Dayton has had solid achievements, but inaction on two major challenges leaves future risks

Love or hate his policies, Gov. Mark Dayton has always communicated an authenticity about doing what's best for Minnesota and has been a counterweight to the mass of cynicism political candidates today often express toward government. In a state that appreciates good government, these qualities are likely a big reason he is serving his eighth year as Minnesota's chief executive.

How good a governor has Dayton been? From the perspective of efficient, fiscally sustainable government — the answer is it's simply too soon to tell. Policies are judged on both their immediate effects and long-term consequences. Legacies are established both by actions taken and not taken.

Economic times are now good, and it seems impossible to open a magazine or newspaper without Minnesota being identified as the best in the nation at something. However, it remains to be seen whether the governor's policy agenda can withstand the test of new demographic, competitive and political realities or if we will look back on these years as an era of failed course corrections and missed opportunities.

One of Dayton's proudest accomplishments was righting the fiscal ship of state. Aside from facing a $6 billion deficit when he took office, the budget he inherited had become riddled with accounting shifts and accounting gimmicks. Today Minnesota has one of the most enviable and respected state finance environments in the nation. Bond ratings are excellent, and Minnesota receives straight A's from public finance experts with respect to its budgeting practices and reserve fund policies.

Instrumental to this outcome was the governor's signature tax achievement — a controversial fourth income tax tier on high-income earners. It made Minnesota's individual income tax the most progressive in the nation and, aided by the second-longest economic recovery in U.S. history, has raised a lot of revenue.

But this fourth tier also created considerable longer-term risks. New revenue is coming solely from the top 2 percent of income earners, a notoriously volatile — and mobile — source. The state's budget reserve helps mitigate the risk, but a deep or lengthy recession still poses a greater threat to the state budget than before.

The long-term competitiveness implications of our income tax have been ignored. The popular pastime of debating whether people are or are not leaving the state because of taxes misses the primary competitiveness concern: the lack of people and businesses moving into the state on the other side of the highway.

Businesses that want to grow their Minnesota workforce, or those considering locating here, must pay a premium to compensate for these high income tax burdens and attract or retain managerial and technical talent. Importantly, federal tax reform will dramatically intensify these competitive concerns as state-to-state differences in income taxes become even more noticeable.

Minnesota has long recognized that public goods and services are important to our economic success, and throughout his tenure, Dayton has taken steps to deliver better value from tax dollars. The administration has pursued "evidence-based policymaking," which includes detailed program evaluations of "what works" and their costs, to identify best practices and find savings.

Behind the scenes, in areas ranging from mental health and criminal justice programs to competitive bidding for managed-care plans and state procurement, these initiatives have yielded dividends for citizens. Good government organizations have recognized Minnesota as a national leader in this area.

While these and other accomplishments are noteworthy, Dayton's government self-improvement initiatives, earnest as they are, have been extremely careful never to upset his base of political support. Nowhere is this more evident than in Dayton's inaction on two bedrock challenges influencing efficient, fiscally sustainable government in the 21st century — managing the public sector workforce and public pensions. To put it bluntly, all the government process improvements and purchasing reform in the world won't matter if we fail to address the challenges these issues represent.

Skilled and dedicated government professionals are retiring quickly. State agencies across the board have experienced frustration with how difficult it is to recruit, retain and reward high-performing government employees. Meanwhile, a recent Gallup survey found only 28 percent of Minnesota state and local government employees "work with passion and feel a profound connection to their work."

The problem can be traced to a very old and regimented civil service system that governs hiring, career progression, management of performance, pay increases and other work-related issues. As Governing magazine notes: "Antiquated civil service laws and regulations inhibit the response to operational problems and contribute to a culture that inhibits employee performance."

Without civil service reform, expensive high-profile debacles like the recent Department of Motor Vehicle information system rollout will likely become more prevalent.

At the same time, underfunded pensions pose a serious threat to the future of government services as they are poised to eat up an increasing portion of the state budget. Dayton recognized the seriousness of the issue by including extra support for pensions in his budget proposals. Unfortunately, he has no political capital to champion any meaningful reform.

Throughout his tenure Dayton's policy playbook has evoked the spirit and ideas of the Minnesota Miracle era of a generation ago, a time when the U.S. dominated the global economy and demographic tailwinds pushed us forward. Today, the economic and competitive landscape has shifted, and as the state's 2009 Budget Trends Study Commission vividly pointed out, absolutely nothing about state government is going to get easier as baby boomers age.

Thanks in part to Dayton's leadership, Minnesota's next governor will face a much better budget situation than prevailed when Dayton took over. However, there is now little headroom for the state to raise taxes again — its corporate, individual income and sales tax rates are among the highest in the nation and the majority of Minnesotans are showing little appetite for any tax increases. Meanwhile, citizens' expectations about what state government can and should do continue to grow — especially when tax policies make sure "someone else" is always paying for it. And government reinvention initiatives — like those recommended in the Brandl/Weber "Agenda for Reform" from over two decades ago to address this tension between what citizens want from government and what they are willing to pay for — continue to languish.

Put it all together and it is unlikely state government is any more fiscally sustainable than it was eight years ago.