, and virtually 100 percent college placement—all at about half the cost per pupil of the local public school. States like Florida, which has a robust tax credit scholarship program, have experienced huge gains in the quality of private and public education. The improvement in the quality of education from these programs has been especially dramatic for minorities and kids from disadvantaged backgrounds. Second, state and local school districts save money, and in a time of tight budgets, this can be especially important. The state only loses a portion of the potential state income tax revenue from a tax credit plus the state charitable income tax deduction. Also, the scholarship is only a portion of what is the per-pupil cost in the public school system. The savings are significant. Some may argue that fewer students in the public schools will increase some fixed costs per pupil. However, any added costs are dwarfed by reduced personnel costs from having fewer children to educate. Of course, in addition to the state tax credit and charitable deduction credit, the donor gets a significant federal tax break so that we are using additional federal dollars to improve the education of our children. Amendments to the Lindsey Nicole Henry Scholarship for Students with Disabilities Act Lindsey’s Law, enacted in 2010, was a great step forward for Oklahoma students with disabilities and their parents. The bill provides an educational scholarship for a student with disabilities for up to 95 percent of the public school cost of educating that student, to be used at any accredited school chosen by the child’s parents. The program is to be implemented by the school district where the child resides with the school district retaining 5 percent for administrative costs. Since this law was enacted, a number of school districts have refused to follow the law and provide the necessary cost information to the parents on a timely basis. Others have given inaccurate information to parents about the law to discourage the parents’ participation. The legislative remedies to this situation could include the state taking the administration of the program out of the school districts’ control, eliminating the 5 percent administrative OKLAHOMA POLICY BLUEPRINT 2011

fee, and setting up an Office of School Choice, possibly in the state superintendent’s office, to directly fund and administer the program. A second remedy would be to establish an educational ombudsman to help advise parents on this and other education choices. Such an ombudsman would be especially helpful if the tax credit scholarship bill discussed above is enacted. The educational ombudsman would be similar to the ombudsman at Oklahoma’s Department of Human Services, who advises loved ones on nursing homes. Other solutions are discussed below in the section on education lawsuit reform. Charter Schools Many of Oklahoma’s charter schools have done a remarkable job of educating some of the most disadvantaged students, proving that great success is possible for all kids. In Oklahoma City alone, the KIPP School is one charter school in which the students have excelled, and Harding Charter Preparatory High School has been recognized as one of the best schools in the nation. Oklahoma must improve its charter school laws for our charter schools to reach their full potential. The states most successful in generating educational progress have greatly enlarged their charter school program. In 2010, the Oklahoma Legislature expanded the number of organizations that could sponsor charter schools. In other states, the state superintendent, municipalities, counties, and other entities can sponsor a charter school. Oklahoma should follow their lead. Another problem facing our charter schools is that most of them receive their funding through their local school district, are subject to the school district’s calculation of that funding, and get no funding for their buildings and infrastructure. Thus, we have a number of high-performing schools operating at lower cost in decaying facilities than the local public schools while nearby we have low-performing, high-cost schools sometimes housed in beautiful facilities. Language exists in the current statutes that prevents charter schools from issuing bonds. That language should be eliminated. Our charter schools should be less dependent on the local school districts with which they are in competition. One way to solve some of these 43

problems is to allow the state superintendent, through the newly created Office of School Choice, to fund charter schools directly and move toward funding parity between charter and other public schools. Another troublesome issue involves emergency transfers. A recent court ruling threw into question a charter school’s ability to accept emergency transfers (the ability to transfer throughout the school year) from other districts of residence. The charter school act clearly provides for the ability of charter schools to accept students through the open transfer process (limited to a window in time within the school year), and the act needs to be amended to also clearly include the ability to accept emergency transfers. One of the major reforms adopted in Florida was the simple idea of the state giving school and district report cards, graded A through F based on student performance on nationally recognized tests.

want to expend the tremendous resources needed to defend these lawsuits. Given these obstacles, it is clear why virtually no teachers are ever fired for low performance in Oklahoma. No matter how much money Oklahoma spends on education and no matter how good the school board and school administration are, without fundamental reform of tenure, nothing is likely to improve. Any good administration must have the ability to replace low performers with higher performers. Our children require no less. Three reforms in this area could make a huge difference. The first would be to abolish tenure for K–12 teachers. Second, we need to end de novo review of teacher terminations. Third, we can level the legal playing field by authorizing and funding the attorney general to represent school districts that have terminated teachers. Of course, the attorney general would also act as an automatic reviewer of school board terminations and could move to settle quickly any terminations he or she deems improper.

Ban Social Promotion A major reform that has worked in Florida is ending the social promotion of children failing to demonstrate basic literacy skills by the end of the third grade. After the third grade, a child should be moving from primarily “learning to read” to “reading to learn.” A young student must be able to read in order to make further progress. A student without basic literacy skills will fall further and further behind with tragic consequences. Florida requires that students without basic literacy skills repeat the third grade with additional mentoring and assistance.

Enact Education Lawsuit Reform A legal problem in addition to the high cost and perverse effects of litigation surrounding the firing of low-performing teachers is the high cost and secretive nature of large legal fees incurred by school districts suing or being sued by others, including the state itself from which the school districts receive most of their funding. School districts have spent significant taxpayer dollars fighting the charter school law in the courts, and a number have threatened to sue the state challenging other educational reforms. This lawsuit abuse must stop. We should put an end to the practice of one state entity suing another with the taxpayers paying for both sides. A school district should be required to seek an attorney general’s opinion before suing the state or paying attorneys to defend suits. There may be a tremendous cost savings in having the attorney general represent school boards in all suits. A related issue is that some school districts have refused to publicly disclose the amount they or their insurance carriers spend on litigation. Since the taxpayers are paying for these legal expenses directly or indirectly through increased insurance premiums, these expenditures should be transparently disclosed to the public.

Reform Tenure A major problem in Oklahoma’s educational system is that a public school teacher receives automatic tenure after three years. Tenure is even more troublesome in Oklahoma when coupled with the Oklahoma law ensuring that every teacher who is terminated can receive a trial de novo, which means that the courts cannot simply review the administrative record but must have a full trial with all new evidence to determine whether the firing was justified. Additionally, the teachers’ union (OEA) has a hefty fund it can access to represent terminated teachers. Many school districts do not have or do not 44

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Building America’s Best Colleges We can dramatically improve the quality of higher education in Oklahoma while reducing its cost. Policy-makers should place the emphasis on students—not institutions —by implementing a comprehensive, student-centered funding mechanism. This will serve to make the state’s public colleges and universities more responsive to the needs of students and the economy.

or conservatives, no area of public policy at the state level presents greater conflicts than higher education. Conservatives naturally align themselves with those seeking to contain costs and generally eschew government intervention in people’s lives. However, conservatives also yearn deeply for a better life for themselves and for those they love, and the prospect of a college education and improving one’s lot are often inextricably linked. The fact that conservatives abhor public funding of mediocrity and desire excellence when state intervention is deemed necessary also creates tension when some college faculty members use their positions to promote ideologies offensive to Oklahoma values. The Left wants to regulate our lives and get us to pay them for doing so. Some left-leaning professors see a college classroom as an opportunity to condition their would-be subjects. However, this section is prepared with the confidence that conservative, free-market ideas will invariably prevail over regimented collectivism. The value of learning a new skill or getting more insight into history and society will win out over the propagandist. This chapter does attempt to place higher education in an environment where it can thrive and self-correct its deficiencies. In this chapter, this Blueprint outlines a plan to allow any willing student to obtain the resources needed to attend college. Details are provided simply to show how such an approach might work in practice without implying that after debate other formulations might not prove to be more appropriate. Excellence in Higher Education: Critical for Sustained Economic Development There is a direct correlation between robust economic growth and the nearby availability of great colleges. It would appear that Silicon Valley in California and Route 128 in Massachu-

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setts, the world’s premier concentrations of hightech growth companies, are located where they are because of the proximity to great research universities: Silicon Valley to Stanford and Route 128 to MIT. Other factors are doubtless important in the economic development of these two regions, but almost every observer notes the close relationship between these great universities and the culture of innovation and entrepreneurship. It appears that if Oklahoma wants to embark on above-average economic growth, it must develop great universities. Toward that end, some have advocated increased funding for the University of Oklahoma and Oklahoma State University. However, most of the nation’s best universities are private, not state-run. In the most recent listing of the nation’s outstanding institutions of higher education published by U.S. News & World Report, one must read past 21 private colleges and universities before coming to the University of California at Berkeley at #22. Perhaps policy-makers should rethink any notions that increasing funding of public universities automatically leads to economic growth. It seems that encouraging the development of private colleges might be a better strategy. Might it also be possible to make progress by encouraging Oklahoma’s public universities to act more like their private counterparts? This Blueprint changes the budget priorities so that the state can encourage more development of Oklahoma’s private colleges. It also seeks to induce the state’s public colleges to be much more responsive to the needs of students and the economy. How Much Should We Spend to Help Wealthy People Elsewhere? Only about one-fourth of Oklahomans hold college degrees. Many of those without degrees would doubtless like to have them and are 45

making sacrifices so that their own children can be college-educated. However, consider the irony of working Oklahomans paying taxes to subsidize the college education of others. Most will probably not object too strenuously to this as society benefits from having capable doctors, engineers, scientists, etc. in the community. However, how does the working Oklahoman gain from paying taxes to subsidize the college education of others when those others take their degrees and put their skills to work in another state? Do We Provide More Training When We Should Just Pay Better Salaries? We commonly face shortages of workers critical to the functioning of our society and the growth of our economy. We often confront these shortages with plans to create or expand degree-granting capability in the relevant areas. However, we should never look to training more graduates alone as a solution. Often, the best solution simply lies in paying more money for the skills needed. If Oklahoma increases its training capabilities but not its pay grades, it may soon find it taxing itself to train critical workers who tend to migrate to higher-paying jobs in other states. For many years, Oklahoma trained more teachers in its colleges than it could realistically use. Many migrated to Texas, which trained fewer teachers relative to the number of pupils to be taught but paid higher teacher salaries. This imbalance has been corrected to some degree, but we should be wary of attempting to solve manpower shortages through more training alone. A Student-Centered Strategy to Address Oklahoma’s Higher Education Needs This Blueprint advances a strategy to dramatically improve the quality of Oklahoma higher education while reducing its cost. States have traditionally provided higher education opportunities for their residents by operating colleges that those residents can attend. The state then subsidizes the operating cost of the colleges to make them more affordable to the average family. However, regulation often accompanies the subsidy. While some regulations may be helpful, many are not—diverting resources to programs 46

of lower value to students but high value to influential interest groups. As a result, quality suffers while costs increase. An alternative to providing higher education through state-operated colleges or direct appropriations to colleges is to provide stipends to students to defray at least part of the cost of college. The principle behind such stipends is largely illustrated by the G.I. Bill, Pell Grants, and even the Oklahoma’s Promise program. One state, Colorado, started to move significantly in this direction, but funding shortfalls and the refusal of policymakers to allow state colleges greater flexibility severely restricted the program’s achievements. Moreover, the G.I. Bill is restricted to those serving in the military, and Pell Grants and Oklahoma’s Promise are means-tested approaches. No state has yet implemented a comprehensive student-centered funding mechanism. Oklahoma should be first. Even better than making grants to students would be helping families save for college. A student who failed to save would still be able to attend but would incur significant debt in doing so. This is not altogether bad, as it does have the advantage of encouraging the student to make wise choices with respect to choosing a degree program. Some have postulated that making public higher education more responsive to students will automatically reduce costs. While funding higher education through the student would provide a strong incentive for colleges to deliver services efficiently, the final result is likely to be far from a race to become the low-cost provider. The change recommended here will also launch a race to become the high-quality provider. A college education is an investment. A student not only spends money but takes several years out of his or her life to get a college degree. The statistics commonly trotted out to show the overwhelming value of a college degree are often seriously oversimplified. Yet they do illuminate an important truth: A good college education can help someone earn a lot more money than would be possible otherwise. A more competitive market in higher education will not only foster competition in price, but also in quality. After all, it would clearly be worth spending an extra $50,000 on a college education if the graduate could increase his or OKLAHOMA POLICY BLUEPRINT 2011

her earning power by $50,000 a year. A quality college education can do just that for some students and should be, on net, an economic plus for the great majority of students. While with competition we should see the costs of many programs decline, we should also see the quality of many programs improve, often dramatically. Students and employers will be more than willing to pay for programs that add value to the work skills of participating students. We should also hope that more programs at both the stateâ&#x20AC;&#x2122;s comprehensive universities achieve world-class status. A nucleus of outstanding graduates can have a multiplier effect, attracting businesses that want to exploit this resource or investors who want to exploit the investment opportunities created by the graduates who become entrepreneurs. Either way, the stateâ&#x20AC;&#x2122;s residents, even those who do not go to college, are winners as businesses employ many people in addition to those with the highest level of skills. The key to these improvements is to apply American principles to higher education governance. Rather than applying rigid, top-down European-style approaches, the approach advanced in this Blueprint will see much better results from decentralized decision making. Few decisions would remain with the regents, a group that will often become irrelevant to most of the daily operations of state colleges. Most decisions would be pushed down to the colleges, which would become largely autonomous. In addition, the state would provide only limited funding directly to the state colleges. Most funding will be provided to students, allowing them to attend the college they think best meets their needs, even if it is a private college or even if it is located in another state. After all, is our goal to provide the best education possible to our citizens or to provide a taxpayer-funded public payroll? Even much of the funding that would be directly provided to the institutions through the approach advanced in this Blueprint would be dependent upon a private-sector match. This match will effectively provide the state with a lot of help in ensuring that state colleges are doing what they should. To be clear, in many cases this will lead to higher tuition. But, if the state is now funding the student, the student will usually be able to pay OKLAHOMA POLICY BLUEPRINT 2011

the higher tuition and still come out ahead. In some cases, the student will come out ahead because the increase in tuition will be less than the amount of the grant. In other cases, the increase in tuition may exceed the amount of the grant, but the higher quality of the college education will more than recoup the added cost. Either way, the student wins. However, there will be a transition period during which the colleges will be increasing tuition but for which students and their families will not yet have built up the resources necessary to easily afford that tuition. The simple way to solve this problem is to provide each Oklahoman attending college with a grant to cover the cost. The amount of the grant would decline each year as the student and his or her family will have had more time to accumulate the necessary resources for tuition and other college costs. The state could borrow money (perhaps $1.5 billion over five or six years) and begin fully funding student grants immediately. However, many will recoil at the prospect of adding to the stateâ&#x20AC;&#x2122;s debt no matter how promising the result, especially in light of the unfunded pension liabilities the state is facing. To avoid more debt, the state could direct more funds to students currently attending college and phase in assistance for those saving for college in the future. Regardless of the approach taken, Oklahoma students should find their colleges more responsive to their needs and more eager to add value to their college experience. A college or university that offers a degree of dubious utility may find it difficult to attract the students it needs to thrive. Conversely, those colleges whose graduates are in demand by employers should find the prospect challenging but attractive. Predictable Funding for Endowed Chairs and Professorships Oklahoma has sponsored a highly successful program to increase the number of endowed chairs at state colleges and universities. The state has promised to match any gift of $250,000 or more toward an endowed faculty chair. The chairs are often used to pay additional expenses, especially for research by key faculty. When a college is able to offer an endowed chair to a prospective faculty member, it immediately makes itself more attractive. This allows 47

a college with endowed positions to retain its outstanding faculty members in the face of competing offers as well as recruit new professors to whom it might not otherwise be compellingly attractive. While the University of Oklahoma, and especially the OU Health Sciences Center, has been the biggest beneficiary of Oklahoma’s endowed chair program, many others have also benefitted. In fact, the program has been so successful beyond initial expectations that the legislature has invariably fallen behind in funding, resulting in the regents taking money from other programs to pay what would have been the state’s share of earnings on the invested endowment. The state eventually issued bonds to bring the program current but has still had difficulty meeting its obligations promptly. As a result, some college presidents have been less enthusiastic in raising new money to support their endowed chairs. However, the program provides significant benefits for the state. First, it helps Oklahoma colleges maintain and upgrade the quality of their faculties. It also helps strengthen ties between Oklahoma institutions of higher education and the public and makes them more accountable to the public. A prospective donor is unlikely to make a major gift if the donor is not satisfied that the college will put his or her gift to good use. The endowed chair program also provides an excellent avenue for businesses to make tangible investments in excellent researchers with whom they can consult when needed. A business that knows that a valued expert consultant is always within easy reach in Oklahoma is more likely to remain and expand here. To address recent budget stresses, the legislature and governor dialed back on the endowed chair program, reducing the match rate for private gifts—especially for larger gifts— capping the state’s commitment at $5 million annually. While the reaction to the downturn in available revenues was understandable, focusing reductions on a successful program that emphasizes excellence is not a longer-term solution. Accordingly, the Blueprint includes some provisions to strengthen the endowed chair program. Under the proposed budget, state funds would be spent as follows: • Up to $250,000 reserved for matching by each 48

regional college or university. • An additional $2.25 million reserved for matching at any regional college or university that has already used its initial $250,000 allotment—these funds to be allocated on a first-come, first-served basis. • Any funds reserved for a regional college or university but not matched during the year would be added to the $2.25 million and allocated among the regional colleges and universities on a first-come, first-served basis. Any amounts remaining unmatched by any regional college or university would be added to the amounts available at the University of Oklahoma and Oklahoma State University. • Matching gifts for the comprehensive universities would have to be at least $500,000 each to qualify for a match. • Up to $10 million reserved for matches at the University of Oklahoma. • Up to $10 million reserved for matches at Oklahoma State University. • Up to an additional $10 million reserved to match individual gifts of more than $500,000 for a single endowed chair on a first-come, first-served basis • The regents would clarify rules for determining which matches qualify and in what order within these guidelines. The approach outlined above encourages every four-year college or university to attempt to attract matching funds and provides the certainty of available state funds if it does so. This approach also allows time for colleges and individual groups to organize and conduct fundraising campaigns to fund endowed chairs and professorships, but would require those to be successful in order to get a state match. In addition, the state would issue bonds to immediately fund the remaining backlog of previously made gifts for endowed chairs and professorships. However, no new funding is provided for new lectureships or matches for other gifts of less than $250,000. New Funding for Scholarships Oklahoma might also find success in a similar approach to funding more scholarship endowments. When a private individual or business provides money to fund a scholarship, it usually indicates informed confidence on the part of the donor in the college or university. OKLAHOMA POLICY BLUEPRINT 2011

Accountability from the higher education community to the public is strengthened as a result. This Blueprint recommends a 25 percent state match for private gifts to scholarship endowments at public colleges and universities. In addition, the state would provide a match for gifts to scholarship endowments where scholarships are granted exclusively to Oklahoma residents and the endowment is managed by a municipality, professional association, chamber of commerce, or other nonprofit organization. At present, many civic clubs and other groups sponsor scholarship programs. These are excellent vehicles for encouraging college studies with built-in oversight by outside groups. This provision would encourage the expansion of existing programs and the creation of new programs. In addition, the state would provide a 10 percent match to scholarships for tuition provided to Oklahoma residents by Oklahoma corporations. Scholarships that require up to three years of service to the employer upon completion of the education would be eligible for the match. In addition to providing more funds for college education, this provision would encourage better cooperation between Oklahoma employers and Oklahoma colleges. Emphasizing Students Over Institutions in Funding As in so many areas of government, the state decides that it wants to promote higher education and then does so by establishing and funding institutions of higher education and charging them to go forth and educate. This model makes the top administrators very sensitive to the needs and wants of the political leaders responsible for much of their institution’s funding. The leadership should be responsive to the needs of their students first. Many already are, but even then, the political/funding machinations can distract even the most dedicated administrator from his or her primary focus. If the state provided funding through the students, it would force all leaders to pay primary attention to the needs of their students. Accordingly, this Blueprint advances a very basic change in the way Oklahoma higher education is funded. Instead of the state debating over and allocating its funding to those OKLAHOMA POLICY BLUEPRINT 2011

institutions best able to compete for it politically, it would channel most state funds directly to students to direct where the students and their families think best. The colleges would continue to enjoy state support, but instead of getting it via the political system of legislative appropriations, the colleges would get funding from the students they serve. This approach provides funding for education not only at state-run institutions but also at private ones. Our goal is not to run colleges but to educate students. To the extent that private colleges can accomplish that mission more effectively, we should help them. This Blueprint advances routing most state funding to students, letting them decide where the money eventually winds up by simply enrolling in classes. However, a basic amount of funding is still provided to state institutions. This basic funding ensures at a minimum that college level education will be available in the geographic area where the college is located. This Blueprint calls for allocating $96 million directly to the institutions as follows: • $25 million to each comprehensive university (University of Oklahoma and Oklahoma State University), giving each system the latitude to allocate those funds among its various divisions as it deems most appropriate. • $2.5 million to every other public four-year college or university. • $1.0 million to each community college. • $2.5 million each in additional funding to two schools with very special situations: Oklahoma Panhandle State University and Langston University. Panhandle does not have access to a sizable recruiting area because of its geographic location. This allocation would allow the state to maintain an institution of higher learning in that area if it is deemed necessary. Langston is Oklahoma’s traditionally African-American college. Some strong cases can be put forward for other allocations. For instance, the University of Central Oklahoma offers several advanced degree programs and in some cases competes with the University of Oklahoma and Oklahoma State University. Nothing in this Blueprint would prevent it from continuing to do so. However, Oklahoma is a relatively small 49

state limited in the extent to which it can wisely spread its resources. It needs to devote its resources to areas where the state can pursue real excellence. To expect the state to adequately support more than two comprehensive universities at this time is not realistic. Help for Students and Their Families in Saving for College Rather than provide the bulk of funding to the institutions, this Blueprint recommends funds to help Oklahoma residents save for college. The Internal Revenue Code provides for tax advantages of state-sponsored 529 plans. Under 529 plans, families invest money for future college expenses. Families can also invest the money in a 529 plan in order to reap interest and possibly investment earnings. A student can attend any accredited college to which he or she can gain admission. While the investments into the plan are not tax deductible at the federal level, all earnings are tax free, and Oklahoma provides an income tax deduction for the investments, as do most states. However, Oklahoma’s 529 plan is not rated highly by investment experts. The plan’s fees are above average for this type of plan, and the state limits the investment options open to savers. As a result, many families find other options more attractive ways to save for college despite the tax advantages offered. The state has taken positive steps to address these shortcomings, but the Blueprint revises the 529 plans further to make them more effective means of financing. Under the enhanced plan advanced in this Blueprint, each Oklahoma family wanting to participate would be responsible for an expected contribution to a 529 plan or plans for family members. The simple rationale here is that before a family gets help from the state, it should be making a reasonable effort of its own. The expected contribution for the year would be $10 plus 1.5% of the family income plus an additional 15% of the family income in excess of 200% of federal poverty level. (I.e., 16.5% of income above the 200% FPL.) The proposal for college savings would mesh with the proposal for public assistance also presented in this Blueprint and the same definitions of income would be used in both situations. The expected contribution is based solely on the family’s income and does not change with 50

the number of children in the family (i.e., a family with three children would be required to contribute only $10 per child more than a family with only one child). Of course, a family with more than one child would be able to apportion its contributions among the children as it considers appropriate. For a family that makes the expected contribution but the amount is less than $3,600, the state would make up 80 percent of the shortfall, provided that the student for whom the contribution is made meets the same requirements as currently under the Oklahoma’s Promise program. For a family of four, 200 percent of the federal poverty level is $44,050 per year. The tables that follow provide examples for families of different sizes and income levels. The tables show the expected contribution of the family, the potential contribution from the state if the family makes the expected contribution, and the extent of help in paying in-state tuition offered under the current Oklahoma’s Promise program. POTENTIAL STATE CONTRIBUTION TO FAMILY COLLEGE SAVINGS Family makeup: One adult and one child 200% of FPL for family: $29,146 Income

Family contribution

State contribution

Oklahoma’s Promise

$ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000 $ 40,000 $ 50,000 $ 60,000 $ 75,000 $ 100,000 $ 150,000

$ $ $ $ $ $ $ $ $ $ $

full full full full full full full none none none none

235 310 385 588 1,413 2,238 3,888 5,538 8,013 12,138 20,388

2,692 2,632 2,572 2,410 1,750 1,090 — — — — —

Family makeup: One adult and two children 200% of FPL for family: $36,820 Income

Family contribution

State contribution

Oklahoma’s Promise

$ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000 $ 40,000 $ 50,000 $ 60,000 $ 75,000 $ 100,000 $ 150,000

$ $ $ $ $ $ $ $ $ $ $

full full full full full full full none none none none

245 320 395 470 545 1,097 2,747 4,397 6,872 10,997 19,247

5,564 5,504 5,444 5,384 5,324 4,882 3,562 2,242 262 — —

OKLAHOMA POLICY BLUEPRINT 2011

Family makeup: Two adults and two children 200% of FPL for family: $44,100 Income

Family contribution

State contribution

Oklahoma’s Promise

$ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000 $ 40,000 $ 50,000 $ 60,000 $ 75,000 $ 100,000 $ 150,000

$ $ $ $ $ $ $ $ $ $ $

full full full full full full full none none none none

245 320 395 470 545 620 1,655 3,305 5,780 9,905 18,155

5,564 5,504 5,444 5,384 5,324 5,264 4,436 3,116 1,136 — —

Family makeup: Two adults and four children 200% of FPL for family: $59,060 Income

Family contribution

State contribution

Oklahoma’s Promise

$ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000 $ 40,000 $ 50,000 $ 60,000 $ 75,000 $ 100,000 $ 150,000

$ $ $ $ $ $ $ $ $ $ $

full full full full full full full none none none none

265 340 415 490 565 640 790 1,081 3,556 7,681 15,931

11,308 11,248 11,188 11,128 11,068 11,008 10,888 10,655 8,675 5,375 —

Family makeup: Two adults and six children 200% of FPL for family: $74,020 Income

Family contribution

State contribution

Oklahoma’s Promise

$ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000 $ 40,000 $ 50,000 $ 60,000 $ 75,000 $ 100,000 $ 150,000 $ 154,190

$ $ $ $ $ $ $ $ $ $ $ $

full full full full full full full none none none none none

285 360 435 510 585 660 810 960 1,332 5,457 13,707 14,398

11,292 11,232 11,172 11,112 11,052 10,992 10,872 10,752 10,454 7,154 554 1

This means that some of those who would now fully qualify for the Oklahoma’s Promise scholarship would be required to make some contribution toward their expected college expenses. At the same time, many more who are currently excluded completely from the program because they make over the threshold of $50,000 per year would receive some assistance in saving for college. The Oklahoma’s Promise program is an OKLAHOMA POLICY BLUEPRINT 2011

excellent concept that has helped many Oklahoma students attend and graduate from college without substantial debt. However, it is time to make the thresholds for qualification and benefits take into account at least some of the complexity that is characteristic of family finances. The current system is exceptionally kind to an only child of a single parent but is callous toward a child from a large family. The proposal for funding higher education in Oklahoma advanced in this Blueprint seeks to build upon the excellent idea central to Oklahoma’s Promise but to make it more inclusive and fairer to all students. The approach put forward in this Blueprint allows for partial help to families needing some assistance and provides greater flexibility in how that help is delivered. It also recognizes that family income may vary from year to year and moves away from measuring income in a single year to determine eligibility. Other assistance for lower-income students, such as Pell Grants and work study, would continue to be available as at present. As a result, almost any family that makes the regular expected contributions to its children’s 529 plans will be able to see those children attend college and graduate with virtually no debt. Note also that under this approach with an enhanced 529 plan, funds are available to help with fees and even other expenses, such as books and tuition. However, if the child does not attend college, the state would get its pro rata share of the balance in the account. Similarly, complications that can arise with respect to maintaining a full-time student class load and required GPA are not factors under the Blueprint plan. A student can even quit school for a time, and the funds remain available in his or her 529 account. In addition, students can use the funds in a 529 plan for graduate school as well as for helping with undergraduate studies. However, a student who wanders from major to major may find he or she exhausts the available funds before reaching graduation. Under this plan, no one is required to make any contribution, but state assistance is only available to those who make contributions. The assets in any account belong to the student as at present. As such, the family faces no risk that the state is not able to make good on its promise. 51

This plan also provides significant flexibility. If someone living in Oklahoma establishes a 529 account under this program but then moves to another state, the account could remain intact although the state would not provide any further matching contributions for nonresidents. This makes it more likely that a student would return to Oklahoma for college and, once graduated, use his or her skills in our state. To avoid any fees associated with making investments under the plan, the state would set aside $5 million per year to cover the administration and investment fees charged by plan investment managers and administrators. However, participants would have the option of using a licensed Oklahoma broker to manage an account and might have to pay some fees if they chose this route. In addition, the state would provide a statesponsored investment pool into which 529 plan contributions could be deposited. Families not wanting to take on the responsibility of managing their investments could turn that responsibility over the state although the state would not guarantee any return on its sponsored plan. Special Aspects for Military Personnel, Nontraditional Students, and Others Military personnel who claim Oklahoma residency and pay Oklahoma taxes, including paying for an Oklahoma motor vehicle license, would be able to participate in the plan like any Oklahoma resident. However, military personnel stationed in Oklahoma who do not claim Oklahoma residency would not be eligible for the program. A growing number of nontraditional students go to college each year. Sometimes people who never went to college decide to get degrees to advance their careers. In other situations, people with some college but no degree realize the importance of completing their degree programs. In still other cases, people decide to make career changes and seek the needed educational background. And there are those who return to college simply for academic enrichment apart from any income they may gain. When a family breadwinner decides to return to college, college costs can place considerable strain on family finances, so much so that the prospective student may decide against going. 52

There are often situations where an employer, recognizing the potential of an employee, may encourage that employee to return to school and even pay all or part of the cost. In almost all these cases, the families and the state are better off if the student can obtain the additional education. In recognition of this situation, the plan advanced in this Blueprint will provide assistance. A family with an adult member contemplating a return to college or going to college for the first time would be allowed to set up a special 529 plan that would be eligible for state assistance where needed. The expected contribution to the plan would be $10 plus 2.5 percent of the family income plus 25 percent of the family income in excess of 200 percent of the federal poverty level. The family would receive a dollar-for-dollar credit for each dollar contributed to a dependentâ&#x20AC;&#x2122;s 529 account in calculating the familyâ&#x20AC;&#x2122;s expected contribution. However, if the family makes the expected contribution, but the amount is less than $6,000, the state would provide 80 percent of the shortfall. Note also that a family usually experiences a reduction in income when a breadwinner goes to college full-time. In this situation, the family would likely be eligible for a larger state match due to its reduced income. We have previously noted that an employer could provide assistance to a student and receive a 10 percent match for doing so. We should also note that nothing prohibits the employer from making contributions to a 529 plan, and those contributions would likely be deductible for the employer if made for business reasons. However, the employer would lack state backing for requiring service after completion of the education for contributions to an employeeâ&#x20AC;&#x2122;s 529 plan. We should also note that the IRS may attempt to tax any investment gains as income to the plan owner. Oklahoma families may be able to defeat this attempt by simply investing in the state-sponsored investment pool. All payments from an account invested in the state-sponsored pool should be treated the same as interest on state and local government debt and the return of contributions as a return of capital. Only an individual unable to establish a business reason for attending college would face federal OKLAHOMA POLICY BLUEPRINT 2011

income taxation of a state contribution to his or her account. In many cases, proper planning can help an individual avoid this outcome. The tables that follow provide examples for families of different sizes and income levels. The tables show the expected contribution for the family and the potential contribution from the state if the family makes the expected contribution. Nontraditional students are generally not able to participate in the current Oklahoma’s Promise program. POTENTIAL STATE CONTRIBUTION TO FAMILY COLLEGE SAVINGS WHERE PROSPECTIVE STUDENT IS NONTRADITIONAL STUDENT

Family makeup: One adult and one child 200% of FPL for family: $29,140 Income

Family contribution

State contribution

$ $ $ $ $ $ $ $ $ $ $

Family makeup: Single adult

15,000 20,000 25,000 30,000 35,000 40,000 50,000 60,000 75,000 100,000 150,000

160 210 260 397 947 1,497 2,597 3,697 5,347 8,097 13,597

7,552 7,512 7,472 7,362 6,922 6,482 5,602 4,722 3,402 1,202 —

Family makeup: One adult and two children 200% of FPL for family: $36,620

200% of FPL for family: $21,660 Family

State

Income

contribution

Income

Family contribution

State contribution

15,000

20,000

510

4,392

25,000

1,470

3,624

30,000

2,845

2,524

35,000

4,220

1,424

40,000

5,595

324

50,000

8,345

—

60,000

11,095

—

75,000

15,220

—

100,000

22,095

—

150,000

35,845

—

$ $ $ $ $ $ $ $ $ $ $ $

385

4,492

Family makeup: Two adults (one is prospective student)

15,000 20,000 25,000 30,000 35,000 40,000 50,000 60,000 75,000 100,000 150,000 151,168

160 210 260 310 360 778 1,878 2,978 4,628 7,378 12,878 13,199

10,432 10,392 10,352 10,312 10,272 9,938 9,058 8,178 6,858 4,658 258 1

Family makeup: Two adults and two children 200% of FPL for family: $44,100

200% of FPL for family: $29,140 Family

State

Income

contribution

Income

Family contribution

State contribution

15,000

385

4,492

20,000

510

4,392

25,000

635

4,292

30,000

975

4,020

35,000

2,350

2,920

40,000

3,725

1,820

50,000

6,475

—

60,000

9,225

—

75,000

13,350

—

100,000

20,225

—

150,000

33,975

—

$ $ $ $ $ $ $ $ $ $ $ $

OKLAHOMA POLICY BLUEPRINT 2011

15,000 20,000 25,000 30,000 35,000 40,000 50,000 60,000 75,000 100,000 150,000 153,997

160 210 260 310 360 410 1,100 2,200 3,850 6,600 12,100 13,199

10,432 10,392 10,352 10,312 10,272 10,232 9,680 8,800 7,480 5,280 880 1

Family makeup: Two adults and four children 200% of FPL for family: $59,060 Family

State

Income

contribution

$ $ $ $ $ $ $ $ $ $ $ $

15,000 20,000 25,000 30,000 35,000 40,000 50,000 60,000 75,000 100,000 150,000 185,619

160 210 260 310 360 410 510 704 2,354 5,104 10,604 20,399

16,192 16,152 16,112 16,072 16,032 15,992 15,912 15,757 14,437 12,237 7,837 1

Family makeup: Two adults and six children 200% of FPL for family: $74,020 Income

Family contribution

State contribution

$ $ $ $ $ $ $ $ $ $ $ $

15,000 20,000 25,000 30,000 35,000 40,000 50,000 60,000 75,000 100,000 150,000 219,755

160 210 260 310 360 410 510 610 858 3,608 9,108 27,599

21,952 21,912 21,872 21,832 21,792 21,752 21,672 21,592 21,394 19,194 14,794 1

Each table above assumes that only one adult is a prospective student but that all children are participants. The amounts shown are for contributions for all family member participants.

Help to Retire College Debt The basic plan advanced in this Blueprint is designed to help families who save responsibly in anticipation of children going to college. However, not everyone—or even most families— save responsibly on a consistent basis. Students whose families have not adequately prepared for college will likely find that they will incur some debt in completing their degrees. The plan would also have a “catch-up” provision that would allow a family to treat a dependent child as an adult for the purpose of calculating expected contributions and the state 54

matching if the dependent has completed the sophomore year of high school and has taken or enrolled in courses consistent with the Oklahoma’s Promise curriculum. However, if the family made no preparations at all, the state would still provide some assistance. A graduate owing money on a college loan to an Oklahoma financial institution would be allowed to use 25 percent of the loan payment during the year up to a maximum of $2,000 as an offset against Oklahoma income tax and motor vehicle tax paid up to 50 percent of the total tax paid. Of course, students who attend college and then leave the state, taking their skills elsewhere, would not get assistance in retiring college loans. Support for Research In addition to providing classroom instruction, colleges and universities are also expected to engage in important research. The fact that this research is conducted by faculty quite often enriches their instruction as they inform students of their progress and findings and even draw more advanced students into the research projects themselves. While the regional colleges may have more modest research programs, the major comprehensive universities, OU and OSU, will be expected to strengthen their efforts. One strategy to accomplish this would be to use state funds as a match for research contracts with the federal government or private businesses. The University of Oklahoma and Oklahoma State University would each receive $20 million for research projects to be spent at the discretion of their management. However, to ensure accountability and effectiveness, each university would have to provide an annual accounting of expenditures, and the status and results of the research would be audited by the Oklahoma State Auditor and Inspector. In addition, the state would also provide $20 million to the regents for other research purposes that it would award through a competitive grant process. Private colleges and even the state’s major private research organizations, the Oklahoma Medical Research Foundation and the Noble Foundation, could submit proposals. Both OU and OSU could submit proposals for OKLAHOMA POLICY BLUEPRINT 2011

funding beyond the $20 million designated for each university. However, to ensure greatest possible dissemination of research efforts, the regents could award no more than 20 percent of their funding to any one college or organization. Once again, the Auditor and Inspector would audit a report on the expenditures and the research findings. While much of the research funded through this program would doubtless focus on efforts subsidized by business or federal agencies such as the National Institute of Health, part of the funds could also be used for research on history, economics, education, and other â&#x20AC;&#x153;softâ&#x20AC;? subjects. Special Assistance for Economic Development Efforts The regents would continue to enjoy support for economic development efforts on behalf of the state. Colleges are often ideally situated to assist businesses in solving problems. An appropriation to the regents for this purpose is included in this Blueprint.

OKLAHOMA POLICY BLUEPRINT 2011

Oklahomans Should Feel Safe in Their Homes, in Their Businesses, and in Public Places Prisons and law enforcement cost money, but so does crime. A three-stage sentencing process, more probation officers, and cost savings for law enforcement can keep us safe at a reasonable cost.

he divide between liberals and conservatives on fiscal policy is usually predictable. Liberals are generally more willing to confiscate people’s earnings and property and direct them toward what they say are worthwhile public efforts. Conservatives are usually more reluctant to back public expenditures, especially when they are accompanied by higher tax rates to generate the needed funds. However, when it comes to public safety, the lines often reverse: Conservatives often advocate spending whatever it takes to remove and keep criminals off the street while many liberals cringe at spending money on prisons and law enforcement that could otherwise be spent on welfare or education. While the purpose of this chapter is not to press support for strict law enforcement, it does assume that Oklahoma will follow policies designed to effectively fight crime and recommends a budget to support that policy. It also looks at areas where the state could spend public money more efficiently and makes appropriate recommendations. Catching the Criminals Criminals will be less likely to engage in criminal behavior if they think their criminal acts will bring swift, certain, and stiff consequences. Certainly, if criminals are removed from the street or deterred from committing criminal acts, the public is safer. In addition, the wider economy also benefits. Consider the reaction of an employer to crime. If the business owner thinks his or her business may be victimized, he or she is likely to spend money to prevent that from happening. While it may make sense to spend that money, it does not add to sales. In fact, the owner may be forced to raise prices to pay for crime prevenOKLAHOMA POLICY BLUEPRINT 2011

tion, a move almost certain to depress the quantity of items sold and possibly even the business’s gross receipts. To the extent that a business is victimized by crime, it will also raise its prices to be able to cover the losses crime causes. Once again, higher prices will lead to a lower volume of items sold and probably lower profits. The general public suffers from the higher prices, and if the business is less profitable, it will employ fewer people. If Oklahoma wants a growing economy, it will find that keeping crime rates low will help. While most investigations and apprehensions of criminals are conducted by municipal or county law enforcement, the Oklahoma Highway Patrol (OHP) is an important part of the picture. Oklahoma troopers work to make our public highways safe and reduce crime through proactive investigations, education, and patrol services. OHP also provides leadership and needed resources during natural disasters and civil disorders. OHP is an important representative of our state. When visitors come to Oklahoma, the first official they may see is an Oklahoma trooper. The impression the trooper creates will help form an image of Oklahoma. We should always expect them to be professional, courteous, intelligent, and caring. Oklahoma has frequently taken steps to ensure and upgrade the quality of Oklahoma troopers. This Blueprint recommends funding to continue that process including: • Increasing the qualifications for becoming a trooper, including requiring a college degree in a relevant field. • Increasing the pay of current troopers who meet the new, more stringent requirements and providing assistance to those who do not 57

meet the requirements but want to return to college for that purpose. â&#x20AC;˘ Increasing the number of troopers so that the state can increase the amount of annual leave for troopers from 15 days to 20 days. This is to provide more personal time to cope with working in a very stressful environment. Those who doubt the level of job stress of the troopers and their families are reminded that 33 troopers have fallen in the line of duty since 1941. This Blueprint also recommends better vehicles and equipment for all troopers. Oklahoma has a history of buying used patrol vehicles from Kansas. While the vehicles may cost less to buy, they cost a lot more to maintain, especially when troopers must do some of the maintenance themselves. This Blueprint recommends additional money to begin purchasing new vehicles. At least some of the additional cost of purchasing better vehicles can be offset immediately through lower maintenance costs. However, larger longterm savings will result from closing the OHP maintenance shop in Oklahoma City and outsourcing all maintenance. Pioneering government manager Gerald Seals discovered that law enforcement can save money in the long run if it buys good quality vehicles but only keeps them until they begin requiring maintenance beyond oil changes and tire rotations. When it comes time to start replacing parts, Seals found that it cost less to simply trade in the used vehicle on a new one. Oklahoma should follow this formula. This also has the advantage of having new cars on the roadâ&#x20AC;&#x201D;cars well able to withstand the stress of a high-speed pursuit or hard maneuvering. Because the OHP is spread out over the entire state, maintenance work can be contracted out most efficiently at the local level. Troop headquarters are located in 13 different Oklahoma communities. This Blueprint contemplates a maintenance contract for OHP vehicles in or near each of the 13 communities, thereby essentially keeping the vehicles on the road continuously. Prosecuting Criminals The Left often complains that Oklahoma prosecutors go out of their way to charge and 58

convict, even when doing so is not in the interest of the state, in order to show that they are tough on crime. There is a way to put this liberal theory to the test and at the same time yield some budgetary savings regardless of the result. That would be to route a significant portion of the funding for public defenders and corrections through the district attorneysâ&#x20AC;&#x2122; offices. This Blueprint recommends placing part of the funding that would otherwise go to the Oklahoma Indigent Defense System (OIDS) and to the Department of Corrections with the district attorney. However, the district attorney must make a transfer of funds to OIDS with each charge filed. Similarly, with each conviction, the district attorney would transfer funds to the Department of Corrections. The goal is not to increase or decrease funding to any agency, but to provide a strong incentive for rational decision making and to discourage empire building. Under this system, a district attorney who files too many charges will soon find that he or she must cut back in other areas of his or her operation or must go to the voters and ask for higher taxes. At the same time, the district attorney has a strong incentive to prosecute cases in ways that do not create unneeded costs elsewhere in the criminal justice system. The district attorney has primary responsibility for maintaining public safety within his or her jurisdiction. This approach gives the district attorney maximum flexibility to perform that duty. Meanwhile, OIDS and the Department of Corrections are largely at the mercy of the actions the district attorney takes. If the district attorney files additional charges, OIDS must mount additional defenses, and, assuming the prosecutions are successful, the Department of Corrections must house the new prison inmates. The approach advanced in this Blueprint protects OIDS and the Department of Corrections if a district attorney becomes overzealous. They gain assurance that they will not be overburdened without a means of coping with the situation. At the same time, while OIDS and the Department of Corrections would both continue to receive a base amount for funding, this approach prevents them from adding staff or other expenses when they are not needed. OKLAHOMA POLICY BLUEPRINT 2011

Incarcerating Criminals Once again, conservatives and liberals debate the fairness and effectiveness of our criminal sanctions. Liberals generally assert that we send too many to prison for too long while many conservatives often take the opposite view. This debate has important fallout for the budget. It costs money to lock people up, so if we lock up too many for too long, it runs up government spending. At the same time, things are not always what they seem. Many studies have confirmed the seemingly obvious: Individuals differ widely in their propensity to criminal activity—i.e., if we have locked up those most likely to offend, the crime rate is lower simply because many who would otherwise be committing crimes are incapacitated by reason of their incarceration. A prison inmate cannot rob a convenience store. Conservatives and liberals also often spar over the extent to which we should attempt to rehabilitate inmates. Liberals generally promote more education and behavioral therapy programs behind bars, even when few inmates attend the classes or there is no history of the programs effectively reducing recidivism. This Blueprint recommends cuts in such programs that largely do not work in any case. Our criminal justice system can reduce recidivism most effectively by punishing criminal acts. The punishment should make the offender think twice about offending again and should broadcast clearly to others thinking about offending that it is a very bad idea. Many corrections managers report that the prison population is more easily managed if they are active. There is no reason to prevent having the inmates spend their time turning big rocks into little rocks if other work is not available. Accordingly, the ideas advanced in this Blueprint are built around a sentencing system of three distinct parts: 1) punishment, 2) preparation for reentry, and 3) immediately revocable parole. If we propose that the primary purpose of punishment is punishment, the Department of Corrections should exist to do exactly that: humanely punish offenders. Accordingly, the first part of the criminal sentence is devoted to punishment. The offender is not sent to prison for education, training, or therapy, but for punishment. The second part of the sentence is designed OKLAHOMA POLICY BLUEPRINT 2011

to prepare the offender to live peacefully in society once released. This Blueprint recommends funding for the inmate to receive training, counseling, and orientation while still behind bars in a secure facility to give him or her a better chance of being a productive lawabiding citizen after release. During the third part of the sentence, the inmate is released to a halfway house and, once having secured employment and housing, to the supervision of a probation officer. The terms of the release are strictly enforced so that any offense results in the return of the offender to prison. Under normal circumstances, the offender would serve approximately one-half the sentence in prison and one-half on probation. The preparation phase, while still behind bars, would usually last about six months. Therefore, an offender sentenced to five years would likely serve about two years and three months in prison, another six months in prison participating in programs designed to prepare the inmate to reenter society, and the last two years and three months outside prison, first at a halfway house and then on strictly supervised probation. This would not prevent a judge from imposing an alternative sentence such as placing a “bracelet” on the offender and limiting mobility. (Drug courts and their separate system of sanctions, which have enjoyed some success, would continue as at present.) This would also allow for very short “shock” sentences that are sometimes effective in convincing the otherwise budding young criminal to change his or her ways. However, the one-day or one-week shock sentence is not meant to replace a regular sentence but to replace the slaps on the wrist often given to novice criminals. Many states have adopted “three strikes” laws. Under these provisions, a felon who reoffends two more times is sent to prison for life without parole. Many credit these laws with preventing countless murders and other serious crimes. However, critics point to the relatively rare situations where an offender commits a minor offense but because of previous convictions, including one for a felony, winds up in prison and does not get out. While Oklahoma has not yet adopted a “three strikes” law, the state has considered adopting a strict sentencing grid in the past where prison 59

terms would be reduced but the offender would serve a set percentage, usually 85 percent, of the term for the crime. A more desirable alternative might be to adopt a grid composed of severe sentences but to allow very generous provisions for earned credits for first-time offenders, less generous provisions for repeat offenders, and very limited provisions for thirdtime offenders. This approach would incapacitate habitual offenders but also lead to the release of many inmates in their fifties and sixties. At this point, medical costs for the inmates skyrocket because of age combined with the fact that few inmates have lived exemplary healthy lives while involved in crime. At the same time, the prospect of an older individual reoffending is considerably less. Keeping Prisons Effective Deterrents to Crime Oklahoma has had good success with using privately operated prisons to house state inmates. It can generally call upon unused space in county jails to house additional inmates. The state should use these resources to alleviate overcrowding in its prisons. It should also reserve space, even if unused, so that it always has space in which to house more inmates. Policymakers should fund enough beds so that the state is only using 95 percent of its capacity. While the state has had success in using private prison operators, it should not allow itself to become too dependent on any one contractor. The state should not contract for additional beds from any source that already has 20 percent or more of the stateâ&#x20AC;&#x2122;s beds. One area where the state should be able to reduce its cost of incarceration is in providing health care for prisoners. While other provisions of this Blueprint should allow the state to safely release some of the older inmates with higher associated health costs, the state should also be able to get a better handle on health care costs by making better use of local hospitals near prisons. The Department of Corrections currently provides most of its own health care facilities. Especially with many Oklahoma prisons located in relatively rural areas, the prisons are often near local hospitals struggling just to keep their doors open. This often results in needless 60

duplication. The prison and the local hospital often duplicate personnel and facilities. If prisons would contract with local hospitals to provide doctors, nurses, and supervision of their clinics, they should be able to save substantial amounts of money. At the same time, the local hospital could get a badly needed source of additional revenue, and the larger patient base may be able to support some specialties that the smaller base of the local hospital could not support on its own. This arrangement should also lead to a modest reduction in the cost of transporting prisoners for needed care while increasing the safety of the general public. Providing Adequate Supervision to Those on Parole or Probation With overcrowded prison facilities, the state sometimes finds itself facing difficult choices with respect to prison inmates. Overcrowded conditions place pressure on officials to release inmates early to stay within â&#x20AC;&#x153;safeâ&#x20AC;? limits. However, if an inmate released early commits an offense, it may be difficult to find space to immediately return the inmate to prison. When this happens, threats of sanctions for bad behavior while on probation lose their value and the probationer is more likely to offend. The approach outlined in this Blueprint depends upon an effective system of probation and parole supervision. This will mean the hiring of more probation officers. Too often, Oklahoma has too few probation officers to be able to supervise a large number of inmates effectively. Accordingly, the Blueprint provides for an additional 50 probation officers to more closely supervise those in state custody outside prison walls. The state should not attempt to release additional inmates unless it is prepared to closely supervise those inmates and promptly apprehend and return to prison any who violate the terms of their release. A Low-Cost Solution Could Be Tried As long as society is vexed by criminals, it will need to face up to the cost of effectively dealing with them. Unless these criminals can be effectively deterred from future criminal acts, this will entail significant costs of incarceration. Liberals decry the high cost of fighting crime, but few recommend that we look at one country OKLAHOMA POLICY BLUEPRINT 2011

that effectively deals with this problem for much less cost than the United States: Singapore. Unlike many other countries with “barbaric” punishment practices, Singapore is a modern country with standards of living that rival those in the United States. It is hardly a backward nation. Yet Singapore is almost free of crime and vandalism. Like the United States in the 19th century, Singapore eschews costly prisons in favor of corporal punishment that it metes out to the horror of outside observers. The practices used might offend our sensibilities. However, we might find it useful the next time Oklahoma’s Left calls for less spending on corrections to ask if they want to consider importing some practices from Singapore.

OKLAHOMA POLICY BLUEPRINT 2011

Letâ&#x20AC;&#x2122;s Actually Help the People Who Need Our Help Current public assistance programs are a hodgepodge administered by many different agencies. Oklahoma can create a national standard of excellence by unifying those programs under one (more efficient and compassionate) umbrellaâ&#x20AC;&#x201D;with an added benefit of strengthening intact families.

e often think of government as providing a safety net to prevent destitution for vulnerable citizens and to help them recover from adverse circumstances. The reality is much different. What we often think of as a safety net is in fact a series of uncoordinated programs that, taken together, often trap the poor in a vicious cycle of poverty rather than help them escape to a better life. Accordingly, this Blueprint advocates abandoning the status quo, with its focus on programs and bureaucratic boundaries, and moving to an approach that emphasizes helping people in difficult circumstances survive them and emerge to a more promising future. This new approach will change public assistance at its very foundation. Currently the Poor Confront a Series of Silos Many programs, usually in completely separate bureaucracies, seek to help the poor. Most of these programs have a major federal government component, both for funding and for setting rules. Temporary Assistance for Needy Families (TANF) usually provides cash assistance for the very poor. TANF is administered by the U.S. Department of Health and Human Services. TANF is the remnant of the basic government welfare program once known as Aid to Families with Dependent Children (AFDC). The Food Stamp Program, now officially called the Supplemental Nutrition Assistance Program (SNAP), provides assistance in buying groceries. SNAP is administered by the U.S. Department of Agriculture. Far from being a public assistance program, the program was begun with the original purpose of disposing of surplus agricultural commodities that were piling up as a result of misguided farm programs. Public housing assistance provides help in OKLAHOMA POLICY BLUEPRINT 2011

paying for rent and, in some cases, for outright home ownership. Housing assistance is administered by the U.S. Department of Housing and Urban Development. Medicaid provides health care for low-income people otherwise without health insurance. Medicaid is administered by the Centers for Medicare and Medicaid Services at the U.S. Department of Health and Human Services. The Earned Income Tax Credit (EITC) reduces the amount of income tax due or provides a payment to tax-return filers with relatively low income from work or business. The amount of the credit is greater if the taxpayer has children. The Internal Revenue Service in the U.S. Department of the Treasury administers the EITC. Additional programs provide assistance with paying for day care services, home heating and air conditioning, newborn nutrition and care, care for the disabled, college tuition, and many other items for those deemed in need of assistance. However, there is no federal mechanism to coordinate the aid given through these various assistance programs. Each adds to the perverse incentives inherent in the current mess that constitutes our efforts to help the poor through government action. The existing government structure is not a rational, integrated scheme that comes anywhere close to considering the entirety of a recipientâ&#x20AC;&#x2122;s situation. Because of our failure to coordinate our programs to help the less fortunate, we often encourage our most vulnerable citizens to make decisions that damage their prospects for a better life for themselves and their families. The Perverse Incentives of the Existing System The single best weapon with which to fight poverty is a father. Children raised in homes with both parents are more likely to excel in 63

school, less likely to become involved in crime or to be victims of abuse, and less likely to themselves become dependent on the government for assistance. These outcomes hold true even when controlled for income, parents’ education, race, or geography. Yet, under our current system, a young woman of modest means may find that she is economically better off remaining single than marrying the father of her children. Even if she does marry the father of her child, she may find herself better off economically to separate. In many cases, we literally bribe poor young women to leave the fathers of their children or never marry them in the first place. As a result, the children are more likely to become victims of abuse, fall behind in school and fail to graduate from high school, engage in criminal activity, and one day become welfare recipients themselves as adults. In other words, we pay for our welfare programs once today and then pay for their poor design and lack of coordination in future years through more prisons and more welfare programs. In addition, we discourage single mothers from taking the initiative to improve their situations. A single mother will hardly be enthusiastic about getting a $200-a-month raise when it means she will lose $300 a month in benefits for her family. And the raise at work is subject to tax while the government benefits are tax-free. In the late 1970s, conservatives generally touted the positive benefits of lower tax rates and especially how they might improve a willingness to work and invest on the part of the public. At the time, the top rate on the individual income tax was 70 percent, and most states, including Oklahoma, added even more. What most people fail to realize is that many poor people today face what amounts to even higher “tax” rates on their work. While we generally understand that we should allow people to be better off if they work, we have developed a series of programs that tell welfare recipients that if they make more than the minimum wage, they will lose all of their gains from their efforts and usually more. In many cases, the effective “tax” rate for low-income individuals exceeds 100 percent! When Ronald Reagan became president and the Congress passed the Kemp-Roth tax cuts, lowering income tax rates significantly, the 64

economy took off when the lower rates kicked in. We should learn from that experience and expect similar results if we remove the inhibiting obstacles to initiative. We should find that people with low incomes react every bit as logically as those further up on the income scale. This Blueprint advances a new approach to public assistance—championing and rewarding family formation and stability rather than single parenthood, and encouraging personal initiative rather than trapping the less fortunate in a cycle of dependency. Oklahoma can accomplish this if it focuses on helping those who need help rather than on bureaucratically administering a series of uncoordinated programs. The programs each have their minutiae of regulations that often present impediments to needed coordination. In many cases, the state will be able work around these requirements and in some cases will need to request federal waivers to do so. However, if the state is unable to resolve a conflict regarding a policy that supports family stability and encourages personal initiative, the state must consistently come down on the side of work and families rather than succumb to federal bribery for the sake of bureaucratic goals. It is more important for Oklahoma children to be raised in homes with fathers than for Oklahoma to collect additional federal dollars. If the result of participating in a particular program means that the state loses federal assistance unless it continues the existing practice of perverse incentives, the state should put its children first and simply quit participating. The Federal Definition of Poverty As is often the case, the federal government takes a one-size-fits-all approach to determining who is and who is not in poverty. If one’s family size is “x” and a person’s income from all sources is “y,” that person may consult a government table and determine whether he or she is living in poverty. Most people realize that life is not really that simple. For instance, a person may live in an area with a high cost of living. Would we expect that person to need more resources to maintain the same standard of living as someone living in an area with a relatively low cost of living in order to maintain the same standard of living? OKLAHOMA POLICY BLUEPRINT 2011

Most people would say “yes.” The federal policy assumes that $10,000 of income in Manhattan will buy the same standard of living as $10,000 in Enid, Oklahoma. The federal government makes adjustments to its poverty level for people living in Hawaii and Alaska, but nowhere else. The cost of living is difficult to measure accurately because so many factors vary from place to place, but most estimates put the cost of living in Oklahoma at 92 to 95 percent of the national average. And some will point out that even within our state the cost of living will vary from place to place. This is a valid point that should be considered, but this Blueprint is already presenting change that is so revolutionary we will not burden it further with yet another departure from the status quo. The federal poverty guidelines for 2010 are as follows: # of Persons in Family

Poverty Guideline or Threshold

1 2 3 4 5 6

$10,830 $14,970 $18,310 $22,050 $25,790 $29,530

However, other factors exert an even larger impact on the relative cost of living. Consider two nearly identical families living next door to one another. The first family of a mom, a dad, and two kids has annual income of $25,000. The family next door also has a mom, a dad, and two kids but an annual income of $50,000. We might consider the second family to have a higher standard of living until we learn that the first family is healthy while a child in the second family suffers from a chronic disease. The total medical bills for the first family average $500 per year. The total medical bills for the second family with the child suffering from a chronic disease average $40,000 per year. Given a more complete picture, we find that after necessary health care bills, the first family of four has $24,500 of income for other things while the second family has only $10,000. Clearly, the first family can enjoy a higher standard of living. This illustration also makes clear that if we want all families to escape poverty, we must consider something other than the gross income of the family. OKLAHOMA POLICY BLUEPRINT 2011

Unfortunately, some of our friends on the Left would maintain that the solution is simply to jack up the poverty levels to ensure that we give enough resources to the second family in order for it to be able to pay its health care costs and still live above the poverty line. As with so much that emanates from the Left, this is a very expensive solution that bestows more resources on the first family than required to achieve our objective of keeping it above the poverty line. A New Conceptual Framework for Welfare Given the current morass of uncoordinated programs, how do we design a framework that might actually help the less fortunate escape dependency? First, cut the Gordian knot! Keeping the current structure intact while implementing a system that actually helps people may be impossible. If we are starting from scratch and we want a system that works, what would be the elements we would need to consider? The following guidelines may be helpful: • Focus on the people who need help rather than the programs. • Always make sure the state rewards the men and women who get married and stay married. • Always make sure the state rewards those who work hard and earn more money. • Always make sure the state never rewards destructive behavior. Let us also use as our starting point the goal that a married couple living together with children does not fall below the poverty line. Let us additionally adjust that poverty line for a lower cost of living in Oklahoma, using 94 percent of the national average and rounding off some numbers to make the concept easier to follow:

National Poverty Threshholds Adjusted for Oklahoma’s Lower Cost of Living # of Persons in Family 1 2 3 4 5 6

Oklahoma Poverty Threshold $10,200 $13,700 $17,200 $20,700 $24,200 $27,700

Let us add in the cost of basic health insurance as well. This will vary from person to 65

person, sometimes by a significant amount. However, the concept is that after paying for basic health care, a family should have enough resources to live above the poverty line. Since health care costs are included in the initial calculation of poverty thresholds, adding health care costs to the equation ensures that the result exceeds the poverty level. In other words, every couple with kids that gets and stays married will be ensured a standard of living above poverty if the couple meets the other requirements of the program. It is true that covering the cost of health insurance is not the same as covering health care costs. We will address this issue later. Our starting point is that a traditional family of four that loses all means of support will receive free health insurance and other benefits worth $20,700 per year. A family of five would receive free health insurance plus other benefits worth $24,200. To those who complain that the traditional family is not the predominant structure among the poor, they need to understand that that fact is the major problem. If we have more traditional families, we will have less poverty and, in future years, less crime and less incarceration. Returning to our example, let us make sure that our family is always better off if the adults work and earn money. For each dollar in earnings, the state would only remove 75 cents in benefits. Therefore, if our family of four earned $10,000 in income, it would receive free health insurance plus $13,200 in benefits [for the mathematically inclined, that is 20,700 - (10,000 * 75 percent)]. If our family of four has income of $27,600, it would get free health insurance, but no other benefits. We will address health insurance issues in more detail below, but for now, let us assume that the family has no other health insurance and that the cost of the health insurance for the entire family is $9,000. If the family has less than $39,600 in other income, it could get some of its insurance paid for, but no other benefits. While some may complain that we are effectively imposing a 75 percent marginal tax rate on low-income families, we should remember that this amount is roughly equal to the top marginal rate in effect in the United States (70 percent) before Ronald Reagan and Kemp-Roth. 66

And while 75 percent is very high, it is preferable to the 120 percent that often prevails at present. Support Stable Families A young woman learns she is pregnant. Her childâ&#x20AC;&#x2122;s father wants to marry her, and she is at first agreeable to marrying him. What does the state of Oklahoma say? Knowing the odds that a child raised in a family with both parents has a much better chance of growing up to be a well-adjusted and contributing member of society, we might expect the state to encourage them to get married and provide a secure family environment for their child. No! The state will usually provide a lot more benefits to the mother and her child if the father is not around. At least the state provides more benefits if the father cannot be found. If he is found living with his family, his income gets counted in determining whether his would-be wife and child are eligible for government assistance in paying for food, housing, day care services, health care, etc. Rather than serve as a proud parent and role model for his child, the father is reduced to hiding out with what should be his own family. Needless to say, most of these relationships do not survive a full year and are far from ideal in any case. We want the family to have a government incentive to stay together, not to split up or never form in the first place. Accordingly, we will provide the custodial parent, which is usually the mother, with free health insurance plus 80 percent of the benefit levels we would provide an intact family of three. The state would not only be saying it likes to see children raised in a stable, loving environment but would be providing a positive incentive for the parents to try to work things out. The starting point for a family consisting of a single mom and two kids that loses all means of support is free health insurance and other benefits worth $13,760 per year. A family consisting of a third child and having no income would receive free health insurance plus other benefits worth $16,560. As with the intact family, the state would remove only 75 cents in benefits for each additional $1 in income. Therefore, if the family of three in this example has $10,000 in income, it will receive free health insurance plus other benefits worth $6,260 [13,760 - (10,000 * .75)]. OKLAHOMA POLICY BLUEPRINT 2011

When our family’s income reaches $18,347, the family would receive free health insurance but no other benefits. Above $27,547 in income, this family would be responsible for all its living expenses, including health care costs. Limit Help for Singles What happens to the father? The proposal put forth here would provide free health insurance plus $5,100 in other benefits, an amount equivalent to 50 percent of the Oklahoma poverty level for a single person. At $6,800, the single man would still get free health insurance but no other benefits. Above $9,600, the single man is responsible for all his living expenses, including health care costs. In the less common situation where the father would become the custodial parent while the mother is single, the equation changes slightly. Our goal is to address everyone’s individual situation. Health insurance for a young woman is more expensive than for a young man of the same age and same general state of health. The proposal would still provide free health insurance plus $5,100 in other benefits, but since the cost of health insurance for a young, healthy single woman is approximately $1,400 per year higher, the state would be out more to cover her. The state would still provide some assistance until the single woman’s income exceeds $11,467. We should note that if the family of three in the preceding section is headed by a single father instead of a mother, there would be comparable downward adjustments because of the lower cost of the parent’s health insurance that would offset the higher cost for the woman living alone. Some will question why we should provide any assistance to able-bodied young adults without children. The point is well taken, and perhaps debate about this issue will lead to a better proposal. However, under the current system, reports of young women getting pregnant in order to get benefits are widespread. If the jump in benefits for single women heading one-child families is too great, we encourage more out-of-wedlock births, the very thing we are attempting to discourage. For this reason, we have a relatively small benefit level for the family headed by a single mom, which together with limited help available for a single woman OKLAHOMA POLICY BLUEPRINT 2011

without children should help discourage out-ofwedlock childbearing. Addressing situations where adoption is appropriate is beyond the scope of this Blueprint. However, prudent policy would not coerce a woman into a marriage harmful for her children. In these cases, the best option for the child is adoption into a stable, loving family. In that event, it would be appropriate for the state to provide some assistance to a single woman anticipating adoption during her pregnancy. Encourage Parents to Marry and Stay Married At this point, let us consider the options facing a financially struggling married couple with two children that is contemplating ending their marriage. Traditionally, American welfare programs tried to provide help for a single mother without a father present to support the family. Unfortunately, this sympathetic impulse created strong incentives for the mother to leave the father or, more likely, never marry in the first place. A marriage of two people of modest means faced strong headwinds when the state—if it intervenes at all—should provide a wind at its back. We are probably beyond discussion about whether we should intervene at all. Given that situation, this Blueprint advances policies that favor marriage and family stability over single parenthood or separation. There are many variables in any personal situation that make one-size-fits-all comparisons difficult, but under a scenario where both parents have $15,000 per year in income—roughly the equivalent of a fulltime minimum-wage job—the intact family will receive income and benefits equal to about 136 percent of the Oklahoma poverty level plus health care costs. If the parents divorce and the mother keeps the kids, she and the kids are reduced to 109 percent of the Oklahoma poverty level plus free health care while the father winds up with 75 percent of the Oklahoma poverty level plus health care. It is clearly to the advantage of the parents to attempt to work out their differences. Under current policy, the opposite is usually true, leading to damaging consequences. In calculating the poverty level, federal officials realized that the cost for two people living together is less than the combined cost of 67

both living alone. However, under the new concept advanced here, the parents dissolving their marriage not only endure the additional burden of maintaining two households but also stand to lose approximately $1,700 in benefits. Additional Aspects of Calculating Income Not all income is equal in terms of its value. Some income has no associated costs and may even be tax-free. Other income may require the recipient to incur some costs in order to receive it. A worker must surrender payroll taxes for Social Security and Medicare. That worker is also likely to face expenses for things like commuting to and from work and additional clothing that would not confront someone without a job. Therefore, for someone receiving income that does not require current expense to receive it, that individual will have 100 percent of his or her income counted in determining the level of eligibility for benefits. This would include income from Social Security, unemployment compensation, pensions, disability, and so on. For wages and salary, this proposal adopts the federal standard of counting 80 percent of gross pay to allow for the additional costs and taxes associated with work. We also need to consider any assets a prospective applicant for benefits may have. Before burdening the public, we should expect that individual to use some of his or her accumulated assets to meet current living expenses. Current federal laws generally allow for modest allowances for an automobile, residence, and furnishings. This proposal incorporates those with the provision that 2 percent of assets will be added to monthly income in order to calculate eligibility and benefits. Another issue is the treatment of health insurance. Many workers receive health insurance as a paid benefit from their employer. This benefit is almost never taxed. Obviously, a worker getting health insurance from his or her employer does not need a second insurance benefit from the state. Therefore, the benefits granted to a worker getting health insurance from an employer will not include health insurance. However, we do not want to create an incentive for employers to drop health insurance coverage. A short explanation as why this might be the case is in order. 68

We need to consider why an employer would offer health insurance to its workers. Federal law makes a health insurance benefit paid to workers deductible to the employer but tax-free to the employee. Of course, wages, while also deductible to the employer, are taxable to the employee. Therefore, an employer facing a 30 percent marginal income tax rate would find that it can confer an insurance benefit worth $4,000 on a worker for a cost of $2,800 [$4,000 less (30 percent * 4,000) tax savings]. However, the worker gets a benefit worth $4,000 because it is not subject to income tax or payroll tax that the worker must pay. The employer can pay $4,000 in additional wages, and the cost is also $2,800 since the wages are deductible. However, if the worker faces a 25 percent cumulative tax burden, the worker would net only $3,000 from $4,000 in additional wages. At this stage, it makes little economic difference to the employer while the employee is clearly better off with the health insurance. Businesses must compete with each other in the labor market. The business that can provide the most attractive compensation package relative to cost has an advantage. So long as the workers value the health insurance, an employer not offering that benefit will lose out to competitors in the competition for the best prospects. At the same time, federal law provides another incentive for the employer to provide health insurance to its workers. If the employer provides health insurance to all workers equally, it can deduct the cost as a business expense, including the insurance provided to the owner and/or senior executives. However, the business cannot generally deduct the cost of health insurance provided only to highly compensated employees or to the ownerâ&#x20AC;&#x201D;it is essentially an all-or-none proposition. Since the executives would like free insurance for themselves, they usually lean toward providing it for all their employees, too. Now, let us consider the role welfare plays in this equation. In a business where most employees are highly compensated, such as a professional services firm, the incentives clearly tilt toward providing a health insurance benefit. However, what if most of the employees are on the lower end of the compensation ladder? The situation changes dramatically. If the compenOKLAHOMA POLICY BLUEPRINT 2011

sation is low enough, the workers will probably qualify for Medicaid and get health insurance through the state for â&#x20AC;&#x153;free.â&#x20AC;? If the workers qualify for Medicaid, the employer is still paying $4,000, or $2,800 after taxes, but the employee is getting something he or she can get elsewhere for free. In this scenario, it is costing the employer $2,800 to provide a benefit that is of little of no value to the employee. In the competition for workers, the employer will find that the health insurance benefit is not an advantage, but a burden. Conservative critics of wider eligibility for Medicaid often point to the fact that over time, an increase in Medicaid coverage will tend to crowd out employer coverage. However, it is to the advantage of the state if more employers provide health insurance, thereby reducing the need to expand government programs. Therefore, the policy put forth in this Blueprint would simply subtract $1,000 per person covered from the earned income ($800 after the 20 percent exclusion) of a worker who obtains health insurance through an employer. For an applicant with a spouse and two kids and a job with health insurance paying $15,000 per year, the state would only count $11,000 in calculating benefits. This benefits employers who offer health insurance. What Is Included in the Package of Benefits? The basic reform embedded in this proposal is to coordinate and integrate all benefits. At present, a public assistance recipient gets different levels of benefits from separate programs. Under the concept presented in this Blueprint, the state calculates the level of benefits it will provide. It then determines which specific benefits it will include in an aid package. In all cases, the first benefit the state will provide is Medicaid, or free health insurance. If other resources available to a family limit the amount of aid it will receive from the state, then Medicaid is likely the only benefit the family will receive. While assistance in other areas impacts the family receiving aid, Medicaid assists many others, too. If an Oklahoman is unable to pay for clothing, the individual suffers, but the clothier is not obligated to provide any items to someone who cannot pay. With a hospital stay or even some other health care expenses, the OKLAHOMA POLICY BLUEPRINT 2011

situation is different. In almost all cases, someone showing up at a hospital emergency room will get treatment regardless of his or her ability to pay. If the person getting treatment does not pay, the hospital must get the money from another source if it wants to keep its doors open. In most cases, the simple answer is that the hospital charges those who do pay more than it would otherwise, in order to cover the cost of treating those who do not pay. It literally shifts the costs to its paying patients. Since most individuals pay their hospital bills through insurance, this passes the additional cost along to the health insurer, which in turn charges higher premiums than would be the case if all patients paid for their hospital care. Since the inability of the poor to meet their financial obligations for health care impacts society at large, Medicaid should always be the first benefit offered anyone seeking state assistance. This should help hold the cost of health care and health insurance below what they would be otherwise. While people with insurance will probably make more demands on the health care system, and health care, like any other activity, responds to the law of supply and demand, the increased demand for health care will offset some of the reduced cost-shifting. However, the public should come out ahead to the extent that more people can pay their health care bills. By giving more people easier access to preventive care, we should also reduce the incidence of uncontrolled chronic illness, dampening demand for some of the most expensive medical procedures. We will address the provision of health care in more detail below. If the state provides health insurance to a family and the family is still eligible for more benefits, the next item the state will provide is help through the Supplemental Nutrition Assistance Program (SNAP). SNAP provides assistance in paying for food and therefore is an offset to cash for almost all participants. Almost all Oklahomans eligible for assistance beyond health insurance (Medicaid) would qualify for SNAP benefits, which generally kick in at 130 percent of the federal poverty level. To the extent that some may or may not qualify for benefits, the state should request a waiver from the federal government similar to 69

those granted to Puerto Rico and the Northern Marianas Islands. Because food is so basic to living expenses, assistance for food basically offsets cash for recipients. Therefore, SNAP benefits will be treated the same as cash benefits in calculating the level of benefits to a family. Other benefits, however, because they are not totally interchangeable with cash, will be valued at 90 percent of cost in determining the level of benefits. Whereas all families will need to purchase food, they may have different needs for assistance with day care, housing, and utilities. For instance, a reliable family member or friend may be able to care for the children, or a family may be able to get very favorable terms on housing rental or even purchase from a family member or charitable organization. It is at this point that the Blueprint program differs radically from the status quo. Under our proposal, the social worker assigned to the case of a recipient family will consult with the family and then put together a package of benefits for that family. Unless the family has health insurance from another source, Medicaid will always be part of that package. Then SNAP will become part of the package. However, after Medicaid and SNAP are included and the recipient family is still eligible for additional benefits, the social worker, in consultation with the recipient, can include day care, housing, LIHEAP (Low Income Home Energy Assistance Program), or other benefits in the package. Each program would be valued at 90 percent of cost in order to determine the extent to which the social worker can include program assistance in a package. However, all families otherwise eligible to participate in the Children First program would be able to do so with the cost not included as part of the benefit package. Under Children First, uniformed nurses visit first-time expectant mothers who may be at risk for being unable to provide proper care and protection to their children. The public health nurses provide basic screenings and instruction, including answering questions from the new or expectant mother. The home visits begin during pregnancy and continue up to the childâ&#x20AC;&#x2122;s second birthday. In only a very few instances do the benefits conferred under Children First substitute for cash expenditures by the family. 70

In addition, Children First is backed by considerable research showing that it actually works. Other programs, such as Head Start, show promise at the time services are provided, but when the participating children are tracked over several following years, the progress disappears and researchers are no longer able to see improved performance by the children leaving grade school. Children whose mothers participate in Children First, however, see persistent gains that last into high school. Assistance provided to an individual by a church or public charity, such as a food bank or the Salvation Army, is not counted as income to the family. Most of these providers focus on getting the family moving in the right direction and escaping poverty and dependency, so the assistance they provide is likely to help rather than harm the individual recipients and their children. In all instances, Oklahoma should seek to cooperate with the federal government in implementing this radically different approach to public assistance. When necessary, the state should seek a waiver from the appropriate federal agency or seek legislative relief to be able to conform to federal regulations. However, if the state finds that it cannot meet federal requirements, it should simply drop the federal program and use cash from the Temporary Assistance for Needy Families (TANF) program and the Social Services Block Grant (SSBG) programs to fund cash benefits to the family. If the requirements of a federal program make it incompatible with the new Oklahoma concept, the state will cease to participate in or support the program, except that those seeking public assistance would be allowed to participate in the incompatible federal program but would be ineligible to receive any benefit package under the new concept. To summarize, the order in which benefits are provided to the family are as follows: 1. Medicaid, or health insurance, as will be described in more detail below. 2. SNAP benefits, valued at 100 percent of the face value of benefits. 3. Other program benefits, valued at 90 percent of the face value of benefits. 4. To the extent necessary, cash will fill in any gaps in designing the package. To the extent that a family only qualifies for a OKLAHOMA POLICY BLUEPRINT 2011

partial benefit in any category, the family would be entitled to a partial benefit or the ability to purchase a complete benefit using some of the assistance otherwise available or other income or resources at its disposal. Other Requirements for Getting Benefits Oklahoma currently imposes several requirements for participation in various public assistance programs in addition to meeting income tests. The concept put forth in this Blueprint would need to retain and even strengthen many of these requirements to be successful in helping people escape dependency. The goal is to reinforce responsible behavior and sanction that which is irresponsible. The most basic requirement is that a recipient of taxpayer generosity refrain from criminal behavior. An applicant must have a clean record for at least one year to be eligible for assistance. A second conviction will make the applicant ineligible for the next two years, and a third conviction will make the applicant permanently ineligible. As part of the application process, the prospective recipient will have his or her hair tested for drug use. Hair testing is generally reliable for 90 days after use, as opposed to three days for urine tests, and hair testing is much easier to administer effectively. If the recipient is still receiving public assistance after six months, the state would administer another test. Applicants who test positive would be allowed to receive benefits but would enter the program on a probationary basis. They would also have to enter a drug treatment program and pass hair tests at 90-day intervals to remain eligible for benefits. Critics of hair testing offer two specific objections. First, an applicant may shave completely and thus not offer any hair for testing. Second, an applicant can get a false positive if he or she has been regularly in contact with marijuana or smoke from other drugs. However, the exposure to secondhand smoke must be intense over a long period to generate a positive reading. In both instances, the burden is on the applicant to comply. An applicant unable or unwilling to be tested is simply ineligible. An applicant who gets a positive reading for drug use because they continually hang out with drug users probably needs to change his or her environOKLAHOMA POLICY BLUEPRINT 2011

ment in any case. To remain eligible to receive benefits, each adult recipient must report to work regularly and when work is not available must actively seek paid employment under the supervision of DHS staff. The state may also find it advantageous to provide work when doing so will accomplish public goals. All adult recipients who are not disabled or eligible for Social Security must report to work regularly or be actively seeking full-time employment. When a student drops out of school or earns his or her high school diploma and does not continue on to college, the family may no longer count that child in determining its benefit level, even if the child lives at home. The family must also make sure that any children have adequate supervision. For those without other means, this may mean that the family includes a day care voucher in its benefit package. In other cases, family members or babysitting cooperatives may enable a parent to meet the need for adequate child care. Every mother receiving assistance must cooperate with the state in establishing the paternity of the father. For a variety of reasons, a mother may be reluctant to reveal the fatherâ&#x20AC;&#x2122;s identity. However, the father is a source of support for the family that will relieve taxpayers of at least part of their burden. Therefore, if a mother wishes to get benefits, she must help the state identify and confirm the fatherâ&#x20AC;&#x2122;s identity or forfeit the opportunity to receive taxpayerfunded benefits herself. Similarly, a recipient must cooperate with the social worker assigned to the case and provide valid identification. The social worker would need to get the concurrence of a supervisor to be able to suspend benefits, but if the state is paying to help the recipient, it has a right to expect the recipientâ&#x20AC;&#x2122;s full cooperation. Some will doubtless criticize this proposal because the requirements enumerated above will exclude many otherwise eligible individuals. Some individuals, such as those with particularly difficult drug habits or who are trying to turn their lives around after getting involved in crime, may be individuals we would want to help. For these situations, we should keep in mind that there is a place for charity and that a nonstate solution will more often than not result in a 71

better outcome. In order to successfully overcome difficult personal situations, very tough love is often needed, a caring that seeks to understand the whole individual. A church or charitable organization is often in a position to take that very personal interest while the state is not. Establishing Health Care Benefits The basic health care benefit includes the following: • Major medical insurance covering 100 percent of costs above a $5,000 annual deductible. The participant may participate in a state-run plan or purchase a private insurance policy approved by the state. The participant would be able to convert the policy to a personal policy by assuming the premiums due. • Free preventive care — Annual medical examination with appropriate tests — Annual dental examination and cleaning — Optional annual vision examination — Immunizations — Appropriate screenings • $75 per person contribution each month to a Health Savings Account (HSA) As discussed earlier, if the recipient finds employment where he or she is covered by an employer policy, the recipient does not get a health care benefit, but does have the earned income component reduced by $1,000 per year for each person covered ($800 per year after consideration of 20 percent adjustment for earned income). This encourages participants to look for work with health insurance coverage as part of compensation and makes the employer coverage more valuable to its employees. The amount of the benefit is increased where the participant or a family member suffers from a chronic disease or other condition that would make him or her ineligible for a premium based upon good health. The one exception is smoking. If an applicant uses tobacco, or has used tobacco in the 90 days prior to application, he or she will receive a benefit that is only designed to cover a nonsmoker and will be personally responsible for the increase in premium that is applied to smokers. If a participant suffers from a chronic illness, the amount of the state’s contribution to the 72

participant’s HSA increases from $75 per month to $150 per month. At the same time, a participant with a family member suffering from a chronic illness will face an additional contribution requirement of 15 percent of income above four times the Oklahoma poverty level—i.e., instead of 75 percent of income being counted, 90 percent of income above four times the Oklahoma poverty level ($82,800 for an Oklahoma family of four). This provision allows a family with a member suffering from a chronic illness to benefit from the new concept but, since it is much more generous than that normally afforded, keeps Oklahoma from becoming a magnet for the chronically ill. Many on the Left argue strongly for a policy of “guaranteed issue” or a requirement that a private insurer must issue a policy at standard rates to any willing applicant. The recently passed “Obamacare” legislation contains a similar provision. However, the provision will drive up costs for everyone else. Our Blueprint proposal addresses the need for those with less than good health to get coverage by giving them additional resources to cover the additional cost. We should also note that mental illness is treated as any other illness. However, all approved care, including any drugs, is under the direction of an M.D. or a D.O. The HSA has a set of special provisions, as suggested in an earlier OCPA study of health care reform, designed to encourage efficient, responsible use of the state’s health care network. An amount, usually $75 per person, is deposited into the HSA. If the participant avails himself or herself of all available medical and dental preventive care, he or she would be allowed to withdraw 15 percent of the balance of the account above $1,000, subject to a 50 percent clawback provision. This should provide a strong incentive to limit unnecessary trips to the emergency room and to use generic drugs whenever possible. Miscellaneous Considerations Oklahomans may occasionally find themselves out of work and uninsured for a temporary period. Such an individual or family may purchase the insurance offered in the benefit packages for a temporary period by paying the premium. OKLAHOMA POLICY BLUEPRINT 2011

Note also that this concept can be applicable to seniors needing nursing home care, so long as stringent clawback provisions are maintained to prevent the transfer of assets to children to preserve an estate. Preserving estates is simply not the goal of Medicaid. Some Appreciation for Stay-at-Home Moms Existing policy often fails to give stay-at-home moms the respect they deserve. Most people instinctively realize the benefit of a close bond between mother and child in the child’s early life, and most research confirms that it exists. Under the proposal put forth here, married stay-at-home mothers get some respect and, in lean economic times, some help. Rather than overtly favoring single mothers, as does existing policy, the proposal advanced in this Blueprint favors the intact family. If a married father makes $30,000 per year from a job and a mother makes nothing, staying home to raise two kids instead, and through the father’s job, the family gets health insurance, the family is eligible for a benefit package of $5,100, which would be made up of SNAP benefits and a small amount of cash in addition. (If the father stays home and the mother brings home the paycheck, the same $5,100 is available; the illustration provided simply conforms to the most prevalent pattern.) Not until the father’s salary reaches $38,500 does the family become ineligible for benefits. Benefits may seem high, but the level proposed here is the same or lower than normally used in calculating benefits under the current system except that the current system favors single parents. Put the same two kids in a family without the father, and the mother can get close to the same level of benefits with $30,000 in income and one less mouth to feed. Under the concept proposed here, all benefits run out before the family reaches 187 percent of the Oklahoma poverty level as defined in this Blueprint. Elsewhere, this Blueprint contains a proposal to make progress toward eliminating the individual income tax in Oklahoma. This is a needed, but bold, step. This goal is designed to spur the Oklahoma economy, and nothing could do more to make it possible for more families to focus more attention on their children than to improve the state of Oklahoma’s economy. OKLAHOMA POLICY BLUEPRINT 2011

However, achieving the goal of eliminating the individual income tax quickly is a difficult task. Accordingly, as long as the individual income tax is retained, the following addition to Oklahoma’s child care tax credit is proposed. A family would be able to compute a state credit as though they were eligible for a federal child care credit of $3,000 for one child or $6,000 for two or more children if they met the following requirements: • The taxpayers were married throughout the entire year, and • One spouse had earned income (combining both wages and business income) of less than $1,000 or $10,000 if a deduction for an office in the home is claimed on the federal return for the entire year. This would reimburse the stay-at-home mom (or dad) to the same extent that the state currently does for families where both spouses work and use professional day care for their children. Of course, in many of these situations, the state is also subsidizing the day care itself, which (except to the extent of the credit itself) it would not be doing under this proposal.

OKLAHOMA POLICY BLUEPRINT 2011

Let’s Encourage Local Control If “all politics is local,” so should be the people’s control over government wherever possible.

merica’s founding fathers believed the best government is that government closest to the people. Few Oklahomans have not at some time ridiculed Washington policy-makers for their lack of understanding of the situation in Oklahoma—the situation for which they are making and enforcing regulations. Perhaps the most notorious example was the group of regulators that mandated that cowboys carry PortaPotties with them when they ventured into the open range. The disbelief and outright laughter that greeted that idea from the Carter administration is not the sole example. And Washington, D.C., is not the sole haunt of overreaching bureaucrats. A quick interview of people around the state will find many local leaders who talk about the bureaucracy in Oklahoma City in the same terms as almost all Oklahomans speak of the bureaucrats in Washington: people who do not understand our problems, our needs, or our circumstances. No one cares more about what happens in Okeene than the people who live in Okeene. No one in Oklahoma City understands the challenges and the local resources and can gauge the willingness of local people to invest in public projects better than the citizens of Okeene. Oklahoma is more centralized than most states. In other words, when we compare state and local spending, the state portion is a larger share of the total in Oklahoma than in most states. Other states tend to spend more money through local governments. Elsewhere in this Blueprint, we have outlined a system by which money can follow the student at both the K–12 and the college levels with the parent and/or student being able to direct where most of the money goes. There is no more local group for such decisions than the family, eclipsing in importance even county and municipal government. In other areas, a similar shift in control from Oklahoma City to the county level will help programs maintain a focus most likely to achieve real solutions efficiently and effectively.

OKLAHOMA POLICY BLUEPRINT 2011

Local Government Should Take Over Many State Programs The state currently administers many programs that would be more effectively run at the county or city level. In fact, many of these programs are already run out of county offices but are managed from the state. When administering a particular state program, state management has some logic, but when the purpose is to provide a service to the local populace, the county or city should take over. A prime example, also discussed in the section dealing with tourism and recreation, is the state park system. While the state has an interest in parks with a national reputation or that house a significant and unique public asset, many existing parks are basically local parks that would be better off in local hands. The same holds true for all the state golf courses. The Department of Transportation already provides a significant portion of funding for county roads and bridges, and there is certainly not a problem with the state making available special expertise in construction and maintenance that a county may not be able to afford on its own. However, local governments should have greater flexibility in meeting local needs. A combination of state aid and county revenue in 68 of Oklahoma’s 77 counties maintain county health departments. The two metropolitan areas maintain joint city-county operations on the same basis. Counties vote a local millage to support their health departments in addition to the state assistance the local departments receive. However, a unique arrangement exists in Washita County, where the local hospital contracts with the Department of Health to provide services to county residents. The Washita County arrangement takes advantage of economies of scale since some of the items needed for a county health department are already found in the hospital. The arrangement also promotes closer relationships between health professionals and patients since many of the health professionals already know patients they have already attended at the 75

health department. The system improves the quality of care while cutting costs. The Department of Commerce provides funding for many local programs. In some cases, such as Community Development Block Grants (CDBG), the state has been known to add its own set of regulations to a program in addition to the basic requirements imposed by the federal government. When the state operates as an overbearing middleman, some counties are forced to bring in expensive Oklahoma City or Tulsa consultants to meet the terms of their grants. We should cut out the middleman and the middlemanâ&#x20AC;&#x2122;s added burdens. Many agricultural programs would be better if managed by the counties. The state provides funding to the Conservation Commission to assist with various flood control projects as well as other programs. A well-designed system would permit a county with flood-prone areas downstream to fund projects in counties upstream to mitigate flooding by building or maintaining containment dams. The Department of Mental Health and Substance Abuse Services (DMHSAS) presents an interesting twist on the concept of local control. DMHSAS maintains operations in 17 regions each with a community mental health center. The state also maintains a psychiatric hospital, a psychiatric youth hospital, and a forensic center. If the state runs more of the funding through the community mental health centers and allows them to contract with hospitals and professionals for services as needed, more needs will be met. Many other programs are good candidates for greater local control, including the Physician Manpower Training Commission, the Arts Council, and local programs of the Department of Rehabilitation Services. One reason often given for state control is that only the state has the resources to pay for the needed services. We can solve this problem by transferring some state money along with the new responsibility to the local level. However, local citizens should get discretion over whether to continue, expand, cut back, or even eliminate the programs transferred. The local government should even have the option of reducing local taxes. Allowing local citizens to cut back or eliminate programs and use some of the savings for tax relief means that under 76

this concept local citizens are effectively paying for local services. If local citizens have true control and both the quality of the services they receive and their cost is their own responsibility, we will be certain to see programs targeted more carefully to meet local needs and managed more efficiently. The expectation that counties can operate programs for less money than the state creates opportunities to cut the overall budget while maintaining or even improving services. Of course, citizens should also have more latitude to tax themselves for additional or expanded public services. Much of the spirit of the Old West still lives in Oklahoma. We tend to be a self-reliant lot, not content to be herded about by bureaucrats. Our policies should harness this spirit to help improve our services.

OKLAHOMA POLICY BLUEPRINT 2011

Praise for the 2002 edition of Oklahoma Policy Blueprint: “Oklahoma Policy Blueprint is a splendid analysis of state issues accompanied by thoughtful proposals for reform. The analysis is thorough, well informed and highly sophisticated; the proposals are throughout directed toward assuring that government is effective in achieving its objectives while preserving a maximum of personal freedom.” Nobel Prize-winning economist Milton Friedman

“Oklahoma Policy Blueprint is a model for conservative policymaking: Grasping the lessons from a broad sweep of both world and U.S. history, it provides innovative policy prescriptions rooted in hard data and a realistic assessment of human behavior. This is a blueprint not just for Oklahoma, but for all states.” William J. Bennett, former U.S. Secretary of Education

Oklahoma Council of Public Affairs, Inc. 1401 N. Lincoln Blvd., Oklahoma City, OK 73104 (405) 602-1667 • FAX: (405) 602-1238 www.ocpathink.org • ocpa@ocpathink.org