WHITE PAPER: An Open Letter to the Next Governor

July 26, 2011

by Phillip J. Troyer[1]

For several months in 2011, it seemed the only obstacle that could prevent Indiana Governor Mitch Daniels from becoming the Republican Party’s eventual Presidential nominee was his own reluctance to accept the mantle. Obviously, Governor Daniels could not have been considered such a formidable contender on the national scene had he not earned a reputation for strong leadership as our state’s chief executive over the past seven years – especially on fiscal matters.

As Governor Daniels himself is quick to note, when he took office, Indiana was facing a $600-million deficit but now boasts a budget surplus of $370 million.[2] Furthermore, from 2009-10, Indiana’s gross domestic product grew by 4.6 percent (the highest by far in the Great Lakes region and trailing only New York nationally[3]), and that growth may stem from the same factors that caused Chief Executive magazine to rank Indiana the sixth-best state in which to do business in its 2010 survey.[4] Given these numbers, it is easy to see how our governor gained a national reputation for effective management of the state’s economy.

However, while Indiana has certainly outperformed many other states during the economic downturn, the recession still had a profound impact on Hoosiers. In January of 2008, Indiana’s unemployment rate stood at just 4.6 percent.[5] (It was a meager 3.2 percent in January of 2001.[6]) By March of 2009, that rate had jumped to over 10 percent and remained in double digits for 17 months.[7] While the percentage of unemployed Hoosiers has continued to tick downward throughout 2011, it remains significantly higher than in many other states. For example, in April of 2011, Indiana’s unemployment rate stood at 8.2 percent compared to just 3.3 percent in North Dakota, 6.0 percent in Iowa, and 6.5 percent in Minnesota.[8]  Furthermore, Indiana’s median household income, which had been right at the national average in 1999, dropped almost 10 percent below that average by 2009.[9] Not surprisingly, therefore, the number of Hoosiers living in households below the poverty line jumped from 8.7 percent in 1999 to 14.4 percent in 2009.[10] As a result, we cannot say the state’s economy is currently in better shape than it had been just a decade earlier.

Similarly, the rosy numbers used to tout our state budget surplus necessarily ignore our massively underfunded state-employee pension funds. According to the Pew Center on the States, Indiana’s public- sector employee-pension funds are funded at only 67 percent, which corresponds to a $12-billion deficit.[11] Given that fact, it should not be surprising that the more than $2 billion allocated for “General Government” in the 2011-13 bi-annual budget represented a three-fold increase over the $486 million appropriated for the same line item in the 1991-93 bi-annual budget.[12]

What may come as a surprise is that, while Indiana suffered a net decrease in private-sector jobs from 2001 to 2011, appropriations for economic development projects increased by over 150 percent over that same period of time – from approximately $790 million to over $3 billion.[13] It may well be that this spending has contributed to the recent decline in our state’s unemployment figures. However, our state cannot continue to rely upon short-term bribes to lure new businesses as a long-term plan for developing a sustainable economy.

Overall, however, Governor Daniels did an admirable job of guiding Indiana through the Great Recession. Unlike our national leaders, he did not use economic downturn as an excuse to run up massive budget deficits. Instead, he prudently tightened the state government’s belt by ordering his executive agencies to refrain from spending funds that had previously been appropriated by the General Assembly. As a result of his efforts, Indiana seems poised to come out of the recession faster and in better long-term shape than our country as a whole.

But while Governor Daniels eliminated Indiana’s deficit in the short term, many of the root causes of the prior fiscal imbalance were not addressed. In fact, had it not been for Indiana’s receipt of federal stimulus funds and the Governor’s refusal to spend money that had been appropriated by the General Assembly, Indiana would have faced a multi-billion deficit over the past two years.[14] In point of fact, state government grew substantially in real terms during the past 20 years, which poses several problems for the next governor. The most obvious is the pressure the cost of these new programs will place on Hoosier taxpayers and the negative effect any attempt to offset future funding deficits though higher taxes will have on economic growth. But an equally important by-product is the growing separation between state government and the public it is supposed to serve. As state government becomes more complex, it becomes more difficult for Hoosier voters to evaluate how their elected officials are performing. Conversely, it becomes more difficult for Hoosier legislators – who serve only part-time with minimal staff support – to provide adequate oversight of an increasingly complex web of governmental initiatives.[15] 

This is important because history has repeatedly demonstrated that unchecked governmental agencies are often a breeding ground for sloth and soft corruption. As Warren Buffett famously observed during the recent stock market collapse, “It’s only when the tide goes out that you learn who’s been swimming naked.” Similarly, the budget crises faced by many states as a result of the Great Recession exposed shocking examples of a disparity between the benefits received by civil servants and the public they serve. This imbalance would not have been possible without the incestuous relationship between public officials who grant these generous benefits and public-sector unions who keep them in power through generous campaign contributions. The next Indiana governor must decide whether to confront this powerful coalition or continue to permit it to have unfettered access to taxpayer funds.

Most importantly, however, the next Indiana governor must find a way to grow our economy and return Hoosiers to the status of “full employment” they enjoyed not that many years ago. As Ronald Reagan noted, the best social program ever invented was a job. Not only would an increase in the state’s employment rate help relieve current budgetary pressures by bolstering revenues and decreasing the need for government programs, it would also enable the next generation of Hoosiers to find work in our state after graduation, thus strengthening families which have long served as the bedrock of our state. As a result, making Indiana the premier location to not only start, but maintain, a business must be the top priority of the next Indiana governor.

The following represent a few important ideas I believe the next governor should consider to accomplish these goals:

I.               Continue to lower the cost of doing business in Indiana.

In May of this year, Governor Daniels signed into law legislation passed by the General Assembly to lower Indiana’s corporate tax rate from 8.5 percent to 6.5 percent. Previously, Indiana had imposed one of the highest flat corporate tax rates in the country, and this reduction should go a long way in improving Indiana’s reputation as a great place to locate a business. Best of all, the reduction will benefit all Hoosier companies, as opposed to tax abatement and special credits for politically favored (i.e., “new”) businesses.

Additional opportunities exist for the next Indiana governor to build upon this momentum to not only encourage economic development but also promote fairness in the tax code by considering the following reforms:

·       Indiana is one of only 22 states that imposes its own tax when one of its residents dies. In fact, bequeaths to “Class C beneficiaries” can be subject to as much as a 20 percent withholding — the highest inheritance- or estate-tax rate charged by any state in the country. The existence of a state death tax provides a disincentive for small business owners to reside in Indiana.  In fact, according to the American Family Business Foundation, federal and state death taxes may result in 32,000 fewer jobs for Hoosiers.[16]  As a result, a repeal of Indiana’s inheritance tax will help spur job growth by making it more appealing to start a small business in our state.

·       According to CNNMoney, Indiana is squarely in the middle of the pack (25^th) in a ranking of state tax burdens as a percentage of income at 9.5 percent.[17] However, just before the Great Recession began in 2008, Indiana raised its sales-tax rate by a full percentage point to 7.0 percent, so that now only California taxes consumers at a higher rate.[18] In addition, Hoosier motorists also pay some of the highest combined gasoline sales and excise taxes in the nation.[19] As a result, Indiana has increased the cost of daily living at a time when Hoosiers can least afford it. Not only has the higher sales tax made it more difficult for Hoosier families to make ends meet, it also makes goods sold in Indiana more expensive. Therefore, the next governor should call for a repeal of the 2008 increase in the state sales tax.

·       As noted, Indiana just enacted a substantial reduction in its corporate tax rate. This, then, begs the question – why must we continue to provide taxpayer-funded bribes (otherwise known as tax abatements and credits) to encourage new businesses to locate in our state or existing businesses to proceed with expansion plans they have already determined to be economically feasible?  As noted above, state spending on economic development has exploded in the past two decades while the state’s unemployment has risen equally dramatically. As a result, the next Indiana governor should commission an independent cost-benefit analysis of the myriad of state and local economic-development programs to ensure our tax dollars are not being wasted on corporate welfare grants that do not actually produce new jobs.

II.             Reverse the dramatic rise in the cost of state government.

No one will be surprised when the suggestion to reduce and/or eliminate existing sources of state revenue is met with allegations that such moves are fiscally irresponsible and will only lead to a return of massive state budget deficits and/or draconian cuts in existing programs. For these critics, any such reductions in spending will be deemed as “further piling on” to the reversions ordered by Governor Daniels to prevent funds previously appropriated by the General Assembly from actually being spent. In truth, however, state expenditures have increased in real dollars in recent years.

Specifically, during the years 2000-09, appropriations made by Indiana’s General Assembly grew at an annual rate of 4.5 percent.[20] By contrast, the annual national inflation rate for the same decade was only 2.56 percent[21] — meaning that state government spending grew at almost twice the rate of inflation. However, the growth in state spending during the period was actually slower than what had occurred during the prior decade. Total appropriations for the 1991-93 bi-annual budget stood at just under $21 billion but had ballooned to just less than $36 billion by the 2001-03 bi-annual, representing a 71 percent increase, compared to less than a 50 percent increase from the 2001-03 bi-annual and the current budget.[22]

Furthermore, it should be noted that, while state spending grew at a 4.5 percent annual clip during the past decade, state revenues grew at just four percent annually.[23] In fact, were it not for the almost $1.7 billion Indiana received from the federal stimulus program and the nearly $1 billion in spending reversions ordered by Governor Daniels, the state would have faced budget deficits for 2009 and 2010 totaling $3.4 billion.[24] 

Given that the current federal stimulus funds are ending and it is unlikely that Congress will approve any additional transfers to the states in the near future, our next governor will necessarily face tough budget decisions upon taking office and should consider the following solutions:

·       Indiana is one of only seven states that has not provided its governor with a line-item veto power.[25] As Governor Daniels demonstrated, the state’s chief executive can simply refuse to spend the money appropriated by the General Assembly. However, having the power to new spending initiatives before they go into practice would help future governors to reign in the growth of state spending by drawing attention to wasteful proposals tucked into otherwise acceptable legislation.

·       In addition to slowing the growth of future spending, the next Indiana governor should order the Office of Management and Budget to provide a detailed analysis of the specific programs that were added to the state budget during the past 20 years along with an assessment of their past effectiveness and continuing need.

·       It may come as a surprise to many Hoosiers that the greatest increase in state appropriations during the past decade was not dedicated to education or social programs. Instead, the amount of taxpayer funds spent on economic development more than doubled over the past 10 years — from just under $1.2 billion in the 2001-03 bi-annual to over $3 billion proposed by the governor for the 2011-13 bi-annual.[26] To the extent those appropriations represent tax abatements, subsidies and other bribes paid to lure prospective new employers to the state, the next governor should look to re-allocate the funds to lowering the corporate tax rates for all Hoosier employers.

III.           Bring Benefits Offered to Public Employees in Line with Those Received by the Public They Serve 

As noted above, if underfunded state pension and benefit funds are folded into the budget numbers, Indiana goes from a state that ably weathered the economic downturn to a state in crisis. For example, at the end of 2007 the market value of the Indiana Public Employees Fund (PERF) stood at $16.1 billion.[27]  Just two years later, that figure had dropped to $11.8 billion – a loss of almost one-fourth of its assets.[28]  While many Hoosiers working in the private sector saw the value of their 401k plans decline by even greater percentages, the important difference between the two groups is that state employees did not actually lose any funds because, unlike the taxpayers paying their salaries, their retirement benefits are guaranteed by their employer (i.e., the State of Indiana). As a result, in addition to the market losses they suffered in their own retirement funds, Hoosiers working in the private sector will likely be strapped with higher taxes to fund the retirement funds promised to state employees.

The discrepancy in benefits received by state employees as opposed to their counterparts in the private sector is not limited to income security at retirement. According the National Conference of State Legislatures, while private-sector employees saw the amount deducted from their paychecks to pay their portion of the company’s health insurance premiums increase dramatically, Indiana state workers experienced the opposite phenomenon – the premiums they paid for health care decreased significantly. Specifically, the average monthly premium paid by a state employee for family health insurance dropped from $291.66 in 2006 to just $182.94 – even as the total cost of their insurance increased.[29] While this reduction may result, in large part, from encouraging state employees to less-expensive, high-deductible policy options, it must be noted that the state actually subsidizes half of that deductible. According to the 2011 rates posted by the Indiana State Personnel Department, those state employees who choose to participate in one of the “Consumer-Driven Health Plans” – as opposed to a traditional PPO – will pay somewhere between six-15 percent of the actual premiums required for the coverage.

In order to protect Hoosier taxpayers and ensure the benefits granted to public-sector employees are in line with those received by their neighbors working in the private sector, the next Indiana governor should consider the following reforms:

·       All state employees should immediately be moved from a defined-benefit pension system to a defined-contribution plan. While the state should not renege on pension benefits already earned by past and current employees, eligibility for additional pension benefits should end. In addition, a formula should be established for converting those pension benefits already earned by existing employees into an equivalent cash value that employees can use to fund their own retirement.

·       The State Personnel Department should be instructed to conduct a survey of the benefits the state’s largest private employers offer to their employees, and the results should be used to ensure the benefits offered to state employees are in line with those received in the private sector.

·       To ensure that a majority of educational funds are dedicated to classroom instruction, local school districts should be required to limit their administrative costs to no more than 35 percent of their overall budget as a condition for receiving state funds, with the ability to petition the Indiana Department of Education for a waiver upon a showing of a legitimate short-term hardship and a detailed plan for reducing administrative costs.

IV.           Give Hoosier workers the right to choose whether they want to join a union and prohibit public servants from engaging in political activities while on the job.

The 2012 elections for the Indiana General Assembly will likely hinge upon public reaction to the walkout staged by Democrat members in 2010 to block legislation they deemed “anti-union.”  Therefore, if one accepts Governor Daniels’ plea that “right-to-work” legislation should not be considered until the public is prepared for a debate on the topic, then the next session of the General Assembly should be the perfect time to address this issue.

While unions will obviously be funneling mountains of cash into state legislative races to prevent this debate from ever occurring, one senses that average Hoosiers have grown increasingly wary of the cozy relationship between public-sector unions and state lawmakers. The mere fact that the Indiana State Teachers Association can continue to dole out campaign contributions after losing track of millions of dollars held in a trust fund earmarked to pay health claims was enough to raise some eyebrows. Similarly, scenes of parents anxiously awaiting lottery results – not for a monetary jackpot but for the chance to pull their child out of a failing public school as in the film Waiting for Superman — did much to undercut public sympathy for the public-union cause, as did the growing awareness that state employees receive benefits far more lucrative than those offered to most taxpayers working in the private sector. When added together, these developments may have convinced voters that the spectacle of angry union members taking over the State Capitol serves as a proper metaphor for what has been occurring for years and that, perhaps, it is time to restore the proper balance between public servants and the public they supposedly serve.

In the private sector, there can be little doubt that a state’s labor laws are a significant consideration for corporations trying to decide where to build a new plant. While the recent controversy regarding the NLRB’s attempt to prevent Boeing from moving operations to South Carolina (a right-to-work state) from Washington (a state that has not adopted right-to-work legislation) has highlighted the issue, corporations in Indiana have quietly demonstrated the importance of this factor in deciding where to locate.

For example, Honda’s decision to build a large production plant in Greensburg resulted in thousands of new jobs being created in our state, and officials recently announced plans to add a shift and another thousand employees. However, there can be little doubt the company would not have located the facility in Indiana had it not been able to restrict its hiring to applicants who already lived in 20 counties that did not have a heavy concentration of existing UAW members.  

Earlier this year, UAW officials hinted they may begin targeting Japanese automakers operating non-unionized production plants in Indiana. Those plants currently employ some 8,000 Hoosiers and, as noted above, there are plans to significantly increase that figure in the near future. However, if the UAW is successful in forcing the plants to become a union shop, foreign automakers may view Indiana as an inhospitable location in comparison to southern states with established right-to-work laws.

Therefore, the next Indiana governor should consider taking the following steps:

·       Support the passage of right-to-work legislation as an integral part of spurring job creation in our state. The enactment of such a law would provide Indiana with a strong competitive advantage over other Midwestern states in attracting new manufacturing jobs.

·       Encourage the General Assembly to amend the “State Employees Bill of Rights” (IC 4-15-10-1, et seq.) to restore the proper concept of public service. Specifically, state employees should be subjected to the same restrictions on their political activities as federal employees under the Hatch Act. In other words, just as taxpayers should not be faced with the possibility of having an IRS agent stand at their door to solicit contributions for a particular party or candidate, so too should parents be protected from having their children’s teachers pressure them to support a particular political cause. Furthermore, fairness requires that, just as IC 4-15-10-3 prohibits denying a state employee the right to join a union, legislation should be enacted to prohibit a state employee from being required to join a union. Similarly, governmental agencies should be prohibited from using state resources to either promote or oppose union activities. This would include a prohibition on allowing governmental entities to collect union dues through payroll deductions.

V.             Provide for checks and balances between branches of government and reduce lawsuit abuse.

Perhaps no issue – including the walkout staged by Democrat members of the General Assembly – has resulted in a greater public uproar than the Indiana Supreme Court’s recent pronouncement that Hoosiers have no right to reasonably resist a law-enforcement officer’s unlawful entry into their homes. The decision, which flew in the face of legislation recently enacted by the General Assembly at Governor Daniels’ urging, highlights the dangers posed by an unchecked branch of government.

It may be argued that our state constitution already provides voters with an opportunity to unseat Indiana Court of Appeal and Supreme Court judges every 10 years. In point of fact, however, only a very small minority of voters have sufficient information to cast an informed vote. As a result, placing the question as to whether a particular justice should retain his or her seat on the ballot does little to advance the public interest. Instead, it actually undermines public confidence in our democratic process by making such ballot choices appear pointless.

Similarly, it must be noted state appellate court judges are nominated by a committee comprised of the Chief Justice of the Supreme Court, three members elected by attorneys practicing in the state, and three members appointed by the Governor. Therefore, unlike our federal constitution, the Indiana Constitution does not permit state legislators any involvement in the process of selecting appellate court judges. As a result, ordinary Hoosiers may be forgiven for questioning whether the current system is unnecessarily dominated by lawyers.

With regard to specific judicial issues, it may come as a surprise to most Hoosiers that Indiana was once a leader in stemming the tide of lawsuit abuse. In the early 1970s, premium rates for medical malpractice coverage rose dramatically and several large carriers pulled out of the market due to growing unpredictability regarding jury awards. In response, the Indiana General Assembly passed a comprehensive reform package that created the nation’s first state-run patient-compensation fund. As a result of these reforms, Hoosier physicians pay some of the nation’s lowest malpractice premiums and our state is able to recruit and retain some of the country’s best physicians.

Under Indiana’s Medical Malpractice Act, a claimant’s case must first be reviewed by a medical review panel to provide an expert opinion as to whether the claimant suffered an injury as a result of the defendant-physician’s negligence. The benefit of this procedure is that it helps to prevent non-meritorious claims from proceeding to trial. While no one is proposing to deny an injured claimant his or her day in court or to shield companies from malicious behavior, frivolous lawsuits pose a tremendous burden on companies and individuals. Strengthening existing law to protect Hoosiers from non-meritorious claims could provide a significant incentive for more reputable businesses to locate in our state.

As a result, the next Indiana governor should consider the following reforms:

·       While attorneys obviously have superior information regarding the competency of those who will be considered to serve on the state’s highest courts, it is undemocratic to give a particular segment of society such influence in selecting our state’s most-important jurists. As a result, the next governor should propose changes to the Indiana Constitution regarding the method by which state judges are selected and retained. To begin with, as a condition of retaining their right to participate in the selection process, the attorneys appointed to the Judicial Nominating Commission should be required to publish an annual guide of decisions issued by our appellate courts, as well as the voting records of the current sitting judges so voters can make an informed choice when deciding whether a judge should be able to retain his or her office. In addition, the Indiana Senate should be required to provide its advice and consent before any appellate court judge or supreme court justice may be seated. Finally, the General Assembly should be given the power to impeach a state jurist found guilty of a serious crime. 

·       Indiana law already includes a version of “loser pays.”  Pursuant to Indiana Code 34-52-1-1, a court already has the authority to require a losing party to pay an opponent’s attorney fees in the event the court determines the party’s claim to be “frivolous, unreasonable or groundless.”  In practice, however, courts rarely exercise this authority. As a result, the existing law should be   strengthened to require judges to issue a finding in each case explaining why attorney fees should or should not be awarded pursuant to the above-referenced statute and these findings should be subject to appeal.

VI.           Reassert Indiana’s sovereignty by pushing back against Washington.

Like the proverbial camel with its nose under the tent, from education to insurance to economic development, the federal government continues to interfere with issues long-deemed the exclusive province of the states. While I would not recommend that the next Indiana governor echo Texas Governor Rick Perry’s threat to secede from the Union, it is becoming increasingly clear that federal mandates are harming states and that governors need to reassert the sovereign rights of their states under the U.S. Constitution.

For example, according to a study conducted by a national econometrics firm, the unfunded mandates contained in the healthcare reform act passed by Congress will cost Indiana between $2.59 billion and $3.11 billion over the next seven years.[30] Given these facts, the decision by Indiana Attorney General Greg Zoeller to join other states in challenging the constitutionality of Obamacare appears to be a wise investment of state resources. Similarly, the next Indiana governor should aggressively assert the state’s sovereign rights under the Tenth Amendment whenever it is determined that federal legislation will impose new mandates on Indiana, as well as studying the impact existing programs (such as “No Child Left Behind”) are having on the state to determine whether continued participation is warranted.

In summary, the next election could provide a turning point for Indiana. The next governor can either aggressively move to position our state as a model for economic freedom or accept the progression of “socialism lite” through a continued expansion of state government. As competition between the states for economic growth becomes more acute, the direction we choose will have a profound impact on our own futures and those of our children and grandchildren.

As Thomas Jefferson famously noted, “The price of freedom is eternal vigilance.”  Just as the Tea Party movement has caused citizens to keep a closer eye on the federal government, I hope this letter will help spark an interest in our state priorities. I am sure the next governor will have his or her own ideas regarding the best way to ensure our future prosperity, as will other Hoosiers.  This letter is certainly not intended to be exhaustive. However, it is a starting point for the discussion, as well as a means for holding our next governor accountable.

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