In this corner, leaders of cities, long accustomed to controlling their destinies! And in the other corner, state governments, anxious to protect the rest of the state from the city’s crisis! It’s a battle playing out in two major communities – Michigan’s largest city and the capital of Pennsylvania – and has the potential to rewrite the book on state/local relations.

Let’s review how we got here.

Detroit and Harrisburg are the national poster children for municipal fiscal crisis. Struggling to maintain solvency, they teeter at the brink of maintaining payroll, meeting debt obligations and sustaining critical public services.

In Detroit, the crisis was fueled by a deeply wounded regional economy. Decades of population decline, an exodus of wealth and the oft-cited struggles of the American auto industry took their toll. Just two generations ago, Detroit was flexing its manufacturing might and experiencing explosive growth. Today, it’s struggling mightily to pay for the municipal structure that was created to meet that mid-century demand.

Harrisburg’s crisis, by contrast, is fundamentally about one failed large-scale project. A soap opera’s worth of mistakes regarding a garbage incinerator initiative – which was supposed to produce revenue through electricity sales – saddled the city with regular operating losses and $300 million in debt. Harrisburg’s per capita debt burden is now three times higher than Pennsylvania’s next-most indebted city, Philadelphia. The situation came to a head in 2009-10, when the city stopped making payments altogether on the facility, thumbing its nose at creditors and forcing its guarantors (including surrounding Dauphin County) to reluctantly pick up the slack.

When cities face bankruptcy, what is the power and obligation of the state to act? How can the cities survive without giving up their sovereignty?

Both Michigan and Pennsylvania (like New York) are “home rule states,” meaning that the state legislature has vested local governments with extensive powers and policy-making responsibilities to address local issues. Those powers and responsibilities grew throughout the 19^th and 20^th centuries, positioning local governments to manage their own affairs almost entirely, with virtually no interference from the state.

This is what makes the recent turn of events in Detroit and Harrisburg so fascinating. In both cases, state governments have stepped in to exert control citing overriding state interests in both cities’ solvency. The result has been a power struggle that may change the paradigm of state/local interaction. State governments hoping to avert disaster are inserting themselves in the process and exerting control; cities accustomed to governing themselves are reluctant to cede authority.

Procedurally, it’s not unlike the imposition of financial control boards in New York State in places like New York City in the 1970s, Yonkers in the 1980s, Nassau County in 2000, and more recently Buffalo (2003) and Erie County (2005). Yet the tale of Detroit and Harrisburg has been much more contentious.

In late 2011, the State of Michigan named a team to review Detroit’s finances as a precursor to appointing an emergency manager, a step that would effectively divest city officials of financial control. Local response was swift and vehement. Elected officials protested the move as illegal and anti-democratic. Community organizations, with help from a U.S. Congressman, rallied against the disenfranchisement of residents, particularly minorities. “Detroit needs to be run by Detroiters,” said its mayor, who even volunteered to serve as emergency manager.

Similar scenes have played out in Harrisburg. After rejecting a state-produced financial recovery plan last summer, the city council (notably, without the mayor’s support) voted in October to file for Chapter 9 bankruptcy protection, a move designed in part to keep the state from imposing its will on Harrisburg’s finances. In November, a federal judge dismissed the filing, paving the way for state control. And act swiftly it did, appointing an emergency receiver in early December and empowering him to develop a recovery plan and override the whims of city officials.

The drama playing out in Detroit, Harrisburg and other places has real potential to alter the fundamental relationship between states and their local governments. As fiscal crisis pushes more municipalities to the brink, states will be faced with the choice to impose more stringent controls that roll back powers localities have long exercised independently.

Where goals of fiscal stability and local control converge, which side wins?

Glaeser reminds us that cities are “density, proximity, closeness. . . . [T]heir success depends on the demand for physical closeness.” He asserts that electronic communication is not a substitute for face-to-face contact (a proposition anyone who has endured a few conference calls will accept). Even sophisticated “virtual meeting” suites fall short. (Maybe it looks like Nathan is in the same room, but you can’t go out for a beer after the meeting.)

Taking one step further, Glaeser argues that the declining cost of communication, by creating access to vast new stores of knowledge, increases the demand for “face time,” as we work together to make something of all of this information. Face time and electronic communication are complementary—each enhances the value of the other.

Some cities succeed while others fail. The economic base of the community is a key factor: Sectors based on innovation—say software (Bangalore or San Francisco) or financial services (New York, London or Charlotte)—rely on urban “people density.” The value of density outweighs the additional cost of an urban location—in term of real estate, salaries, taxes, etc. Sectors that are less knowledge intensive may find that the benefits don’t outweigh the costs and will locate outside cities.

This explains why technology leadership emerges from cities. New York, the San Francisco Bay area, Boston, Singapore, Shanghai and other tech leaders bring smart people together and spawn competitive companies with innovative cultures.

Is there a lesson here for Rochester? If proximity feeds innovation, let’s explore ways to bring our smart people closer together. Unlike many college towns, our community is separated from our marquee academic institutions, the University of Rochester and the Rochester Institute of Technology.

UR’s campus is a place of splendid isolation—the main site is virtually walled off from the city to the north and west by the Genesee River, to the east by Mt. Hope Cemetery and to the south by Genesee Valley Park and I-390.

RIT’s antecedents, the Rochester Atheneum and the Mechanic’s Institute, were established in Rochester’s downtown. The first building of the combined institution was on Plymouth Avenue next to the Erie Canal. Although the relocation to Henrietta has served the university well (and has enabled the creation of a fabulous 5.6 million square-foot facility), the campus is distinctly suburban and remote from the rest of the city.

It is UR’s “splendid isolation” that prompted the notion of a new I390 interchange. Recently endorsed by Governor Cuomo, the Kendrick Road exit will address problems of congestion and poor design in the E/W Henrietta exit and will dramatically expand access to underutilized real estate south of the UR campus. If you trace the map southwest, you run right into RIT.

Might this be the Rochester economy’s new “center of gravity?” Our “idea factories”—UR and RIT—anchor the north and south. Monroe Community College, a critical partner for tech-based manufacturing, marks the site’s eastern boundary. Ready highway access is assured by I390 and the NYS Thruway.  Adjacent to this site, the airport is also a considerable asset, given the size of the metro area: Rochester International hosts eight major carriers serving 14 nonstop destinations; ticket prices are already below average for the nation and may fall further after Southwest absorbs Airtran.  And just to the west is the Genesee Valley Park, one of our Frederick Law Olmstead-designed public parks.

How does the new interchange promote economic development? It improves traffic circulation, certainly. Better access to UR, less congestion on E/W Henrietta roads, and fewer accidents are good things but the interchange only improves the economy directly through UR. Extending south of Kendrick Road, however, is a former railroad right-of-way, now converted to a bicycle/walking trail. Jim Yarrington, who leads design and construction for RIT, points out that this right-of-way almost directly connects UR, RIT and downtown.  He muses that this could be an Upstate version of the Boston area’s Massachusetts Avenue, which connects the universities and center city. Just as Research Triangle Park in North Carolina spurred economic expansion through proximity to Duke, UNC-Chapel Hill and NC State University, the largely undeveloped real estate between our great universities—UR and RIT—is fertile ground for idea creation and knowledge-intensive business development.

This brings us back to Ed Glaeser: For all of our sophisticated “virtual” connections, physical proximity still matters. Yes, let’s add an interchange on 390. But let’s also explore how that investment can catalyze development of a high tech corridor that creates opportunities for our children and enhances the region’s economic vitality.

Their experience mirrors those of many districts across the state:

• Decreasing enrollment. Ontario will serve 9% fewer high school students by 2020. Only one district expects enrollment to grow. Four estimate a loss of more than 20%.

• Fiscal pressures. State aid is at risk; salary, health care, and pension costs steadily increase; mandates and expectations from NYS are rising; the recently-enacted “tax cap” limits their power to raise taxes. Stimulus funds and fund balances masked the pain, but are largely spent. Shrinking enrollments, combined with fixed costs, turn the fiscal squeeze into what appears a death grip.

Collectively, Ontario County districts have cut 320 staff positions over the past three years. Some have cut extracurriculars (the football team, in one case), or closed or reconfigured school buildings. All are exploring shared services with their municipalities or with other districts. All are concerned about preserving the opportunities they currently offer students.

• Disparity in access to educational opportunities. State test scores indicate that every one of these districts offers a quality general education. Yet advanced courses, upper level languages, and specialized electives are expensive to deliver for districts with small enrollments, and so it is not just extracurriculars that are on the chopping block. The growing concern is that students in some areas have access to substantively less, affecting their chance to be college and career ready or compete in the global marketplace.

One of Ontario’s districts offers 77 high school courses; another offers 132. One offers 4 AP courses; another offers 17. Three of the nine districts are able to offer the robust International Baccalaureate curriculum to interested students. While all districts participate in BOCES and college partnership programs, these cannot close these gaps in access.

Exploring possibilities as a region

CGR was engaged to explore regional solutions to the problem of offering secondary school education in a largely-rural area. Framed as a strategic planning process, the communities used this as an opportunity to go back to the drawing board to imagine plausible alternatives for the future.

• Would pooling resources and making decisions as a region enable more students to have access to more educational opportunities? Would it remove barriers to distance learning and other innovations?

• Would a regional model save money?

• What are the obstacles to change? What considerations need to be discussed and addressed?

Two possible regional high school models demonstrated how Ontario County could move from nine current high schools to five or six in the future. With multiple, and often conflicting goals, the models have tradeoffs, potential cost savings and potential cost increases.

Beginning to think regionally raises many questions that beg further discussion. If communities view the options as intriguing enough to merit further study, an implementation study could move forward. The details of the feasibility study can be found on the study website with a final report due out in March.

NYS pushing regional policy?

State regulation doesn’t provide guidance or a model for the creation of regional high school models. Other states have countywide districts and regional high schools, and there are a few Central High School Districts on Long Island. But since the 1940s, state law does not allow districts to form regional high schools. Without guidance from the state, questions about what body would govern and award diplomas, how regional schools would be financed, and how communities would decide and potentially transition are all unknown. State Senator Catherine Young’s bill (passed Senate, pending Assembly) would allow districts in her Western NY Senate district to develop and opt into a regional high school; a task force is working to flesh out models.

The Board of Regents just included statewide regional high school legislation in their 2012 legislative priorities.

“What ifs?” are both exciting and daunting, especially when the outcomes matter so much. We applaud Ontario County school leaders and their constituents for being proactive, for keeping open minds, and for wrestling with tough questions. The need on the ground and the interest from the State may mean we hear more as the year unfolds.

At CGR, we are often brought in many months (or years!) after a program has been started and asked “well, how’d we do?” only to find that the information needed to answer the question hadn’t been captured. This is a painful discovery. Not only does managing in the dark make it even harder to reach your mission, in today’s environment the case for additional funding to support good work can’t be made without documentation.

Below are a few quick tips to increase the power of your data in 2012:

1.      Think about the end from the start

In order to tell the story of what happened, proper procedures to collect data must be in place at the very beginning. To figure out what to collect, answer a few simple questions:

• What would you like to be able to say your program accomplishes?

• What do you wish you knew 6 or 24 months from now?

• What type of information would be helpful when making decisions about the program?

Envision points in the future and work backward to develop the systems that will get you there. Chances are your organization is filled with data already – take a look around and see what is useful to collect and can help you accomplish these goals.

2.      Don’t count what you don’t use

Collecting and processing data into useful information takes time and resources. Plenty of agencies have multiple funding streams which dictate what data must be collected and reported. Often when the funding expires, data are still being collected as part of standardized procedures. It is a good idea to audit your current data efforts and determine if any of these skeletons are in your closet. Redirect resources to where they add value to your work and don’t be limited to data requested by funders either – use the data collection process to collect details which help inform overall organizational goals as well.

3.      Outputs aren’t always worth the inputs

There is an endless list of things we wish we could know – but the reality is it may just not be possible, realistic, or affordable. Tracking the number of graduates from a job training program is relatively easy, but resources may limit our ability to keep in touch with all graduates over time to determine employment status or to see if their earnings increased. We must be realistic and look for ways to tell our story within the resources we have – perhaps it is tracking a small subset of graduates or partnering with host employment sites to track these details.

Internally, it is also important to weigh the costs and benefits of what we are asking of staff. How much time does it take to complete the forms? Are data demands competing too much with service delivery time? Are the data entry procedures clear and make sense in the real world of practitioners? It is critical to provide consistent training and especially to listen to the people who are tasked with collecting the information. Check-in periodically to address any barriers which prohibit the collection of quality data to avoid making decisions based on bad information.

4.      Numbers are only half the equation

Don’t forget to capture qualitative measures that help tell your story in a compelling and meaningful way. Numbers may help you manage your operation, but rarely will numbers alone provide the connection needed to win over new supporters. Increase the power of your data by coupling it with qualitative measures and antidotes that put a face to the figures such as documenting client testimonials or sketching out a few stories through informal interviews.

5.      Share results and use what you learn

Numbers are meaningless unless used. Some ways to put your data into action are:

• Establish a feedback loop by making it standard to review data and use the results to inform decisions and planning. Share both the insights and the information with all staff. Collecting information can be tedious—empower your staff to be diligent and consistent by showing them how their work is used.

• Engage staff in a discussion about the interpretation of your data. They will offer surprising insights—and often suggest better ways to explore the same issues.

• Look for new opportunities to promote your work outside the organization in a visually creative way to help others understand your mission and why they should be a part of it. A recent article in the Chronicle of Philanthropy gives a few examples of how to make your data fun.

With funds tight and competition fierce, improving your organization’s data tracking efforts should be at or near the top of your list of priorities as you plan for the year ahead.  The process might take a little while to implement, but these simple steps will pay you back abundantly in better programs and, perhaps, more money to support your overall mission.

As a participant in the Rochester Downtown Rotary’s annual economic forecast luncheon, I was pleasantly surprised by the generally upbeat expectations of my fellow panelists. Moderated by Sandy Parker, head of the Rochester Business Alliance, it included Steve Babbitt, chairman of the board of the Greater Rochester Association of Realtors; Brad McAreavy, president of the Rochester Auto Dealers’ Association; and Clayton Millard, first vice president of wealth management at Merrill Lynch.

While realtors are congenitally optimistic, Steve Babbitt’s positive outlook for the housing market is supported by two recent national releases. Homes.org, an online source of listed homes nationwide, identified promising markets using affordability, appreciation potential, price stability, area unemployment/job potential, and median price. Rochester was one of its top nine metros, along with Washington, DC, Santa Fe, NM, Bremerton, WA, Orlando, FL, Austin, TX, Houston, TX, Cambridge, MA, and Chicago (see http://t.co/NOzNINNA).

Jed Kolko, Chief Economist at Trulia, another website devoted to real estate issues, posted his “top cities” in a Huffington Post column. He also included Rochester, along with Austin, Houston and Cambridge. He added San Jose, CA to homes.org’s list. As it happens, Kolko hails from Brighton, a Rochester suburb. He had to assure his readers that he’d not “put his thumb on the scale” and was frankly surprised that Rochester scored so well, given Kodak’s well-publicized troubles (see http://t.co/fCd5qjx6).

I find the breadth of recent employment growth encouraging. We’re accustomed to seeing education and health care driving most of the region’s growth. Yet in 2011, this sector actually shrank. And manufacturing, long the source of job losses, added an estimated 1,400 positions. Growth spread across the economy is more likely to persist.

As the Wall Street Journal highlighted on Dec. 24, the recent economic downturn gave rise to a partial rebirth of Rochester’s entrepreneurial past: “Many of the people laid off by the large companies in Rochester are highly trained engineers who have started their own companies and live in the upscale neighborhoods of Pittsford, Penfield and Brighton,” the piece explained. “Some have left the engineering world behind as they made the transition from company man to entrepreneur.”

While the panelists are all feeling good about the future, we also agree that the downside risk is greater than the upside risk. Clayton put it best: A continued lackluster recovery is the most likely good outcome. At the other extreme, a collapse of the Euro is not beyond the realm of possibility. And that would be very disruptive to the world economy.

I’m not optimistic that the Europeans will do better than muddle through the ongoing Euro crisis. In aggregate, the Europeans will be looking to refinance about $200 billion in debt during the first quarter, one third of that by Italy. As Italian debt yielded 7% at the end of the year, refinancing will be an expensive proposition and will make the country’s fiscal challenge that much greater.

Domestically, the national election will encourage Congress and the President to delay bold action, as each side seems to fear handing a “win” to the other, even if that success can be shared. Deals like the unsatisfactory compromise on the payroll tax extension may be all we can expect.

The collective positive tone on the panel follows cautious optimism expressed by economists at the national level heading into 2012. Some of the factors behind Rochester’s success story – job creation, investment by businesses small and large, and a healthy housing market – may help to drive such comebacks in other metros.

See below for updated charts on Rochester’s comparative performance, discussed in Policy Wonk on November 14 (see http://bit.ly/zVMTSF).

We want answers. We blame globalization or automation or the school system. Or we blame government or regulation or some shadowy conspiracy. And we blame each other. The Occupy Wall Street movement blames the greed of the rich and powerful and their agents in government. The Tea Party movement blames the power of Big Labor—and their agents in government.

What we want changed depends on who we think is guilty. The Tea Party wants less government. The Occupy movement wants more.

The more radical Occupiers question the fundamentals of our economic system. I was asked to speak to a group at Rochester’s Third Presbyterian Church on this topic—“How does a Christian think about capitalism?” Putting the question in a faith context changes how we value the results of our economic system. A parable of Jesus speaks of a sorting of the worthy and the unworthy—and that worthiness is defined by actions taken for the “least of my brothers,” e.g. the hungry, the stranger, the unclothed, and the prisoner.

Popularized by Karl Marx, the slogan, “From each according to his ability, to each according to his needs” seems more consistent with Jesus’ parable than what our system achieves. However, the problem with utopian socialism isn’t its objectives, but its results. Socialism works for saints—the gifted give without thought of repayment; the needy accept without exploiting the giver. For sinners, we need capitalism.

Adam Smith, the patron saint of market capitalism, noted that markets aren’t driven by love: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Self-interest—greed, if you like—is the engine of capitalism. Critics claim that economists, like Michael Douglas’ Wall Street character Gordon Gekko, think “greed is good.” I disagree: to be reflexively self-interested is the human condition, “original sin” in theological terms. Economists think about greed the way engineers think about gravity—it isn’t good or bad, it just is.

To be productive, the economic system must permit reward, thus harnessing self-interest to the task of meeting society’s material needs. To be fair, the economic system must also limit the power that can be amassed from market success, thus restraining the capacity for exploitation. Adam Smith’s proposition was that greed can be both harnessed and limited by promoting a distribution of market power.

“Unbridled” capitalism often leads to concentration of power and from there to exploitation. It was that same Adam Smith who said, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Thus, the bridle is a critical piece of equipment. There are two approaches to manage, or bridle, concentrations of market power in capitalist systems. One solution is more regulation, effectively creating countervailing power in an agency charged to act on behalf of the public. The other solution is to create a more competitive private market.

The performance of the regulators in the financial crisis was dismal. Pick a reason:

a) The regulations were too weak.

b) The regulators had been captured by the regulated.

c) The regulators were simply outgunned, as outsized Wall Street salaries attracted the best and brightest.

I’ll take “all of the above.” Which is why I’m unimpressed with the response of the nation’s leadership, having left the structure of the financial sector untouched, and choosing instead to put our faith in more regulation and better regulators.

One unintended consequence of efforts to shore up the banking system in 2008 was an increase in the concentration of our banking sector. The top three banks—JP Morgan Chase, Bank of America and Citibank—are still the top three and their combined assets in 2011 rose 23% from 2007. The assets of the largest five banks grew 28%. #5 Wells Fargo absorbed #4 Wachovia. Bank of America acquired Merrill Lynch. JP Morgan Chase purchased Bear Stearns. And so on.

For capitalism to work, we must balance self-interest against self-interest by splitting up these enormous companies, companies that are, indeed, “too big to fail.” Markets work best when you pit wolves against wolves. So far, our strategy has been to hire more sheep dogs.

The City and Town of Batavia, NY are an exception. They are two communities reinventing themselves.  The endeavor began in 2008 when Town and City leaders launched an exploration of service sharing options. From combining highway operations to merging the police department with the County Sheriff, the municipalities looked at feasible courses of action to save money.  By the end of the study, the idea of merging into one new city had captured their imaginations. Becoming one city presented the most opportunities to streamline the local governments, cut costs, enhance services and improve the communities’ image in the region.

In 2010, Town and City elected leaders approved a joint resolution authorizing a charter task force to design a new City of Batavia. Their task will include drafting plans for tiered tax zones that allow certain services of the former city to not impact the former town and visa-versa.  This minimizes cost shifts alleviating tax payer concerns that they will end up paying for services they don’t want or use.  The task force will assess whether the new city needs a mayor (the city currently does not) or whether, as the Model City Charter suggests, a city manager form makes a more effective government.  Current election wards in the city could be redrawn or the task force could decide that all members of the new city council should be elected at large.  At stake are historic boundaries and representation of certain constituencies that have a strong voter presence in the community.

The creation of a new city charter allows the task force to be creative as it contemplates the future.  The task force is being presented a blank slate and is being asked to rethink how local government should work.  This is rare in CGR’s experience.  Rather than opt for a momentous shift from the status quo, communities are often compelled to reorganize what is already in place.  With limited options, the momentum that preceded the project is lost and little is ever accomplished.

Innovation does have its limits.  The blank slate analogy breaks down a little when voter preferences are brought into play.  The task force must weigh how much change the community will accept.  Ultimately, the citizens of the Town and City of Batavia will have to vote on this historic new charter.  Voter preference is notoriously hard to predict.  Will people be energized by the innovative thinking or will fear of change stop the momentum.  Will the vision for a new Batavia be more compelling than the status quo?

Innovation is meeting opportunity in this historic redesign of two communities.  Stay tuned to find out if the City and Town of Batavia become the first to merge as a new city in NYS.

You can follow the Batavia city charter development process at www.cgr.org/onebataviacharter . You can read about the consolidation plan developed in 2008/09 by going to the website  www.cgr.org/bataviaconsolidationplan.

As states grapple with rising costs and tighter budgets, states at the top of the list may see the rankings as evidence that rising employee costs are crippling. On the other hand, states at the bottom of the list may feel defensive about the comparison. More than 230 news outlets in 42 states ran pieces on the rankings. And some found the report troubling. In an article in the Plains Daily, Ken Purdy, Classification and Compensation Manager with the State of North Dakota’s Human Resources Management Services—the state with the lowest average state payroll—said:

“An overall comparison of average salary is pretty baseless. It’s not very valid. It depends on the makeup of the workforce, and the employees at various levels. Throwing out a blanket number like that, in a business sense, isn’t very helpful. The true measure in trying to price your employees is a more direct job-to-job comparison of salaries to competing employees.”

The question for us at CGR is this: Should we be issuing straight rankings from our Govistics database without applying an additional analytical “screen”? Or are we contributing to a “dumbing down” of complex statistics, stats that should only be explored in the context of careful review and discussion?

Many take offense at rankings. US News and World Report has turned the ratings game into a business model. There isn’t a college president in the country that doesn’t roll his or her eyes at the latest release of USN&WR’s “top colleges” issue, even schools that score well. While they accept parts of the approach, they also know that much of what makes a college or university desirable and effective can’t be easily reduced to a numbered list.

A simple ranking is a crude indicator—in the case of public sector payrolls, for example, a robust study of variable pay would include more than just gross per person. Certainly cost of living is a factor—a dollar goes much further in Fargo than it does in Manhattan. Non-cash compensation also makes a difference. Pensions vary dramatically from state to state—how many years are required before the benefits are assured, even if the individual leaves public employment (called “vesting”)? What share of final salary is assured after, say, 20 years of service?  “Other than pension employment benefits” (referred to as “OPEB”), particularly health insurance, also influences total compensation. And consider job security—states with strong unions like New York or California have achieved much greater job security than in states with less influential public employee unions. Dollar for dollar, a safer job is worth more than a job that is more subject to the state’s fiscal condition or changing priorities of the state’s leaders.

But you have to start somewhere. State workers in North Dakota (again, the last ranked state) earned $34,000 on average—about 60% of earnings in New Jersey, the first ranked state. If the difference can be explained by differences in labor markets and cost of living—then let’s have that discussion. What is it about New Jersey and New York that have driven up average salaries? Why is it more expensive to live in New York than North Dakota? High salaries for public sector workers don’t emerge from a vacuum. While high average salaries for the public sector drives up cost to taxpayers—a bad thing—high average salaries in the private sector probably reflects an economic base in high value-added industries—a good thing.

So CGR’s simple Govistics rankings—just like the college rankings—can only be a starting point for deeper study and further discussion. A small difference in rank—consider Arizona and Alabama—is certainly meaningless. Big differences between similar states are another matter. But we are reminded that the lion’s share of cost for state government is salaries. We intend to continue to explore the information on the public sector contained in CGR’s Govistics database and to add to it additional information that can inform and empower taxpayers and community leaders.

As recently as 2005, more than 40 counties outside New York City owned and operated public nursing homes containing some 9,900 beds.  Now those numbers are closer to 35 counties and 8,100 beds, and those totals are likely to dwindle further over the next few years.  Why the sharp declines in such a short period of time?  Rising costs and declining revenues combine to force county taxpayers to plug steadily-rising deficits.

And that reality is not likely to get better without major changes.  Costs of negotiated health care coverage and retiree pension costs continue to increase for public employees.  Reimbursement levels from Medicaid and Medicare—the primary payers in most nursing homes—are being reduced, relative to operational costs.  For example, Medicaid pays for about 80% of the resident days in the typical county home, yet the Medicaid daily reimbursement rates are often $100 or more below the actual daily operational costs.  These trends are likely to be exacerbated in public homes in the future, as fringe benefits continue to exceed private sector benefit rates by wide and often growing margins:  Total benefits typically approach or exceed 50% of the costs of wages and salaries of the work force in the county-owned homes—close to twice the proportions in proprietary and not-for-profit homes.

Why does all this matter?  County nursing homes typically have been in operation for many decades, and have been considered an important part of the county’s mission, often serving residents other nursing homes are reluctant to serve.  In some counties, there are few competing homes.  The average county home serves more than 200 residents and employs more than 300 people.  So with hundreds of lives affected, elected officials are understandably reluctant to alter the status quo.  Adding to the political complexity of the decision, facility employees are typically members of a local union, and are often active in local elections. These factors create considerable pressure to keep the facility open and under county control.

And yet, those employees cost the nursing home lots of money in salaries and benefits—costs directly subsidized by county taxpayers.  Unless the county can find ways to significantly reduce costs and/or expand revenues, taxpayers can anticipate an ongoing need for subsidies, often totaling millions of dollars per year per facility.

So what’s a county to do? How can county leaders balance the legitimate needs of residents, employees and taxpayers?  Counties do have a number of options to consider, in addition to closing their facilities, including but not limited to:

• Consider various management efficiencies and revenue enhancements that eliminate or substantially reduce the home’s annual deficit, as some homes have been able to do;

• Sell the facility to a new owner. Private operators are often better able to cut costs, while protecting the jobs of most employees (several counties have made such changes in the past few years);

• Consider management efficiencies and utilization across county nursing home and home care agencies simultaneously, which can cut the combined subsidy across both services—or consider selling both as part of a package deal, as a couple counties have recently considered; and

• Change the legal structure of the facility. By creating a public benefit corporation, for example, counties may in some cases be able to enjoy some of the same cost savings as private operators while maintaining a level of public control (at least one county is currently considering this option).

In each case, the goal of the county is to continue serving the needs of the frail elderly, even though the ownership, operations or governance of the facility may change.

Whatever the decisions of the elected officials about the future of their nursing homes, they will be agonizing, and not everyone will be pleased.  But CGR’s experience—we’ve worked with a half dozen counties in the past year alone—is that in nearly all cases, the officials are attempting to make principled, thoughtful decisions, taking into consideration and attempting to balance the different needs of important constituencies.  No single solution is best for all counties—but there are options available that can be crafted to each county’s unique circumstances that can enable critical services to be maintained in the community.

Closing failing schools and replacing them with new–hopefully better–schools is at the heart of the Portfolio Plan strategy in place in the Rochester City School District. It sure sounds appealing, especially to those who have long felt that education is a world shielded from the consequences of failure. But does it work?

The answer is critically important, not only for the obvious reason that we all want effective schools for children, but also because closing a school necessarily means dismantling a school community. Perhaps that community was dysfunctional, unhealthy, even dangerous, but it was still the daytime home for the students and staff members in it.

Hence, when districts propose to close low-performing schools, there is often an outcry among students, parents, teachers and other staff members. We have certainly seen this in Rochester, as school communities at the School of Applied Technology at Edison and others rallied together to speak out against closure. While outsiders may be puzzled at these protests, to those directly affected, closing a school means uncertainty, upheaval and pain. Relationships are broken, the negative stigma associated with a school often becomes worse, and there is no guarantee for students and staff members that something better lies ahead.

Research on the effectiveness of this approach, what little that has been conducted, is mixed. While there are studies finding that small schools formed in the wake of school closures achieved some higher outcomes and created stronger relationships among students and teachers, other research on school closures suggests they might not benefit students. Studies of Chicago, a city with extensive experience in closing failing schools, found performance among students who moved to other schools did not significantly improve, in part because students often transferred to other poor schools.

The authors of a study summing up existing research on school closure also point to the potentially harmful effects simply of moving students around (see report). Even controlling for related factors such as previously low achievement and socioeconomic status, research has established that mobility has its own, separate negative effect on students’ likelihood of graduating.

Yet under the federal No Child Left Behind legislation, school districts are required to do something drastic about the lowest performing schools. Closure is one option; others include replacing all or most of the staff, reopening as a charter school or yielding to a state takeover.

So we’re left in a quandary. We know that some schools have failed generation after generation of students. And we know that turning around a failing school is brutally difficult. Yet we’re told that the evidence in favor of closure as a general strategy is weak. The secret to a successful “portfolio” strategy depends on whether the new schools are a significant improvement over the schools that have been closed.

The Rochester City School District is phasing out 8 low-performing schools, restructuring two more and this year opened two new schools in addition to the five begun last school year.

The cautionary tales from Chicago and elsewhere suggest that good implementation is critical to making the strategy successful here. We at CGR have been a part of the effort to make sure that happens; CGR conducted a first-year implementation evaluation of the five schools opened in 2010-11. We found the schools, whose students were generally quite similar to the overall district population, had some higher outcomes than the district (including attendance, GPAs, and high school credits) and had established positive climates. But state test results were mixed, with the new schools exceeding district performance in 6 of 12 comparisons, and the schools all have work to do to increase academic rigor and student engagement in learning.

Our study didn’t focus on the population most at-risk under this strategy: the students in the phasing out schools. Although some of these students transferred to other schools, including the new schools, for those in higher grades there were few realistic options. We did interview a number of those students and found a range of experiences, with some students reporting that their phasing out schools were still generally pretty good and others saying they had greatly declined since the announcement that they were being closed. Generally speaking, performance at the phasing out schools continues to be low, though two of the schools improved enough last year to come off the state’s watch list.

But if the lesson to draw from Chicago is that there must be more high-performing schools created for the school-closure strategy to work, then Rochester is taking some of the right steps toward giving more students quality educational options.