Skip to content
Link copied to clipboard

Cutting the city budget, sensibly

ONCE AGAIN, the city's been given a budget choice between two options: Raise taxes or cut services. But there's a third choice - perform existing services more efficiently. And it's been done before right here in Philadelphia.

ONCE AGAIN, the city's been given a budget choice between two options: Raise taxes or cut services. But there's a third choice - perform existing services more efficiently. And it's been done before right here in Philadelphia.

In the early 1990s, city government had a program called "competitive contracting" that significantly reduced spending while increasing the quality and quantity of services. Hundreds of millions of dollars were saved.

It was called "competitive contracting" - and not privatization - because the aim was to inject competition into city government to get the best service at the best price - not just turn services over to contractors. The impetus behind this program was the city's fiscal emergency of that period.

The framework of the program was provided by a contracting-out clause in the city's union contracts that required the city to perform an "economic analysis" of various services that the city provided and then to "meet and discuss" them with the union involved.

The administration made a list of more than 30 services from almost every city department that were notorious for being poorly run: City Hall custodial services, prison food services, mowing grass in city parks, the nursing home, etc.

I know about it because I was in charge of moving the program along.

In order to see if we'd save money on a particular service, we had to know what it was actually costing and for what level of service.

OK, said naive me.

I'll ask the manager of each service to bring in the current performance standard and cost analysis, and we'll go over it.

These requests were met with blank stares. The city at that time had no performance standards and no cost data.

So we spent weeks tracking down all the costs of a particular service and establishing the current level of service. I was amazed. How can you run a multibillion-dollar organization and not know what you are getting and what it costs?

Even more amazing is what happened at the "meet-and-discuss" sessions, where the unions and managers were presented with the in-house vs. potential contractor costs.

Lots of ideas emerged to dramatically drop costs, sometimes as much as 10 to 20 percent. Everyone knew where the inefficiencies were, but there was no incentive to fix them, and no one asked.

One of the most dramatic examples was what happened with the Water Department's sludge processing plant. We determined that the operation cost $23.9 million and issued a pre-bid request to identify qualified private operators.

Within weeks, the managers and union identified $8.2 million in savings - 34 percent - and the service was retained in-house.

Most of the competitive contracting initiatives were eventually contracted out, as the savings were so large, but in every case, the service level was improved.

And few of the city workers affected were left without a job because they were given "first hiring preference" for needed but vacant city positions elsewhere, or by the contractors hired to do the work.

Overall, it was an enormous success, and downsizing the city payroll significantly reduced health costs and future pension obligations. The gross inefficiencies weren't the fault of bad managers or employees - they were the fault of skewed incentives and flawed systems.

Now we have another fiscal emergency. What should be done? Not trash fees. The surrounding suburbs (where the wage tax is typically 1 percent) do charge a fee, but private companies compete, offering the best service and price.

Here are some things that can be used to get results:

Enhance the accounting system.

To radically change the city's "business culture," supplement the accounting system that tracks inputs with "activity-based costing" that tracks end-results, so managers can know how much each service really costs. The cost is an essential half of a cost/benefit analysis that managers and policy makers must perform to see if we are getting our money's worth.

The Popular Budget.

Publish on the Web the cost and performance of all city services so that taxpayers know what they're paying for. This will facilitate really informed budget discussions.

Alter the incentives for managers and employees.

Generally, government managers' salaries and careers advance by how big a budget they control and how many employees work for them - not how efficiently they deliver services.

But that's really the opposite of what we need. And programs that reward employees for good ideas that save money have proved successful in many large organizations.

Push hard to reduce costs.

Appoint a champion for change who isn't afraid to make waves. Use the above changes to set cost-cutting goals for managers. Start with 4 percent - the savings needed this year to balance the city budget.

The city doesn't have to contract out everything, and can be happy if the initiative results in somewhat smaller savings that also keep the work in-house.

But if the mayor and City Council won't make these changes, maybe PICA can require it. Spending cuts without cutting services can be done. I saw it happen.

Linda Morrison is a public policy analyst and former director of Mayor Ed Rendell's competitive contracting program.