Ten Recommendations For North Carolina’s Budget Reform and Advisory Commission (BRAC)

In January of 2009, Gov. Bev Perdue issued Executive Order #5 to establish the North Carolina Budget Reform and Advisory Commission (BRAC). BRAC was established, in part, to ensure that “the operations of State government are streamlined and improved to achieve cost saving without sacrificing core missions and services.” ¹

Such a commission is not new to state government in North Carolina. In 2002, Gov. Easley formed the “Governor’s Commission to Promote Government Efficiency and Savings on State Spending.” In the prior year, Easley oversaw the “Efficiency and Loophole-Closing Commission.”  Perhaps the most recognized state government efficiency commission was the Government Performance Audit Committee (GPAC), which issued its findings in 1993. GPAC was re-authorized to conduct another audit of state government in 2006, and their results were reported in 2008.

Dating back even further, in 1973 Gov. James Holshouser created the “Governor’s Efficiency Study Commission” with his first executive order as Governor. ²

North Carolina’s current BRAC was formed in large part in response to the current state budget deficit situation. Several other states in like situations have formed similar commissions to examine ways to streamline government operations as well. Thus far, North Carolina’s BRAC has met three times and is already examining issues such as reforming North Carolina’s Alcoholic Beverage Control (ABC) system, purchasing and informational technology systems and the use of state aircraft.

In their search for ideas, BRAC members would be wise to not only examine recommendations from other state commissions but also recommendations from previous North Carolina commissions that were never implemented.

With this in mind, the Civitas Institute has created a list of 10 recommendations to streamline North Carolina government and more efficiently administer public programs.

1. Increase auditing of pharmacy overpayment reimbursements

A report prepared by the State Auditor of Washington state³ recommended increasing its investment in auditing pharmacy overpayments in the state’s Medicaid program. The report concluded, “In fiscal years 2007 and 2008, DSHS experienced an average 162 percent return on investment” for such audits.

Should North Carolina increase its auditing of Medicaid pharmacy overpayments, it is likely to yield similar results.

UPDATE: The original version of this article recommended implementing changes included in a 2009 bill (HB 190) which proposed DHHS invest in “technically advanced software and services” to more thoroughly detect Medicaid fraud. Estimated savings attached to the bill concluded the state could save $37 million in the program’s first year. The bill died in committee. However, the Medicaid fraud software provisions were included in the FY 2009-10 budget bill. Civitas regrets the error.

2. Initiate a multi-state pooling consortium to purchase items like Medicaid drugs, heavy equipment, institutional foods, etc.

According to the American Legislative Exchange Council, twenty-seven states currently participate in multi-state Medicaid drug purchasing coalitions.⁴ North Carolina and neighboring states Virginia and South Carolina, however, do not. Taking advantage of larger economies of scale can better position states participating in purchasing coalitions to negotiate deeper discounts for prescription drugs covered in their Medicaid program. For instance, the state of Louisiana reported a savings of $301 million in fiscal year 2009 due to their participation in a multi-state drug purchasing coalition. ⁵

No doubt, further state savings could result from similar purchasing coalitions for major items such as heavy equipment, institutional foods, and other regularly-purchased items.

3. Require co-pay for non-emergency treatment in emergency rooms in Medicaid

Currently, 28 states require a co-pay for Medicaid patients receiving emergency room treatment for non-emergency conditions.⁶North Carolina does not.

North Carolina’s system provides incentive for Medicaid enrollees to use emergency room services even in cases of non-emergencies, because it ends up costing recipients nothing. A 2007 Heritage Foundation evaluation of Centers for Disease Control data found that “Medicaid and SCHIP enrollees are twice as likely as the uninsured and four times as likely as those with private insurance to use the emergency department for non-urgent problems.” ⁷

Establishing a co-pay for non-urgent use of emergency room services will curb the unnecessary usage of highly expensive emergency room care, and at least partially offset some of the costs for those who continue to do so.

4. Restructure State Health Plan pricing, introduce more choice

Based on the 2002 Governor’s efficiency commission recommendations, the state should alter the pricing for the state health plan. Because the state pays the entire cost of health insurance premiums for state employees, but none of the premium costs for dependents, many state employees opt to not cover their children on the state plan.

The state should instead shift to an arrangement where state workers pay a share of their own insurance premium; but offset that additional cost by partially covering dependent coverage. Doing so will diversify the state health plan’s risk pool by introducing many young, inexpensive children into the pool. Such diversification will drive down premiums and costs in the state health plan – saving taxpayers money.

North Carolina should also introduce high-deductible/health savings account (HSA) options for state workers. Twelve states already offer such options, including area states South Carolina and Florida.⁸

Introducing HSA options for the State Health Plan can produce significant taxpayer savings.

For instance, Indiana began offering HSA options for state employees in 2006. According to the state’s assistant general counsel ⁹ this move has already produced estimated savings of $42 million.

The new HSA options have become quite popular among Indiana state employees. Indiana Gov. Mitch Daniels recently noted that two thirds of their state employees are currently enrolled in an HSA plan.¹⁰

Similarly, Washington commissioned an actuarial study in 2006 to determine the potential savings of offering HSA plans for state employees. The study concluded that if only 2 percent of the state’s 127,700 public employees switched to an HSA plan, the state would save $3 million. If enrollment rose to 10 percent, savings would increase to $20 million.¹¹

5. Phase-out unnecessary state personnel

A close evaluation of North Carolina state personnel reveals many vacancies go unfulfilled for six months or more. As recommended by the 2002 Governor’s efficiency commission, North Carolina should establish a system that closely examines long-standing vacant positions and tasks agencies with justifying the necessity of maintaining these positions. If the agency is capable of fulfilling its core mission without filling the position, the agency should be obliged to eliminate it. Any essential duties  could be distributed among current employees. The savings, then, could be split between the state’s General Fund and the agency for use as extra compensation for those taking on additional responsibilities, or other necessities.

6. Consolidate workforce development programs

According to the 2002 Governor’s efficiency commission report, “Perhaps no other area of state government is cited more often as an example of inefficiency as workforce development.”

In 2008, the Fiscal Research division produced a “workforce development inventory” report. The report noted that total spending on North Carolina workforce development programs totaled $1 billion (including federal funds) in FY 2007-08. The report also itemized 31 different programs spread out over eight state agencies, and noted that the programs “do not collectively function as a single workforce development system.”¹²

Similarly, the North Carolina Department of Commerce’s Commission on Workforce Development cites a comprehensive system “of approximately 49 workforce development programs in 8 state agencies.”¹³

The conflicting number of programs cited should be sufficient evidence in itself that North Carolina’s workforce development efforts are disjointed, difficult to track and most likely duplicative.

Rather than continue to have so many programs scattered throughout so many state agencies, North Carolina’s workforce development efforts could be more efficiently administered if the numerous programs were consolidated under one agency.

7. Consolidate administrative functions of the 58 community colleges

Significant savings could be realized by consolidating the administrative functions of North Carolina’s 58 community colleges. As recommended by the 2002 Governor’s efficiency commission, “A move to a multicampus structure with centralized oversight is appropriate.”

8. Reduce/Eliminate advocacy functions in the Department of Administration

As stated on its website, North Carolina’s Department of Administration exists to act as “the business manager for North Carolina state government.” Over the past several years, however, the Department has acquired more advocacy functions. Indeed, there are now 17 boards and commissions located in the department, ¹⁴ most of which serve an advocacy role in that they lobby the General Assembly to pass legislation or appropriate state money in the interests of their represented group .

The taxpayer and state government is best served when the Department of Administration focuses on its role as “business manager” and lets the private sector assume advocacy roles.

9. U.S. Treasury state reciprocal agreement program

In 2005, the federal government launched a pilot program to enhance tax liability collections from state and federal government contractors. According to the State Auditor of Washington, two states participated in the pilot program – Maryland and New Jersey.¹⁵

The reciprocal agreement works as follows: when state or federal government agencies contract with a vendor, the agency determines if the vendor owes money to either the state or federal government. Any amount owed is thus subtracted from the payment to the vendor, and credited to the governing body owed money.

In the pilot program, New Jersey and Maryland collected a total of $20.7 million in one year. A minimal investment for system upgrades would be required, but the pilot states recovered start-up costs in only one and three months, respectively.

10. Sell non-essential state assets

North Carolina state government currently owns more than 11,800 buildings and nearly 9,000 parcels of land. ¹⁶

State government is far and away the largest owner of buildings in North Carolina. For sake of comparison, a Fiscal Research 2008 presentation noted that Equity Office, the largest publicly traded office management firm in the U.S., owns 300 office buildings totaling 50 million gross square feet across the nation. The nearly 12,000 state-owned buildings total 107 million gross square feet. ¹⁷

As recommended by the 2002 Governor’s efficiency commission, North Carolina should inventory the state’s assets and consider them “for privatization, where appropriate.”

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