Reflections on Iowa Governor Hiring PSG

Iowa Hires Minnesota Consultants To 'Reinvent' State Government

A similar, grim reality existed in most other states, where officials faced two unpalatable choices: slash budgets or increase taxes, actions all but guaranteed to enrage their constituents.

But in Iowa, the governor and legislature embarked on a third course, undertaking a broad reinvention of the machinery of state government.

And rather than do the job themselves, they handed the keys over to a private Twin Cities consulting firm that stands to win a hefty payday of more than $6 million -- but only if its proposed reforms pay off.

"It was a huge accomplishment to get a Democratic governor and a Republican legislature together on issues that are this controversial," said Babak (Armi) Armajani [pictured above], who heads the Iowa project for Public Strategies Group, an organization best known until now for running the Minneapolis school district in the 1990s.

"But it feels like we're just getting started."

Armajani's group has endured sneering criticism and howls of outrage, but appears to be pulling off the task set before it, said Cindy Eisenhauer, Iowa's chief financial officer who oversees Public Strategies' work with the state. "During a lot of the process, they were viewed as kind of a pariah," she said. "It was scary and threatening to everyone involved, but they're helping us make government more nimble."

State Sen. Jeff Lamberti, who chairs the Iowa Senate's Appropriations Committee, generally agreed. "You can like or hate the results, but you can't fault their record," he said. "Now, for them to really ring the bell and get their full payment, the savings they're talking about can't be temporary."

Public Strategies was created in 1990 by several veterans of the Perpich administration, organized around the notion that the public sector needs to act more like the private sector -- shedding bureaucratic inertia, encouraging public employees' creativity and treating taxpayers more like customers.

Led by former Minnesota Finance Commissioner Peter Hutchinson, Public Strategies took over management of the Minneapolis school district in 1993 and ran it for four years. It was the first time a large U.S. school district hired a private firm to act as its superintendent.

Although it got mixed grades, Public Strategies was credited with restoring trust among the district's teachers and eliminating a financial roller coaster.

"We looked at that track record when we decided we needed outside help, and of all the bidders we had, Public Strategies was the only one used to dealing with government," Eisenhauer said.

The state also had prior experience with the company. Public Strategies helped it create a new Department of Administrative Services, which centralized functions such as information technology, saving the state about $12 million a year, she said.

This year's task was much tougher. It was clear from the start that broad tax increases were off the table, but the state's $4.7 billion budget was headed for a deficit. Gov. Tom Vilsack brought in Public Strategies and gave it these marching orders: Come up with cuts and reorganizations that will save money in exchange for 5 percent of any savings that are realized.

The firm proposed what it dubbed a "smart spending bill," legislation calling for $88 million in savings and sweeping reorganizations in such areas as local government aid and child welfare programs. The GOP-dominated legislature balked, increasing the cuts to $128 million while easing up on the reorganization.

"At the end of the day, we got a mix of some of the reinventing stuff, but a lot of what we did you'd have a hard time classifying as anything but an old-fashioned cut," Lamberti said. "But we got a lot done."

Armajani was sanguine about the fact that the budget signed into law by Vilsack was less ambitious than the original blueprint. "Yes, it's frustrating, but that's life in the public sector," he said. "It's never perfect and you never get everything you want."

What he and about 15 staffers working out of a state office building in Des Moines got was a mishmash of savings spread widely across state government that they will spend the next two years trying to implement.

Here's how the three biggest reinventions are supposed to work:

The firm will help officials of the state's Department of Human Services redesign its child welfare program while reducing paperwork in the hope of saving $20 million.

Also, five state agencies, including the state lottery and public safety department, have become so-called "charter agencies" that accept 10 percent budget cuts worth $15 million. In exchange, those agencies will get relief from a certain amount of red tape -- with the idea that savings from the reduction in bureaucracy will make up for some or all of the budget cuts.

Finally, $70 million in aid to the state's 949 cities will be cut in exchange for relief from some state mandates.

That latter plan created by far the loudest public outcry. "The whole process stunk -- it was all out of whack," said Tom Bredeweg, executive director of the Iowa League of Cities. "There's no reinvention in this whatsoever. Why do you have to give a consultant $6 million just to cut local government?"

He said Public Strategies was hired merely "to provide political cover for the governor and the legislature."

Public Strategies' role, said Lamberti, was less to provide political cover than to serve as "a buffer" between Vilsack and the legislature.

"It helped to have someone from outside come in and learn about Iowa politics," he said. "I'm not sure we could have done it with a local firm, because then we'd be dealing with friends. They had more perspective."

Said Armajani: "Taking heat was part of the deal. There wasn't enough money to go around, so if I was in their shoes I'd be complaining about cuts, too."

The Iowa project was by far the most ambitious undertaken by Public Strategies, but it also has taken on reorganizations in Washington, New York, California and Illinois, as well as modest projects in Minnesota.

If the expected savings don't materialize in Iowa, the firm was to be paid nothing. But it already is on track to receive an initial installment of $2.85 million, he said.

"Iowa is where we've gone the farthest, and it's where we risked the most -- a 100 percent risk," he said.