Ray Scheppach: Gubernatorial Guru Departs

On his last Friday as head of the National Governors Association , Ray Scheppach gave his staff a casual-dress day. He set the tone by wearing jeans and a sweater, fitting attire for a leader whose relaxed personality was key to his longevity as chief spokesman and negotiator for the nation’s governors.

Scheppach officially steps down tomorrow (March 31), ending a long career as one of the giants of Washington’s public policy arena. In a city of changing presidents, congressmen and lobbyists, Scheppach managed to keep his job for 28 years, serving a total of 300 Republican and Democratic governors.

“He has two important characteristics,” says former Pennsylvania Governor Ed Rendell. “He is incredibly smart. He can grasp the most complex issue and boil it down to simple points for governors to contemplate and take action on. Second, he has the type of personality that builds coalitions pretty easily. He tries to get along with everyone.”

Scheppach’s job required a dispassionate advocate for governors on Capitol Hill and in the White House. Both parties always understood that. “He often told me he saw his responsibility as protecting the interest of the minority,” says former Vermont Governor Jim Douglas. “At various points Republicans would grumble that he was leaning to Democrats but other times Democrats would grumble he was leaning the other way, so I think that’s a testament to his impartiality.”

Debating Medicaid

In the mid-1990s, congressional Republicans persuaded some GOP governors to support a proposal to turn Medicaid, the federal-state health care program for low-income Americans, into a block grant. The federal government would distribute the money and states would set the level of benefits and eligibility. Over several days and boxes of pizza, Scheppach convinced Republican and Democratic governors alike that the block grants could harm states because Congress could limit funding, create inequities between states due to demographic differences, and ultimately jeopardize health care coverage for thousands of low-income people. He still considers that feat of persuasion one of his most important moments in all his years on the job.

An economist by training, Scheppach served during the nation’s longest economic expansion, the 10 years between 1991 and 2001, and the longest downturn since World War II, the so-called Great Recession of 2007-09. This last recession was so deep and broad, Scheppach says, that it may affect states for the rest of the decade. Between 1978 and the 2007 downturn, state tax revenues grew at an average of about 6.5 percent a year, while during the recession, there were five straight quarters of revenue decline; the largest quarterly decline was 16.8 percent. It will take some states until 2015, Scheppach says, to bring in the same amount of revenue they collected in 2008. 

At the same time revenues are recovering slowly and $246 billion in federal stimulus money disappears, states have been hit with huge challenges: taking care of needs deferred during the recession such as maintaining infrastructure, building up depleted rainy day funds, catching up on unfunded public pension and health care liabilities and reducing the climbing costs of Medicaid.

“Nobody really looks at Medicaid relative to states’ revenue path,” Scheppach points out. “What scares me about this is when your revenue is growing at six and a half percent a year you can probably handle a Medicaid program that’s growing… But when your revenue is growing at 4 percent a year and the program is twice as big as it used to be, you just can’t handle that.”

Layered on top of those challenges is a long-term structural problem that began eroding state tax revenues before the recession. Most states have antiquated tax systems, Scheppach says, that evolved around a manufacturing economy, not the high-technology, service-oriented, international economy of today. The sales tax in many states, for example, applies only to goods, not services, and not to goods sold on the Internet. “‘New’ economy output is growing but avoiding taxation; ‘old’ economy goods are not growing yet bear the tax burden,” Scheppach contends . Until this imbalance is fixed, he says, states will find it difficult to increase revenues.

Then there’s the unknown cost of the federal health care law. Scheppach worries that rising health care costs will draw off money that states need to invest in education and job training to stay competitive in the global marketplace. “I don’t know how you get from here to where we need to be,” he says.

Because of the severe impact of the Great Recession on state revenues, Scheppach says, states will not be able to continue the recent cycle of spending cuts, tax increases, tapping rainy day funds and borrowing to balance budgets. Instead, he says, governors and legislatures will have to restructure state government, which will no doubt mean fewer services and employees than now. “The good news is, state government is going to be more efficient,” Scheppach says. “The bad news is, people are going to feel it in services.” He cites as one example Michigan’s recent move to trim its state-paid unemployment benefits from 26 weeks to 20 weeks.

Partisan frustrations

In 28 years, Scheppach has lived through a dramatic escalation in partisanship that, in his view, makes it more difficult for governors to protect their states’ sovereign rights. Gone are the days, he says, when a core group of lawmakers and White House aides worked amiably with governors of both parties to sort out the responsibilities of the federal government and the states, practicing federalism in an effective way.  Increasingly, he says, the federal government is simply telling states what it plans to do.

The governors association has had its share of setbacks under Scheppach. It has been unable to stop the spread of federal categorical grants, money given to states for a specified purpose, such as the distribution of food stamps, but inefficiently because some states cannot use them. The association could not block Congress from voting to allow the president to take over state National Guard operations during Hurricane Katrina and other disasters. Scheppach helped repair that legislation by convincing Congress to amend  the plan to set up a joint command under which the governor and state adjutant general would direct state and federal military forces during an emergency.

More often, there were triumphs. In 1989, persuaded by southern governors concerned about the poor level of education in their states, Scheppach convened the first of several education “summits” that established the National Governors Association as a leading force behind initiatives to fix the nation’s schools and improve economic competitiveness. Former Virginia Governor Gerald Baliles, the host at that 1989 conference, recalls “Ray Scheppach, baton in hand, conducting the discordant notes to the point where he produced a harmonic convergence of all the different voices.”

When a group of northern governors pushed for a revamped federal welfare law in the mid-1990s, Scheppach and the governors essentially came away with the version of change that they wanted. In 1998, when Congress tried to capture a share of $246 billion in tobacco settlement funds, Scheppach and the governors persuaded lawmakers to allow states to decide how to spend the money.  

Though he is 71, Scheppach is not actually retiring. Baliles was instrumental in coaxing him to accept a position at the University of Virginia, where Baliles is director of the Miller Center of Public Affairs . Scheppach is taking on two new jobs there: He will be a public policy professor at the Frank Batten School of Leadership and Public Policy and senior fellow for economic policy at the Miller Center.

It is a testament to Scheppach’s skill that when the governors were searching for a successor, they specified to the search firm that they wanted someone like Scheppach — someone who understood federal and state budget issues, would be honest and direct with governors, but “not get into the politics — let us deal with the politics,” says Washington Governor Christine Gregoire, the current chairman of the group.

The person they found is Dan Crippen , a former director of the Congressional Budget Office who has Capitol Hill and White House experience under former Senate Majority Leader Howard Baker and President Ronald Reagan. He starts April 1.

Asked to offer a parting civics lesson, the soon-to-be professor reflects that there are only a few times in political life when conditions are favorable for national and state leaders to work together to solve the country’s major problems. One such time was the mid-1990s, when Democratic President Bill Clinton and a Republican congressional majority hammered out the compromise welfare law that remains intact and has been widely judged a success. 

“There aren’t a lot of windows of opportunity,” Scheppach says. “When there are, you’ve really got to move.”