Earlier this year, Dan Carr, president of The Collaborative, sat down with Tim Pawlenty to discuss several of the major issues he’s encountered and addressed in his role as governor. Speaking as the CEO of Minnesota’s largest employer, Pawlenty talks about the state of Minnesota, the impact he’s had during his seven years in office, and what challenges lie ahead.
 

Dan Carr: We first did this interview in 2003 shortly after you took over as CEO of Minnesota. You’d gotten off to a strong start, resolving the budget crisis without increasing taxes, despite a deficit of $4.5 billion. It’s been seven years, and you’ve announced your “retirement” from the CEO role.

In the past, we’ve discussed clusters, Thomas Friedman, Richard Florida, Michael Porter’s work, and you’ve also cited Wayne Gretzky and Peter Drucker. Many suggest fueling the innovation economy at the regional level is a product of the broader “quality of life”—amenities, education systems, transportation infrastructure, and the like (i.e., the Minnesota quality of life, above average, higher tax, higher quality, etc.). Where do you stand on that as CEO?

Governor Pawlenty: Well Dan, as with everything else, it is a matter of balance, not just a quality of life, but an innovative economy and entrepreneurial economy. Minnesota is not lagging behind in most outcome measures—things like education, culture, arts, amenities, outdoors, or the like. Where we are lagging behind is in terms of having a business climate and a job climate here that says to entrepreneurs and established business leaders: This is a place you want to grow. And on the “competitiveness dashboard,” the yellow light that’s flashing is Minnesota’s taxes are too high and its business and job climate is anti-competitive. Again, there is more to it holistically, but that is one of the categories that stands out where more improvements need to be made. The others we do very well in compared, on average, to the rest of the nation.

Carr: Many of the Minnesota venture-backed and entrepreneurial companies The Collaborative serves aren’t necessarily as focused on the marginal tax rate as they are on whether they can be successful with their business model (i.e., attract the talent they need to succeed). How do we balance that?

Pawlenty: Really important question. I do think you have to follow the data. Capital and all sorts of activity have been migrating to lower-cost places. During 2007 and 2008, over half of all the jobs in the entire country were added in Texas. One state. So, as you look at that data, Richard Florida can talk all he wants about having nice museums and sports stadiums—those are important add-ons—but if you don’t have the kind of economy where private-sector businesses want to start, stay, and grow, you won’t be buying too many tickets to the museum or the Vikings game.

Carr: I think we have had a good balance of both.

Pawlenty: We need to focus on the reality that 95 percent of us work for 5 percent of people who are entrepreneurs or have companies. So there is a group—call it the creative class, call it the entrepreneur class, call it the great innovators of America, call it the entrepreneurial spirit, call it whatever you want—but there is a cluster of people in Minnesota and around the country and the world who are the inventors, the innovators, the dreamers, the designers, the risk-takers that will provide the bulk of the economic growth in the future because we know that’s where it starts. So, it is a legitimate question. What things from a tax-policy standpoint, and otherwise, say to individuals that Minnesota is a good place for you to be?

Carr: There are many states and regions with efforts that focus on specific industries. Should we be helping specific industries through tax policy or other incentives?

Pawlenty: It is better to just make the whole state [more] competitive, but if we can’t do that, or can’t do that fast enough as a matter of triage or strategic importance, I think it is okay to put down some interim markers on areas that we know are strengths in Minnesota in order to exploit, leverage, and advance.

Carr: Can business be doing more in your view? The head of the National Venture Capital Association has told me more than once that you had a better grasp of innovation and the venture-creation side of the economy than most anyone he has seen in public office. You also have had a lot of experience with The Collaborative over the last seven years. Should we be more active? Are we are doing our part?

Pawlenty: Well, I went to a group yesterday, I won’t name which one, and it was purportedly about how to help the state reposition its competitiveness. I said, “How many of you in the room are not in government, regulated by the government, funded by government, or in the nonprofit sector?” And three hands went up. We have a need for business people who actually do what you and I are talking about to step forward. It’s hard because they are busy and their time is very valuable. People who are trying to start and run early-stage companies don’t like to sit around long meetings and listen to politicians flap their jaw. And we so desperately need that business involvement and leadership.

Carr: One of the things The Collaborative tries to do is to shine a light on the economic strengths or clusters we have in this state, such as medical technology or clean technology. I am going to jump to the job as CEO of the state. Management is a real success factor in growth companies. There is a lot of focus on the management team in measuring eventual business success. What do you do in managing your “team,” if you will allow this loose metaphor, given your team is partially elected through the legislature?

Pawlenty: If you take the general fund plus all the special funds of the state, it is about a $50 billion operation with 50,000 employees. I have [only] about 28 or so direct reports. So it is not a vertically integrated enterprise. We treat our commissioners, for the most part, as CEOs in their own right. For example, I don’t view them as the VP for agriculture or the VP for the department of administration. This operation is so large that each of these individuals has to operate basically as a wholly owned subsidiary. So you pick good people, give them some good guidance in terms of philosophical direction, and let them do their thing. In the analogy with the private sector, I function really more [like] the chair of the board than the CEO in all of this, because it’s just so big.

Carr: Still on management, what have you learned in seven years as the CEO of the state in running this huge enterprise?

Pawlenty: I think it is important to have clear principles, clear values, clear philosophy, and a clear direction. Again, because the enterprise is so large, if you don’t set those down in strong and clear terms, you can have mission creep or confusion. I don’t think we have any mission creep or confusion in our agencies about the direction or philosophy we have. I think that has been a helpful thing. If you are in a private-sector model, the CEO and the board say, “We are going to do X,” usually X gets done. Here, if the executive branch says, “We are going to do X,” the legislature says, “Maybe we will, maybe we won’t, maybe we’ll do Y or maybe we will do Z.” And so it is a much more, no pun intended with your organization, collaborative exercise.

Carr: Financing. In business it's equity, debt, and cash flow. In your “business,” it’s the budget—the mechanisms, the revenues, expenses, and capital plan (bonding), cash flow, deficits. Clearly this is a political football issue given our timing, but from a CEO and business perspective, what would you like to say about the state of our finances as a state, and how are we set for the future?

Pawlenty: All levels of government—federal, state, and local—are locked into a General Motors [type of] problem. Over the decades, the costs, promises, and commitments have run up so high, it just doesn’t work. You have federal government, for example, that takes in $2.2 trillion in revenues from all sources for all purposes, and they have $65 trillion in unfunded liabilities. It doesn’t matter if you are Republican, Democrat, Independent, Green, or something else. That math just doesn’t work. They are going to have the reality come home sooner rather than later. You see that in California right now and, to varying degrees, in every state in the country. In Minnesota’s case, the last budget cycle, we took in about $34 billion in revenues. We have just experienced the worst economic collapse since World War II, and we now have $29 billion in revenues. So we have 2011 expectations for spending on 2005-2006 levels of revenue. That’s why we have a budget deficit, and those two things have to be reconciled.

Carr: In the “Meet the Press” interview you did in February, you talked about how “fiscal prudence” has been lacking for years within the federal government. This is something business people have to deal with and is some of what you were alluding to—if you have lower revenues, you have to do something with expenses or you have to bring in more capital. This is an especially difficult capital-raising environment, so many businesses are forced to do more with less. Do you want to make any comment on that?

Pawlenty: Well, if you look at the nation's finances as far as the government, it is pretty clear that presidents from both parties and Congresses of both parties have contributed to the problem of the current deficit and debt. The day is coming quite soon, Dan, where it is no longer going to be an option. It is going to be a matter of math; you see this unfolding in real time in California. We talk about the innovation economy and what that means. California, of course, has been a leading innovative state, but now you have people leaving the state and businesses leaving the state in measurable and significant ways because of the challenges that state faces, in part because of its finances and the extraordinary burdens that they placed on their businesses.

Carr: What is your greatest strength as CEO of the state?

Pawlenty: I have a pretty clear understanding of what I believe in and why I believe it, and I have tried to make sure to be consistent and clear in that direction and philosophy. I think that has been helpful, and I am proud of that.

Carr: In your seven years at the helm as CEO, of what accomplishments are you most proud?

Pawlenty: As far as a manifest in terms of specific policies, setting priorities and focusing on those priorities matter. Being as faithful as I can to the men and women who serve in our U.S. Military and supporting them in any way possible, and getting a lot of legislation passed to back that up. I am very proud of that. In the area of government reform, I think we have done a lot of remarkable things. A lot of it is unglamorous and doesn’t get into the newspaper, but when you see the agencies we have merged, the technology systems that we have merged, the bringing things into the e-government that used to be “wait in line to file a form” have been tremendous. We have significantly advanced the ball in market-based health-care reforms, and we have significantly advanced the ball in education reform—the first ever in the state, and the first in the nation, statewide performance-pay-per-teacher model. I am very proud of that.

Carr: I heard your comments on a February talk you gave in North Carolina where you addressed the future and highlighted Minnesota growth company, Capella Learning, as an example. Care to share on that?

Pawlenty: In a nutshell, the future looks a lot like an iPad or an iPhone—individuals are in charge, have robust choices, transparency around price, offerings in a marketplace offered in way [that is] convenient and in real time, less and less emphasis on physical location, bricks and mortar or one-size-fits-all applications. We have a government that is kind of a 1940s industrial model in a world that’s becoming an iPad. Those two things are going to be reconciled, and the marketplace will decide this. The only question for Minnesota is: Do you want to lead it or do you want to get dragged there?

Carr: What thoughts would you like to leave us with as we end your years as CEO on your legacy and your future?

Pawlenty: Well, just this: I am very grateful to the people of Minnesota to have had the opportunity and the privilege to have served this great state. It’s a state that has been liberal in its politics, but it is filled with really good people and I love them even if they disagree with me. I do think I represent a game-changer as a conservative coming in and saying “I think we should put some limits on government, I think we are going to slow down the government spending and try to emphasize private-sector solutions.” . . . pretty dramatic for Minnesota, but I think it was needed. But really I leave with a sense of gratitude.

Carr: What about the future of the state you are leaving. Do you have any concerns or thoughts you would like to share other than the reckoning we are going to have? Any other thoughts for the next person—your successor, whoever that might be?

Pawlenty: I have a very strong view of that. I think the state, on so many measures, does great. We are not out of competition in education and we are not out of competition in arts and culture. We are not out of competition in health care. We are not competitive enough when it comes to business climate and tax climate. In this changing world—this hyper competitive world—we have to be more competitive.

Dan Carr has served Minnesota innovators for over 20 years as CEO of The Collaborative, a Minneapolis-based membership organization of growing companies, entrepreneurs, investors and advisers who aim to build better, more profitable Minnesota companies. Learn more about Carr and The Collaborative at collaborative.net.