human capital investment for state economic development (western governors assoc., 1988)

8/4/2019 Human Capital Investment for State Economic Development (Western Governors Assoc., 1988)

1/29

HUMAN CAPITAL INVESTMENT FOR STATE ECONOMIC DEVELOPMENTA CASE STUDY OF A STATE GOVERNMENT "PORTFOLIO"

byLewis J. Perelman

Western Governors' Association

July 1988

Western Governors' Association600 17th StreetSuite 1705 South TowerDenver. Colorado 80202~5442


2/29

TABLE OF CONTENTS

SUMMARY iFOREWORD BY Governor Roy Romer xiINTRODUCTION I - ICOLORADO PORTFOLIO--STATE PROGRAMS AND INVESTMENTSCatalog of Programs 2-1Statistical Summary and Charts 2-41COLORADO PORTFOLIO--ISSUES AND OBSERVATIONS 3 - 1CONCLUSIONS AND RECOMMENDA nONSThe Colorado PortfolioThe Quality of the Investment PortfolioColorado's Relative PositionRecommendationsEpilog: Lessons for MappingAn Investment Portfolio

4-14-24-84-8

4-12

APPENDICESA. The Ecology of HumanCapital InvestmentB. Kinds of Learning for aProductive PopulationC. A Note on the Private Sector

A-IB-1C-I

ABOUT THE AUTHOR


3/29

SummaryHUMAN CAPITAL INVESTMENT FOR STATE ECONOMIC DEVELOPMENT

A Case Study of a State Government "Portfolle"by Lewis J. Perelman

While there is growing concern about the role of education and training in staeconomic development, as well as international competitiveness, governors and othpolicyrnakers lack a clear picture of how investments in these and related forms of humaresource development actually lead to an impact on the economy. This report represenan initial and limited effort towards developing a comprehensive picture of the enti"portfolio" of investments in human capital creation made throughout the economv ofsingle state. As a pilot project, the study that produced this report focused on Coloradand on the human capital investments made only by or through the state government.complete the picture traced so far of human capital investment in Colorado, furthresearch is needed on the activities of local governments and especially on tinvestments made by the private, nongovernmental sector.Yet the findings of even this limited study raise important questions about tadequacy and focus of many recent education reform and job training efforts: While tmajority of state tax dollars is invested in human resource development, hardly anyspent to meet the basic education needs of the adult workforce. There is litaccountability to either the consumer or the taxpayer for results from these larexpenditures. And the productivity of the programs that receive the lion's share of thefunds is poor and declining. To remedy these flaws, the entire state education atraining system needs to be fundamentally restructured.BACKGROUND

It is no secret to the governors that the states and the U.S. as a whole facegrowing human capital crisis. A fifth of the current workforce is functionally illiteraand another fifth is only marginally literate. Accelerating job and career transitions methat most workers find their acquired training and experience rendered obsolete every fito seven years. Meanwhile, over 80% of the new entrants to the U.S. workforce durithe next decade will be females or minorities--groups that now are disproportionatelyrisk" of academic failure or deficient basic skills or discriminatory barriers to their mproductive employment.Even while the workforce as a whole is decreasingly competent to perform existijobs, the intellectual and skill requirements of future jobs are expected to steadadvance. A recent report of the Congressional Office of Technology Assessmeemphasizes that the "learning enterprise"--the business of training, education, and othprocesses of learning that develop human resources--is becoming ever more criticaleconomic development. As the structure of the economy has shifted from one basedmaterials and production to one based on knowledge and learning, strong basic skills acontinual. lifelong retraining and reeducation have become crucial for a oroductiworkforce.Yet simply spending more on training and education is neither an effective noravailable solution. The productivity record of the education sector is the poorest of a

-i-


4/29

SummaryHUMAN CAPITAL INVESTMENT FOR STATE ECONOMIC DEVELOPMENT

A Case Study of a State Government "Portfollo"by Lewis J. Perelman

While there is growing concern about the role of education and training in stateeconomic development, as well as international competitiveness, governors and otherpolicymakers lack a clear picture of how investments in these and related forms of humanresource development actually lead to an impact on the economy. This report representsan initial and limited effort towards developing a comprehensive picture of the entire"portfolio" of investments in human capital creation made throughout the economy of asingle state. As a pilot project, the study that produced this report focused on Colorado,and on the human capital investments made only by or through the state government. Tocomplete the picture traced so far of human capital investment in Colorado, furtherresearch is needed on the activities of local governments and especially on theinvestments made by the private, nongovernmental sector.Yet the findings of even this limited study raise important Questions about theadequacy and focus of many recent education reform and job training efforts: While themajority of state tax dollars is invested in human resource development, hardly any isspent to meet the basic education needs of the adult workforce. There is littleaccountability to either the consumer or the taxpayer for results from these largeexpenditures. And the productivity of the programs that receive the lion's share of thesefunds is poor and declining. To remedy these flaws, the entire state education andtraining system needs to be fundamentally restructured.BACKGROUND

It is no secret to the governors that the states and the U.S. as a whole face agrowing human capital crisis. A fifth of the current workforce is functionally illiterateand another fifth is only marginally literate. Accelerating job and career transitions meanthat most workers find their acquired training and experience rendered obsolete every fiveto seven years. Meanwhile, over 80% of the new entrants to the U.S. workforce duringthe next decade will be females or minorities--groups that now are disproportionately "atrisk" of academic failure or deficient basic skills Or discriminatory barriers to their mostproductive employment.Even while the workforce as a whole is decreasingly competent to perform existingjobs, the intellectual and skill requirements of future jobs are expected to steadilyadvance. A recent report of the Congressional Office of Technology Assessmentemphasizes that the "learning enterprise"--the business of training, education. and otherprocesses of learning that develop human resources-c-is becoming ever more critical toeconomic development. As the structure of the economy has Shifted from one based onmaterials and production to one based on knowledge and learning, strong basic skills andcontinual. lifelong retraining and reeducation have become crucial for a oroductiveworkforce.Yet simply spending more on training and education is neither an effective nor anavailable solution. The productivity record of the education sector is the poorest of any

- 1 -


5/29

Summary

major production sector. Since 1950, real-dollar spending per pupil in public educationhas grown nearly four times; labor productivity has declined by half. The U.S. spends$300-500 billion annually on education and training; more per-capita than any otherindustrialized nation. Yet American students rank low on standardized tests in comparisonwith peers in other nations, and a troubling proportion of the American workforce lacksadequate basic skills.In their 1986 report on education reform, the nation's governors declared that thestates could no longer afford "more of the same" and that the "time for results" hadarrived. Formal education appropriations account for some 40% of state governmentbudgets on average; for a growing number of state and local governments the portion isover half. Fiscal reality is that the capacity of the federal and state, and most localgovernments to increase spending in this area will be negligible for years to come.States will need to get more effective results at lower cost from their public andprivate learning enterprises to meet the challenge of economjc development. The existinghuman capital investment picture must be clearly understood so that available resourcescan be reallocated and invested with ever-greater productivity.Yet state governors and other policymakers have a hard time getting a clear (or evenmurky) picture of how the matrix of state policies actually affects the learning that hasan impact on economic development. Though governors have promoted investments ineducation and training in the hope of gaining a more competent and productive workforcein their states, the reality is that many state "education" and "training" expenditures donot purchase the kind of learning (if any) needed to boost economic growth. At the sametime, many state policies and appropriations that have an important effect on learning arenot explicitly identified with "education" or "training."The governors urgently need to see the "big picture" of the overall market forlearning in their states. and how state government policies and programs fit in Atpresent, the governors get little or no comprehensive information about what their ownstate governments are actually doing to affect learning and human development, much lessan accurate gauge of the efficiency and effectiveness of all those efforts. True, thegovernors are supplied with ad hoc reports, but the deluge only serves to further muddythe picture. And the extensive array of investments in education and training by businessand industry, associations, the military, families, and others outside the domain of stateand local government agencies is not only unreported, but almost entirely uncharted. AMap is needed to guide the governors' strategic vision.The project that produced this report was an initial, limited step toward creating thiskind of investment Map. The project selected a single state, Colorado, as a case study ofstate policies and programs. The focus of this project was mainly on attempting todescribe only the "portfolio" of the Colorado state government's human capital investmentsas these are reflected in existing policies, programs, and budgets of the various stateagencies.OVERVIEW OF THE COLORADO "PORTFOLIO

Some of the notable characteristics of the Colorado state government's human capitalinvestment portfolio are these:

- ii -


6/29

Summary

o Some 18 state agencies or programs have a significant role in human capitalinvestment. Of these, 16 support or provide education/training activities.o The vast rna joritv of spending is in the three traditional areas of state interest K -12education' higher education' and the community colleges and occupational educationsystem. The combined budgets of these three programs account for 58% of the stategeneral fund budget, and one-third of total state appropriations.o All other education/training programs combined account for 1.6% of general fundappropriations. or about 2% of total state spending.o Local governments spend an amount about equal to state spending, mostly in the K-12category.o Federal funds for education/training in Colorado are less than 6% of the total spentby state and local governments, but often constitute the major or even sole source offunding in specific targeted areas, such as' job training for unemployed/disadvantagedpopulations.

This. project could not study the private sector in Colorado, but national data implythat education/training investments by private employers (including military) in the stateare probably between 30% and 40% of the amount spent by state and local governments.ISSUES AND OBSERVATIONS

While the study could not perform a comprehensive survey and evaluation of the stateprograms, several important issues were observed:o While at least as many adults are in need of basic education (up to high schoolgraduation or equivalent) as children in the state, over 99.9% of governmentexpenditures for basic education are targeted on children (age 5-18).o The latter point underscores the importance of knowing the total human capitalinvestment picture in the state. If other, private funding sources were meeting theneed for adult basic education, the current distribution of state spending betweenchildren and adults might appear reasonable.o Nevertheless, the limited available data suggest that there is a significant. generalshortfall of investment in the learning needs of the adult workforce, especially forthose needing basic education.o While the scope of state investments and acnviues in human capital investment isquite broad, there is no comprehensive policy or coordination mechanism to managethe entire portfolio. Some useful coordination of government programs is provided bytwo state offices, but there is relatively little coordination between public and privateactivities.


7/29

Summary

o While some 60% of the state's general fund is allocated to education and training,there is very little accountabi!jty for achievement of results from this vastinvestment. The great majority of these funds are distributed to schools and collegesby formula, with relatively few state requirements.o As in most states, there is yet no statewide program to increase the capital/laborratio, modernize the technology, or generally to improve the productivity of

education/training institutions.o Overall, the human capital investment strategy of Colorado, like that of every otherstate, is overwhelmingly institution-oriented rather than consumer-oriented.

There is an inevitable desire to know what these findings imply about Colorado'sstanding and performance in relation to other states. In general, Colorado ranks aboutaverage or above average among states on such broad and common indicators ofeducational investment as dropout rates, test scores, graduates, spending on K-12 orhigher education, and so forth. But since, to our knowledge, no comparably broad studyhas been made of any other state's detailed human capital investment portfolio, theColorado portfolio cannot yet be compared to other states'.KEY CONCLUSIONS

From the empirical information about the state's programs and budgets, and theobservations about key issues, several key conclusions follow about the value of theportfolio as a system of investment in economic development:o There is an acute imbalance in the distribution of resources in the state portfolio andthe priorities of economic development. In particular, the learning and developmentneeds of the current adult workforce are underserved.o There is little or no accountability to the state government, and hence to the statetaxpayer, for the achievement of specific results from expenditure of the nearly 60cents of every general fund dollar and the over one-third of all state spendingallocated to education and training. Investments are almost entirely input- basedrather than outcome-based.o There is an overwhelming absence of consumer choice and competItIon among theproviders of education, training, and related services. Despite a philosophy of "localcontrol," virtually all public investments in education and training in Colorado areallocated to government owned and operated institutions that are constrained bystatute or administrative policy from competing to serve consumers.o As a result. the productivitv of government investments in human capital developmentis severely limited. The combination of a delivery system structured as a governmentmonopoly, lack of accountability for achieving specific results, and absence ofconsumer control of resources gives professional providers little direction or incentive,

- IV -


8/29

Summary

other than altruism, to improve consumer service or to reduce costs through greatertechnical efficiency.These conclusions warrant some further explanation.Imbalanced Distribution

Ongoing development of the existing knowledge-based, postindustrial economy is highlydependent on the quality, flexibility, and productivity of the current adult workforce.Even looking to the future, over three-quarters of the people who will comprise the U.S.or Colorado workforce in 2002 are already adults, beyond school age, today. Yet theoverwhelming majority of government resources invested in human capital are allocated tothe education of children -between ages 5 and 18.At a time when unskilled jobs are rapidly vanishing, and the majority of new jobs (ornew requirements of old jobs) demand knowledge and skills beyond that required by a highschool diploma, about 700,000 Colorado adults, representing around 40% of the stateworkforce, lack the literacy and basic education expected of a high school graduate. Yetover 99.9% of government expenditures for basic education are targeted on the less than540,000 school-age children in Colorado.So the total of funds known or believed to be invested in adult literacy and basiceducation annually in Colorado is about 1(IOOOth of the amount expended on K-12education for children. for a larger population in need. Given that the content andprocess of "basic education" are essentially equivalent for child and adult, and evenconsidering that some portion of spending on public schools is required for day care andother functions not directly related to' instruction, there is no rational justification forsuch a glaring inequality of investment.Proponents of the view that investment in adult human capital is insufficient pointout that U.S. industry invests on average about one-tenth as much in human capital=-viaemployee training and development-vas in physical capital: plant and equipment.The extreme imbalance in Colorado's human capital investment portfolio is not atypicalof other states. It stems not from government incompetence or malice, but simply fromthe obsolescence of a model of the economic and social role of education geared to a19th-century rather than a 21st-century world. A hundred years ago, early childhoodeducation was provided by mothers, who were almost always at home. For the averageAmerican, formal education was literally an adolescent process that ended when he(usually "he") entered the workforce, where he would spend the rest of his working life ina single job or career. Today the majority of mothers work and the half-life of mostjobs or careers is five to seven years. The human investment strategy is lagging farbehind these new realities.Creating a balanced portfolio requires knowing the productivity, or rate of return, ofalternative investments, and allocating resources to achieve the maximum payoff for thestate economy,

- v -


9/29

Summary

AccountabilityThe downside of existing arrangements intended to assure "local control" andindependence of educational institutions is that they lack almost any mechanism ofaccounting and accountability to assure the consumers of the education system-i-students,employers, and taxpayers--that their investment of effort and treasure will be repaid withspecific, concrete results. Such accoun!abi!jty that does exist. usually in the name of"accreditation" or "certjfication: focuses almost exclusively on inputs rather thanoutcomes, These accounts only inform the consumer how much and what kind ofresources have been put into the education process, but not what they are good for oreven, for that matter, whether they are good for anything.The occupational part of the community college curriculum is competency-based, and

several other specific services, such as adult literacy or rehabilitation, focus on achievingspecific, measurable outcomes. But these comprise only a few percent of the investmentfunds. The vast majority of the state's human capital investment portfolio is invested ininstitutions that, for all practical purposes, are not accountable for results.Choice and Competition

Overall, the human capital investment strategy of Colorado, like that of every otherstate, is overwhelmingly institution-oriented rather than consumer-oriented, Nearly allfunds in the state's portfolio are allocated to institutions rather than to persons,Specifically, the state funds go to government owned and operated elementary, secondary,and higher education institutions that control 90% of their markets, and that function aspublic monopOlies,Productivity

The characteristics that lead to an unproductive industry are high labor intensivity,low capital investment, and little innovation. The recent OTA report on economicdevelopment in an information-age economy shows these characteristics in the educationsector, Education has nearly the most intensive use of labor of any industrv, with laborcosts accounting for 93% of total value added. At the same time, the education sectorhas the lowest level of capital investment of anv industry: only $1,000 of net capital perworker, compared with an average of over S50,000 per worker across the entire economy,and levels of S6,000 to S20,000 per worker even in other service industries,The capitalization picture is even worse if one considers that in education, uniqueamong businesses, it is the consumer, rather than the salaried employee, who performsmost of the essential work: In the typical school, the cost of equipment and materialsused directly by the individual learner is only a few percent of the total budget,Investment in research and development accounts for 2,5% of the entire U,S, GrossNational Product; but only 0,025% of all education soending goes to R&D--evidently, ahundred times less than the average for the whole economy,The reason the education sector is so unproductive, and invests so little in becomingmore productive, is simply the consequence of the conditions summarized in theconclusions above: The consumer has little choice and almost no power, there is virtually

- v i -


10/29

Summary

no competition, and government pays the bills, runs most of the system, and demands noaccounting for results.RECOMMENDATIONS

To improve the productivity of state investments in human capital, the followingaction items are recommended for consideration by the governor of Colorado, as well asby the other governors. The recommendations are in three areas: administration, researchand planning, and policy.Administration. To improve administration of the human capital investment portfolio, the governorsshould:

o Treat learning a s a human-capital-forming enterprise or industry, as strategicallycritical to development of a knowledge-based, postindustrial economy as steel was to amaterial-based, industrial economy.o Create a state-level 'czar' for the strategic learning industry to oversee the entireportfolio of human capital investment. The czar must be independent of anyonestate agency, program, or institution, reporting directly to the governor, and actingprimarily as a consumer advocate. A select or joint committee in the legislature, withsimilarly broad oversight responsibility, would further strengthen the state's ability to

manage its largest and most crucial investment.o Convene or encourage the establishment of an all-private-sector council on learningand human capital investment. The council needs to work on documenting andcoordinating private activities, and to work as a full partner with government leadersto improve the productivity of the entire state learning enterprise.o Encourage other states to map their human investment svstems and to establish publicand private oversight authorities. This will facilitate comparisons of state investmentportfolios and the opportunity to learn from others' experience.Research and Planning

In addition to these action items, several research and planning tasks should beaccomplished. The governors need:o Survey research to describe in detail the human capital investment activities occurringin the private sector of the state economy. This knowledge is needed to evaluate theproper role and relative effectiveness of government investments.o Research to identify the specific kinds of learning and human capital developmentneeded for economic development, including the expected return on investment in each

- vii -


11/29

Summary

category. This knowledge is essential to evaluating the prudence and effectiveness ofthe state's investment portfolio.o Research and development to define effective measures of productivity of specificeducation. training, and other human resource development processes, includingmeasures of outcomes/competencies and of costs.o Planning the application of productivity measures to enforcing accountability forgovernment investments in education and training.o Research on alternative mechanisms for financing public and private investments inlearning, and planning to apply the results to state policies and programs.PoliCY

Restructuring education and training systems to make human capital investments moreproductive for state economic development will require some bold and innovative changesin state policies. How, when, and in what form restructuring policies can be proposed inColorado or other states are matters of political judgment that only the governors andtheir staffs can resolve. The following are some potentially valuable policy initiatives tobe considered:o . Introduce the discipline of competition to the K-12 public education system by givingfamilies the ~ of the schools and school districts their children will attend.

Making choice work also requires giving education professionals the freedom to createand manage their own schools, and the choice of where and how they will teach.o Efficient markets require informed consumers. Work with business and otheremployers to define specific. measureable requirements of a "basic" education.Establish statewide standards of achievement of basic competencies. Make testedachievement of basic competencies a requirement of a state-accredited diploma. Testthe performance of schools and make the results available to consumers to informtheir choices.o Establish a competency-based education svstem. Require that all academic creditgiven by schools receiving state funds be based on measured achievement of

competency in subject matter, not simply on time spent in class. Make part of statefunds paid to schools contingent on competencies achieved by students, rather thanjust attendance. Abolish tracking and age-grading.o Shorten the time required to earn a state diploma of basic education so that ll1Qllstudents can comolete the requirements by age 16 or the equivalent of 10th grade.Require public schools to operate on a year-round calendar. Provide an additional twoyears of state aid to state-diplorna-ed students for "postsecondary" education and/ortraimng. (This is similar to a new Colorado law, adapted from Minnesota, whichallows I I th and 12th grade students to attend postsecondary institutions.) Reduce thesize, number, and scope of high schools. Expand the community college system to

- v iii -


12/29

Summary

serve the "liberated" 11th/12th graders. Completely meld the secondary vocationaleducation system into the community college system. (An advantage for Colorado: itis the only state that has both systems governed by the same state agency.)o Reallocate resources from the K-12 system to expand early childhood development,oreschool education. and day-care services.o Make free, public "basic" education (through state diploma) an entitlement of everystate resident, regardless of age--i.e., reallocate K-12 resources to serve adults aswell as children in need of basic competencies.o Outlaw emoloyment discrimination on the basis of academic credentials. Requireemployers in the state to hire and promote on the basis of measured competencies and

job-relevant experience.o Apply competency-based instruction requirements and "value-added" accountability topublic higher education institutions.o Revise the state personnel system to make the state government a model employer.Assure every state employee of continuing training and education opportunities.o Allocate at least 2% of state education and training expenditures to research anddevelopment and technological innovation, Create a Learning Research Institute and aLearning Technology Extension Service to provide technical assistance and promotetechnology transfer to schools, colleges, homes, other providers.o Establish the goal of doubling the productivity of state investments in education andtraining by 1994. Couple with a cost-containment strategy: Aim for zero growth inper-capita education and training spending by the end of the period.

This report is the product of a pilot project, an initial attempt to map out theportfolio of human capital investments made in one state, To be fully effective, thisprocess needs to be expanded and repeated in COloradoand other states,

- ix -


13/29

Human Capital Investment for State Economic DevelopmentFOREWORDby Roy Romer

Governor of ColoradoThis report provides an important look at the education and trammg system in Colorado.While the details of organization and funding may be unique to this state, the major trendsand issues raised in the report are shared by most states in the West and other regions.Lew Perelman has reported on Colorado from a point of view clearly developed in his priorwork, notably The Learning Enterprise. This perspective vigorously promotes an increase inconsumer choice and other market mechanisms for the world of education and training.Having examined the education and training system in Colorado, Perelman has reached aprovocative conclusion: most of our state tax dollars are going to support an educationsystem with declining productivity, while other critical investments in the workforce of todayand tomorrow are underfunded or neglected.Governors and policymakers increasingly speak about the importance of education and trarnmgfor economic competitiveness and development. Therefore, Perelman's conclusion andrecommendations should be studied and considered along with more traditional and limitedreforms.Dr. Perelman's VIsion of our state education and traming programs replaces the entitlementview. with an enterprise view. That is, he encourages us to treat this major portion of ourstates' budgets as a strategic capital investment, rather than as a fixed operating cost. Thisapproach shifts our focus from add-ens and incremental change to the entire "portfolio" ofexisting public and private investments in human resource development.Governors and other readers of the report can ask: Are our portfolios properly balancedgiven the characteristics and needs of our states? Are resources appropriately distributedamong short-term investments (training and retraining) and long-term investments (preschooland education)? What are the risks and anticipated returns from each investment? How arepublic and private resources leveraged to increase return on investment? Are therealternative investments we can expect to yield higher or more certain returns?Perelman argues for fundamental reallocation of the investment portfolio, requiring substantialrestructuring of education and training institutions. This level of reform is no longer a tabooconcept in education and training policy. The leaders of the two major national teacherunions both have called for basic restructuring of our education system. Communities such asMiami, Florida and Rochester, New York are consciously and aggressively working to reinventtheir local school systems. Minnesota has recently given the majority of the students in thestate open choice among public schools and districts. Michigan's new "opportunity card"seeks to bring consumer choice into the job training system. Arkansas has establishedstandards to make public schools accountable for achieving results. Massachusetts pioneeredrefocusing welfare programs on training for employment. New Jersey opened up alternativepaths to' teaching and educational administration to competent individuals lacking formal "edschool" credentials.As Governors, business people, educators, and concerned citizens, we have important choicesto make about how we ensure a skilled workforce for the future. Nothing less than ourfuture in the global economy is at stake.

xi


14/29

1. INTRODUCTION

It is no secret to the governors that the states and the U.S. as a whole face agrowing human capital crisis. A fifth of the current workforce is functionally illiterateand another fifth is only marginally literate. Accelerating job and career transitions meanthat most workers find their acquired training and experience rendered obsolete every fiveto seven years. Meanwhile, over 80% of the new entrants to the U.S. workforce duringthe next decade will be females or minorities--groups that now are disproportionately "atrisk" of academic failure or deficient basic skills Or discriminatory barriers that have keptthem out of many of the economy's more productive jobs.

Even while much of the workforce lacks the trained competencies needed to performexisting jobs, the intellectual and skill requirements of future jobs are expected tosteadily advance. A recent report of the Congressional Office of Technology Assessment,Technology and the American Economic Transition, emphasizes that the "learningenterprisetv-the business of training, education, and other processes of learning thatdevelop human resources-vis becoming ever more critical to economic development. As thestructure of the economy has shifted from one based on materials and production to onebased on knowledge and learning, strong basic skills and continual, lifelong retraining andreeducation have become crucial for a productive workforce.

Yet simply spending more on training and education is neither an effective nor anavailable solution. The productivity record of the education sector is the poorest of anymajor production sector. Since 1950, real-dollar spending per pupil in public educationhas grown nearly four times; labor productivity has declined by half. The U.S. spends5300-500 billion annually on education and training; more per-capita than any otherindustrialized nation.

But the quality of the education system's product has not kept up with the growth ofits cost; in the view of many critics, the quality has declined. Business leaders expressdismay that 30% of America's youth-s-and an even larger proportion of some minoritygroups=-drop out before graduating high school. Equally troubling: nearly a quarter ofthose who get diplomas lack a high-school level of literacy.

The economic liability of a sub-literate workforce in a knowledge-based economy,where at least half of all new jobs demand further knowledge and skills beyond thosetraditionally expected of a high-school graduate, is stunning. David Kearns, chairman of


15/29

INTRODUCTION

Xerox Corp., complains that the burden of training illiterate workers is costing Americanbusiness some $25 billion a year.An example: Motorola, Inc. traditionally employed eight of ten applicants for entry-

level jobs. Now the company has to screen out as many IS applicants to hire one withthe requisite 7th-grade English literacy and 9th-grade math ability. Motorola's trainingdirector figures that it costs $200 to train an American worker in the technique ofstatistical process control essential to quality manufacturing. It costs only 47 cents toteach the same method to a Japanese worker. The difference is that the U.S. workermust first be taught to read.

State and local governments have, in most cases, reached the limit of their capacity,and perhaps even their patience, to spend their way out of the education crisis. Formaleducation appropriations account for some 40% of state government budgets on average;for a growing number of state and local governments the portion is over half. Theinescapable implication is that large increases in education spending only can be achievedwith equally large increases in taxes.

Fiscal reality is that the capacity of the federal and state, and most localgovernments to increase spending in this area will be negligible for years to come. Thefederal government only pays about 6% of the public education bill; burdened by deficitsand debt, Washington will be hard-pressed to maintain much less increase its contributionfor the foreseeable future. The states, as a group, have barely managed to restore theirfinancial reserves, depleted by the sharp recession of the early 80s and essential toweathering the next economic downturn that history dictates must come eventually. Manyof the states with still-depressed economies--notably in the West, the Midwest, and theSouthwest--have been struggling, under austere circumstances, to avoid cutting educationbudgets. After a short-lived windfall for some, the states also are finding that federaltax reform has cut into their revenue base, pushing them either to increase taxes simplyto maintain current programs or alternatively to reduce services.

In any case, the governors made it clear in both the title and body of their 1986report on education reform, Time for Results, that the age of throwing dollars ateducation was over, and that from then on they would concentrate on getting a betterreturn on the massive investment in education. As former Governor. Richard Lamm ofColorado put it, 'We are worried that the nation is creating solutions to the wrongproblems. We are afraid that states are working for more of the same without taking a


16/29

INTRODUCTION \1=1

good hard look at the system itself." And, former Tennessee Governor Lamar Alexander,who directed the governors' study, concluded: "Some of the changes that need to bemade are so deep and will take so long that unless the Governors push, small changes willbe labeled reforms and nothing much will happen except spending more money."

Marketing expert Theodore Levitt once observed that people do not buy Quarter-inchdrills because they want Quarter-inch drills--they buy Quarter-inch drills because theywant quarter-inch holes. Similarly. governments, businesses, and individuals who invest ineducation and training do not do so simply to purchase education and training but toacquire learning that will contribute to the satisfaction of some important human needs,including economic needs.

Yet state governors and other policymakers have a hard time getting a clear (or evenmurky) picture of how the matrix of state policies actually affects the learning that hasan impact on economic development, Though governors have promoted investments ineducation and training in the hope of gaining a more competent and productive workforcein their states, the reality is that. many state "education" and "training" expenditures donot purchase the kind of learning (if any) needed to boost economic growth. At the sametime, many state policies and appropriations that have an important effect on learning arenot explicitly identified with "education" or "training."

So what we have is a highly disorganized and inefficient system for investing inhuman capital. Investors in this market have only the haziest notion of what otherinvestors are out there, who the alternative suppliers are, who's buying what, and whatthe ultimate value is of whatever is being purchased. It's sort of like buying a house bymail-order, with no broker and no information about what kind of neighborhood the houseis located in, what other houses are selling for, whether there are termites in the rafters,or even exactly what the final price is going to be.

The governors urgently need to see the "big picture" of the overall market forlearning in their states, and how state government policies and programs fit in. Theurgency stems from the realities of America's economic situation. One reality, the resultof mushroomed federal deficits and burgeoning foreign debt, is that government-e-state aswell as federal--is going to have to accept fiscal constraint for years to come. A relatedreality is that the American people face the choice of either taking a sharp cut in theirstandard of living or becoming much more productive to payoff the debts they have runup and to be successful competitors in an ever more competitive world economy.


17/29

INTRODUCTION

Both realities imply that the critical need for investment to improve the productivityof the states' human capital will have to be met without major new government programsand appropriations for education and training. Instead, the states must eliminate wasteand work to achieve much greater payoff from the investments they and their citizensmake in learning. Doing that will require a clear understanding of the current investmentpicture.

The utility of this for the governors should be evident. At a time when, as JackBrizius has pointed out, the governors are both taking and being given far greaterresponsibility for the results of education and training investments in their states, and forthe quality and productivity of the state's workforce, finding efficient ways to achievemore effective results from not only the state government's but the public's investmentsin learning is a top priority. At present, the governors get little Or no comprehensiveinformation about what their own state governments are actually doing to affect learningand human development, much less an accurate gauge of the efficiency and effectivenessof all those efforts. True, the governors are supplied with ad hoc reports, but the delugeonly serves to further muddy the picture. And the extensive array of investments ineducation and training by business and industry, associations, the military, families, andothers outside the domain of state and local government agencies is not only unreported,but almost entirely uncharted. A Map is needed to guide the governors' strategic vision.

The "Map" would illuminate the relationships among demand, supply, and investment inthe state's learning enterprise, the total system through which the state's people, of allages, seek and acquire learning. The Map would aid the governor, as CEO of agovernment that is a major investor in human capital, in much the same way a prospectusand effective business plan, based on solid market research and competitive analysis, servethe ordinary business investor--it would reveal the conditions, risks, rewards, and strategyof the venture.

The project that produced this report was an initial, limited step toward creating thiskind of investment Map. The project selected a single state, Colorado, as a case study ofstate policies and programs. Describing the great array of education, training, and otherhuman resource development activities in the private sector--which is really to sayeverything outside the domain of the state government itself--was impossible with theresources and time available.


18/29

INTRODUCTION

The focus of this project was mainly on attempting to describe only the "portfolio" ofthe Colorado state government's human capital investments as these are reflected inexisting policies, programs, and budgets of the various state agencies. All state agencieswere considered, except the National Guard, whose important role should be addressed inrelation to the overall federal military program.

The Colorado "portfolio" is laid out in the following two sections of the report. Thefirst, "State Programs and Investments" includes a summary of relevant agency policies,activities, and expenditures; it describes agency programs and functions, needs addressed,populations served, relevant laws, and budgets. It also includes a table and chartssummarizing the program data.

The next section provides an overview of "Issues and Observations" that covers themore qualitative findings of the research; it discusses what the study found about specific,existing programs in terms of effectiveness, "cross-impacts" (interactions among policies,programs, and agencies), needs, technology, and plans or proposals for the future.

The final main section of the report presents the author's "Conclusions andRecommendations." The conclusions focus on four key limitations and needs forimprovement of the existing state human investment portfolio. A series ofrecommendations is offered in the areas of administration, research and planning, andpolicy. A brief epilog to this section lists some practical lessons learned from this pilotstudy that may be applied to future research on state human capital investment portfolios.

The report concludes with several Appendices that discuss issues outside the mainfocus of this pilot study, and that relate to the larger effort at mapping and modeling thehuman capital investment system that is needed. The first Appendix addresses theproblem of building a dynamic model of "The Ecology of Human Capital Investment" thatcould help governors and other state decisionmakers anticipate the actual economicimpacts of investments in education. training, and other human resource developmentactivities. The second Appendix briefly lists the "Kinds of Learning for a ProductivePopulation" that should be accounted for in a useful human capital investment model orpolicy. While charting the human capital investments of the private sector in Coloradowas beyond the resources of this project. the third appendix provides "A Note on thePrivate Sector" that discusses what the scope of private investment in human resourcedevelopment might be in the state based on limited data that were readily available.


19/29

INTRODUCTION

Many people assisted the effort that produced this report. Jo Clark, Liz Santillanez,Bill Chance, and the other staff of the Western Governors' Association providedleadership, guidance, and support without which this project would have been impossible.Bart Alexander, Deputy Director of the Governor's Office of Economic Development, wasthe principal point of contact with the Colorado state government, and provided generousand invaluable assistance in the planning and execution of every phase of the effort.Many officials throughout the state government were equally cooperative and generous inproviding the extensive information gathered for the study; . they are listed in the"Catalog" part of section two.

A note of thanks is also due to Curt Weideman of the Colorado planning andbudgeting office, Fidel Aguilar and Robert Greene of the Colorado AFL-CIO, MaxineBrandenburg of the Colorado Alliance of Business, Bob Wendover and Michael Reid of theColorado Society for Training and Development, Lucy Schiffler and Doug Seipelt of theColorado Private School Association, Anthony Carnevale of the American Society forTraining and Development, and Madeleine Hemmings of the National Association of StateDirectors of Vocational Education for their consideration and assistance.


20/29

2. COLORADO "PORTFOLIO"--STATE PROGRAMS & INVESTMENTSContents

EDUCATIONAll except Adult Services(see separate heading)HIGHER EDUCATIONAll. other than Community Colleges/Occupational Ed.(see separate heading)HIGHER EDUCATIONColorado Community Colleges and Occupational Education SystemGOVERNOR'S JOB TRAINING OFFICEJOB TRAINING COORDINATING COUNCILEDUCATIONOffice of Library and Adult ServicesLABOR AND EMPLOYMENTEmployment and TrainingGOVERNOR'S OFFICE OF ECONOMIC DEVELOPMENT/CCCOESColorado FIRST Customized Training ProgramCOOPERATIVE EXTENSION SERVICEINSTITUTIONSSOCIAL SERVICESRehabilitation ServicesHEALTHCORRECTIONSPERSONNELHIGHWAYSTraffic Safety

RELATED PROGRAMSSOCIAL SERVICESREGULATORY AGENCIESDivision of Registrations

STATISTICAL SUMMARY AND CHARTS

2-1

2 - 4

2 - 7

2-102-10

2-13

2-16

2-18

2 - 2 0

2-22

2-24

2-26

2-29

2 - 3 1

2-33

2 - 3 5

2-37

2-39

2 - 4 1


21/29

"0 0 ' " ' " '" -e "1 ' "oq ' " ' " ' " r - ; 0 oq0- 0 -o -c '" 0 '" r-. '" 0 ~" M 0 '" N 0 '" '" "0'" 00 """ c ~c i. oj " " "0'- " ~0. r-. 0; ._; E0 0.a, " c :r-. 00~e e 00 .0 .:::"- ~W .J E" .~>.2 ~" " N 0 "0_0" " 0 0 C~U"'"U " " . r-, '" "" " 00 O. O. O. " " . O. 00 " '. " " . '" " '. ' " 00 " ' . 00 r-,00 M 00 0 '" ' " 0 M 00 '"a, 0000 N '" - N -e Mil . . . . l ~ N '" r- N- . . . . l N -ef- < . . : :il-- - . . : : ":-. : : > :: E > < f- o Z - e0 '" _, G : < W .J : r : u - e ee 0.0 0 : : : '" o 0 W .J W .J '" Z U U ; "I W .J W .J Z 0 : : : f- o W .J ~ v; U. . : : < 0 0 ". : : . : - 0 W .J . , . ; '- -i 0 : : : : r :- . . : : '- ~ '" til oj -- " u a :i . . . . l . . . . l 0 '" . . : : 0 : : : 0: : S 2 E " '" Eci U c .. 0 0 0 '" 0 W .J 0 W .J " . . c : a "f- o - z 6.J : : r : u -i U U U u : : r : u c .. - : : r : f- o : : r :. . . . - . . . .


22/29

C olorado H um an R esource D evelopm ent (H RD ) Portfo lioH RD A PP R OP R IA TIO NS A S A PR OPO RT IO N O F G EN ER AL F U NDA PP R OP R IA TIO NS - 1987

T ota l H RD = 60" ,

A ll o the r epprcprtatior.s! ! ! I I A ll o the r H RDI i i l l Educat io n (K -121o Comm . Co lle g es/O c cu p . E d .o H ig he r E d uca tio n (o th er 1


23/29

Colorado H um an R esource D evelopm ent (H RD ) P ortfo lioH RD A PPROPR IA TIO NS A S A PROPORTIO N O F TO TA L STA TEAPPROPRIATIONS - 1967

A ll oth er app ropriationsIII A ll other H RDW J Educa ti on (K-12 )D Comm . Colle ges /O c c u p. E d.o Higher Educa ti on (othe r)


24/29

Buman Capital as a Percentage of State Appropriations byCategory of Punding, 1987

Federa lCash

Gen er al F u ndo I o n 20% 40% 50n0%

G enera l FundI I I I l Cashm I l Federa lD To t a l


25/29

Colorado H um an R ousource D evelopm ent (H RD ) P ortfolioA PPROPRIA TIO NS BY CATEGORYO F FUNDS BY HRD

EXPENDITURE . 1 987Fun Educa t io n (K - 12 )dC H ig h er E d u ca tio n ( o th e r)t Co r am . Co l le g es /Oc cu p , E d .e90 A ll o the r H RDry 0 200000 400000 600000 800000 1000000 1200000

Thous.nds of $I E J Fede ra l IICash G ene ra l Fund


26/29

Buman Capital as a Percentage of State Appropriations byCategory of Punding, 1987

[] To ta l

G enera l FundI ! I ! I Cashf3 Federa l

Federa lCash

G en era l F un do 10% 20% 30% 40% 50% 60 %


27/29

Colorado Human Rousource D evelopment (HRD ) Portfo lIoAPPROPR IA TIONS BY CATEGORYOF FUNDS BY HRD

EXPEND ITURE. 19 87Fun Educa tion (K -12 )dC H ighe r Educa tion ( o th e r )l C o ram C o lle g es /O c cu p , E d ,e90 A ll o the r H RDry 0 200000 400000 600000 800000 1000000 1200000

I f i l l Fede ra lThous.nds of tI l l ! ! Cash G ene ra l F und


28/29

Colo rlido Human Resource Developmen t (HRD ) Portfo lioAPPROPR IATIONS FOR "OTHER" HRD PROGRAMSBY CATEGORYOF FUNDS - 1987

F .Job Traming Office ( JTPA)u lib ra ry and A du lt Se rv icesn L ab or a nd E m plo ym e ntd C o lo ra do F irs tC C o o pe ra tiv e E xte nsio n Inst i tu t ionst Soc ia l s e rv ic e s/R e h aoe9 Hea l th0 Cor rec l i onsr Pe rsonne lie H ig hw ay s/T ra ffic sa fe ty5

0

..,.:.'

5000 10000 15000 20000 25000 30000Thousands or $

f J l l l Fede ra lIII Cash G ene ra l F und


29/29

PRIORITIES OF STATE INVESTM ENT IN ADULTS VS. CHILDRENNEEDING BAS IC EDUCAT ION

No . o f Pe o p le (Th o usand s) I 1 1 I I I M illio n s o f D o lla rs

12001 0 2 1

1 0 0 0

800

6 0 0

4 0 0

200

o Chi ldren Adults

human capital investment for state economic development (western governors assoc., 1988)

Documents