Section Three

Bureaucracy

A recent study by the Government Accounting Office found that every department of the federal government is mismanaged. Leon Panetta, President Clinton's Director of the Office of Management and Budget, commented; "I think about that statement every day." He believes if a government agency saves money it should not be penalized. However those that "keep sloppy books or engage in year-end shopping sprees rather than turn back savings to taxpayers" should receive their just deserts. He once said, "I think there are civil servants out there who want to do the right thing. But they look to people next to them who aren't being productive, who are basically wasting their time and they're saying, 'How can they get away with it, and I'm working hard?"

On page 254 of Reinventing Government, we find the following comment by Osborne and Gaebler:

Their (governments') message to employees_ Follow orders. Don't use your heads, don't think for yourself, don't take independent action. If something goes wrong that is not strictly your responsibility, ignore it. If you absolutely have to make your own decision, choose safety. Never, ever, take a risk. . . . To return control to those who work down where the rubber meets the road, entrepreneurial leaders pursue a variety of strategies. They use participatory management, to decentralize decision making; they encourage teamwork, to overcome the rigid barriers that separate people in hierarchical institutions; they create institutional 'champions'. to protect those within the organization who use their new authority to innovate; and they invest in their employees, to ensure that they have the skills and morale to make the most of their new authority.

Civil Service

The Civil Service Act of 1883 was a response to the assassination of President Garfield by a frustrated job seeker. It was instituted to protect public employees from political manipulation and patronage. But the system has gotten out of hand over the years. Take job classification: According to David Osborne, writing for Governing April 1993:

New Jersey has 6,400 (job classifications,) New York 7,300, Michigan 2,700. The federal government has 459 job series, 15 grades and 10 steps within each grade. This approach not only hamstrings public managers, it wastes millions of dollars on personnel officers whose job it is to classify each employee._the system is expensive, cumbersome, time-consuming and intensely frustrating to managers. It often takes months to get positions classified and filled. Classification standards_(make) it difficult to move people around as needs and funding change. _They drive high performers out of their fields of expertise into supervisory positions, to get higher pay, and make it difficult to recruit quality employees.

Civil service and collective bargaining rules generally allow the person cut to take the jobs of less-senior employees and so sometimes the "bumping" disrupts an entire department. Again quoting from Governing magazine, May 1993:

Positions considered unnecessary may get cut, but then the bumping starts in a massive administrative version of musical chairs. It isn't until the music stops that officials really know who will wind up in which job. The fits might not be so good. And one thing bumping guarantees: the newest arrivals to government employment get wiped out, even though they may be harder working and more talented than some of the more senior people who get spared.

Civil Service regulations are excessively long and complicated; the federal personnel manual alone is over 6,000 pages. Osborne and Gaebler agree that "most of what civil service procedures were established to prevent has since been ruled illegal or made impossible by collective bargaining agreements."

Civil service is so often blamed for what is wrong with government, that it is little wonder some states are giving it up. Texas public workers have never been covered by a civil service system nor have employees of certain federal agencies like the FBI and the Social Security Administration. Florida's governor, Lawton Chiles convinced the legislature in his state to sunset the civil service system in 1992.

(C-1) Does your state operate under a civil service system? Your city or town?

Not long ago the Massachusetts Taxpayers Foundation conducted a study and discovered that state managers agreed that civil service hiring procedures hurt rather than helped them hire the best employees. Under civil service systems, managers are forced to hire from lists of those who have taken civil service exams. They are supposed to hire the top scorer, or one of the top three scorers. Motivation and references have no bearing. To show how by the number and totally lacking in discretion the system is, Osborne and Gaebler used San Francisco, as an example. In that city, if two applicants tie for the top score, the one with the highest social security number is automatically hired. Another twist was added from a 1970s study conducted by E.S. Savas in New York City. He found that those that scored highest were seldom hired by the government. During the seven months that normally intervened between testing and hiring anyone of any caliber would almost certainly get another job.

(C-2) Explain, in your own words, why those who score highest on civil service exams are seldom hired by governments.

The following is from page 127 of Reinventing Government:

Federal employees we know describe colleagues who spend their days reading magazines, planning sailing trips, or buying and selling stocks. _The waste in this system is mind-boggling. with 17.5 million civilian government employees_our public payroll approaches $500 billion a year. Benefits add another $100 billion or so.

The Civil Service Reform Act was passed in 1978 under President Carter. It authorized a demonstration project at the Naval Weapons Center in China Lake, California, which was highly successful. During the China Lake Experiment, as it was called, people were hired at market salaries and salary increases and bonuses were awarded without first reclassifying the employee. At China Lake bumping was based on performance, not seniority and was restricted to one career path. Normally, as Osborne and Gaebler explained, when civil service employees are bumped, everyone moves according to seniority, not job skills, until the position is covered. That often means people find themselves in jobs they don't like and for which they have little skill or training.

(C-3) In your own words, explain the difference between "bumping" at China Lake and elsewhere.

Even public employees favor making it easier to get rid of incompetent workers. Many believe, however, that more emphasis should be placed on training. Current practice is to grant civil service employees automatic promotions whether or not their abilities and responsibilities have increased. The Office of Personnel Management has estimated that almost 14 percent of all civilian workers are classified in grades higher than they merit.

Rogers discusses the civil service system in Alternatives:

Managers in government have grown twice as fast as the number of front-line service-delivering employees. _James Florio (former governor of New Jersey) found that to fire one percent of his civil service employees, he would have to send notices to twenty percent. Any dismissal would set off a chain of civil service bumping–––down grading (or up grading) as positions were eliminated. Civil service rules are a big part of the problem. For instance Iowa has 1,254 job titles for 44,000 employees. One person alone held 364 titles!
 
Washington DC has two full time window shade repairmen –– with a combined salary of over $100,000. _New York City has to comply with court-mandated staffing ratios which cover everything from the number of special education teachers to the number of prison guards per prisoner to the number of officers that must ride in each squad car.
 
New York City has one administrator for every 150 students, whereas New York's parochial schools get along with one administrator for every 4,000 kids. There have been the same number of libraries for forty years, but front-line staff decreased from 1,700 to 1,500 while top management exploded. Everyone wants to be the $100,000 per year assistant. Promotions mean more money, so new layers have to be constantly created to accommodate career and salary ambitions.

(C-4) Give 3 reasons why New York City's public schools have so many more administrators than the number required by the City's parochial schoools.

Michael Cheney, a whistle blower who worked for the San Francisco Muni (transportation system) claimed that of $1,218,000 paid in overtime over a 14 month period, only $59,000 went to body and fender workers, painters and those who scrubbed graffiti---32 people in all. According to Mr. Cheney, forty-four supervisors got $343,000 in overtime. Thirty-two of the forty-four got $280,000 just to oversee the work. $84,000 went to 10 controllers –– more than was spent to keep 500 buses looking good. The top four managers made $68,000 in overtime in 14 months. (Again more than the 32 laborers made in overtime.) The discovery was first made in 1985. One and a half years later records showed employees making as much as $6,000/month in overtime with management taking 40 cents, or more, out of every overtime dollar. For awhile management was getting only 15 cents of each dollar.

(C-5) What is a "whistle blower" as used above?

Turning once again to Reinventing Government:

All this has an insidious effect on employees. "It's suffocating, entangling," says Tom Fulton. "It's like Gulliver, being tied down." Unable to do what they know is right, fearful of punishment if they are found to be ignoring the rules, many public employees simply give up. They forget their agency's mission and settle for following its rules. They write memos upon memos, in the time-honored tradition known as "covering your ass."
 
Fernando Noriega, director of the mission-driven Community Redevelopment Agency in Tampa, Florida, sums it up perfectly: "What's happened in the public sector has been a massive attempt to de motivate the employees, by not letting them exercise their minds –– by telling them exactly what they have to do and when they have to do it and how they have to do it."

(C-6) Rules constrict and demoralize public employees.Are they worth the enormous cost we bear in dead-weight?

(C-7) An idea is to let policy administrators shop for the most cost-effective service providers. Choose two from the 4 reasons listed and discuss why your 2 choices would be an improvement over civil service.
Competition results in lower costs (1) and better performance.(2)
Being able to go into the marketplace gives administrators flexibility.(3)
Accountability is established when tenure gives way to job performance.(4)

Searching For A Better Way

The following account is found in Reinventing Government, pages 272-275:

Rudy Perpich, governor of Minnesota from 1976 to 1979 and 1983 to 1991 ... learned first hand how much state employees resented edicts sent down from the top. To cut spending, he had created a Committee on Waste and Mismanagement. It had nickel-and-dimed employees in the worst way: forbidding them from buying new file cabinets, turning off every other overhead light, banning coffee-making machines from state offices. To this day, employees in Minnesota remember when the governor took away their coffee machines. In 1978, many of them took their revenge on election day, and Perpich went down to an unexpected defeat.
 
For the next four years, Perpich worked for the Control Data Corporation, in its Vienna office. There he learned something about managing knowledge workers. He particularly remembers the fury when American managers told their Austrian employees they could no longer keep wine in their office coolers.
 
When Perpich was reelected in 1982, Minnesota again faced drastic fiscal problems. His first impulse was to create a business group like the Grace Commission, which had combed through the federal government for waste, then submitted a gargantuan report that gathered dust on many shelves. Perpich planned to call it Strive Toward Efficiency and Productivity.(STEP) Fortunately, he asked Dayton-Hudson Chairman William Andres to cochair the group. Andres understood that productivity was not something that could be imposed from without. It had to be built in from below. 'The way to get it is to empower the employees to do what's right, ' he told Peter Hutchinson, the vice president he assigned to the project. 'When you help people figure out what's right----and empower people to do it---you get great results. You get results that are way beyond anything you could dream up in the big offices upstairs.'
 
Hutchinson took this message to the working group that Sandra Hale, Perpich's commissioner of administration, had put together to design STEP. ...
 
The program was simple. Perpich appointed a STEP board, which he and Andres co-chaired. It solicited proposals from employees who had innovative ideas, and it chose the most promising as official STEP projects. It used criteria similar to those entrepreneurial governments were embracing all across America. STEP projects had to be proposed by a team, they could not require any new money, and they had to embody at least one of six principles: customer orientation, participatory management, decentralization of authority, performance measurement, new partnerships, or state-of-the-art technology.
 
The STEP seal of approval did four things. It gave people permission to innovate. It offered them technical assistance. It forced their bosses to sit up and listen. And it gave them protection when the inevitable flak hit. ...
 
Good ideas may bubble up from below, but in centralized systems those ideas are usually ignored. To empower employees to act on their ideas, policy makers must decentralize the locus of decision-making ... efforts to improve productivity usually undermine both productivity and morale; efforts to improve morale by empowering employees usually heighten both morale and productivity.

The U.S. Postal Service has a rule book the size of a collegiate dictionary. The New York City school system has a rule book the size of two collegiate dictionaries. Principals in New York cannot tell school custodians when to open and close their schools –– much less discipline or fire them. They cannot even fire teachers, in practice. And the Board of Education cannot fire or transfer a principal, once that principal has put in three years at a school.

What effect do you suppose this has on the performance and morale of employees?

(C-8) At your school, what control does the principal have over custodians and other school employees?

(C-9) Under what circumstances can the principal, or any teacher, be relieved of his or her duties at your school? Describe the procedure.

The Public and the Private Sectors

The May 1993 issue of Governing magazine featured a map showing the percentage state and local government employment growth exceeded or fell below private job growth between November 1991 and November 1992 in each state. In 42 states the growth was level or exceeded job growth in the private sector. It exceeded private sector job growth by between one percent and 2.9 percent in Hawaii, California, New Mexico, Colorado, Missouri, Iowa, Wisconsin, Alabama, Florida, South Carolina, Rhode Island, New Hampshire and Vermont. Government job growth exceeded private sector job growth by 3 percent and more in Oregon, Nevada, Nebraska, South Dakota, Oklahoma, Louisiana, Virginia, New Jersey and Connecticut.

Altogether there are three million federal workers. Disregard 800,000 postal workers and we still have a federal workforce of 2.2 million. The U.S. Bureau of Labor Statistics (BLS) reported that between July 1991 and July 1992, 250,000 more workers were added to the more than 15 million already on the payrolls of state and local governments throughout the land. The following is from a Wall Street Journal editorial which ran on August 26, 1992:

ALEC (an group of conservative elected officials--American Legislative Exchange Council) calculated that operating costs, adjusted for inflation and population changes, rose an average of 28% in the 1980s in 41 surveyed cities. The reason, according to ALEC, comes down to having too many people on staff, and paying them too much relative to the private sector.


Think what it means to have more people working in government than in the private sector. Who is paying all these employees? What are they adding to the productivity of nation? Are they increasing the GNP (gross national product) or the GDP (gross domestic product)?

(C-10) Write out your researched definitions of GNP and GDP as used above.

Too Many Government Workers?

Americans have 504,404 elected officials, one for every 182 voters according to Osborne and Gaebler.

In a discussion of the November 1990 Budget Accord, Rogers claimed

Congress added $14 million to congressional committee coffers and added even more employees to the staff of 37,388 already on Capitol Hill. Eighty-one staff members were making more than senators before the Senate voted itself a pay raise in the summer of 1991.

In 14 different government hearings there were 1,060 witnesses; 47 percent were federal administrators, 10 percent were state and local officials and six percent were members of congress.

Between 1980 and 1989 the budgets of the ten largest regulatory agencies in the federal government increased in real terms (adjusted for inflation) by 26 percent. In 1985 we bailed out the Farm Credit Administration, to the tune of $4 billion. By 1992 its staff had doubled in size. The SEC –– Security Exchange Commission–– has increased its staff by 25 percent although the number of industry workers it seeks to oversee has decreased dramatically. The extra gas-tax dollars are underwriting the regulatory personnel at the Federal Highway Administration which has increased 170 percent since 1985. The Commodity Futures Trading Commission only gained an 18 percent increase in staff. The Department of Agriculture had 3,300 employees at the turn of the century. Ninety-three years later and with three million less farmers to represent, the Department had 129,000 government employees. The EPA now takes 38 percent of the entire regulatory budget up from 15 percent of an immensely smaller total in 1970--included in the increase is a 70 percent increase in the Army Corps of engineers since 1985. Finance and banking also gets a larger share of the regulatory budget than it had in 1970.

(C-11) Which two agencies mentioned in the preceding paragraph saw their staff increase while their clientele decreased?

The Center for the Study of American Business at Washington University in St. Louis found that in FY1992 the number of federal employees passed the high-water mark set by the Carter administration in 1980. Clinton's 25 percent cut in the president's staff exempted so many people that the 1,044 positions remaining were more than the 785 in 1981.

Donald Devine was director of the U.S. Office of Personnel Management under Ronald Reagan. Early in 1993 the Wall Street Journal ran a selection from his "Memo to President-elect Clinton", written at the auspices of the conservative Heritage Foundation:

Of Bill Clinton's many promises, one of the clearest was this one: "(I will) eliminate 100,000 unnecessary positions in the bureaucracy. I will cut 100,000 federal government positions through attrition. _I will require federal managers and workers to achieve a 3 percent across-the-board administrative savings in every federal agency." _Ronald Reagan showed how.
 
In the 1980 election campaign, Mr. Reagan promised to reduce the size of the bureaucracy. In office, he defined his goal as a 75,000-person decrease in non-defense full-time personnel. By the end of his first term, non-defense federal employment had gone down by 78,650. Significantly, about 90 percent of the decrease was achieved by the end of the first year.

Unfortunately the hiring freeze ended at the end of the first term. Under President Bush federal domestic positions increased by 24,283. State & local government have increased their personnel in the same time period by 66 percent.

All this seems to be in deep contrast to what Professor Walter Williams of the University of Washington, has to say in his new book Mismanaging America. Professor Williams makes the case that the federal government is understaffed and underpaid. He claims under Reagan the Federal Drug Administration inspections dropped nearly forty percent from 33,000 to less than 20,000 and that the FDA laboratories were inadequate to their purpose. Social Security Administration staff declined from 80,000 to 63,000 under Reagan, resulting in “tens of thousands of poor aged, blind and disabled persons ... deprived of their SSI payments because of staff shortages.” He listed the following personnel reductions: Labor 16 perrcent, HUD 17 percent, HHS 23 percent, Education 32 percent. Williams claimed there are slightly over one million civil servants if one doesn’t consider those involved with defense and the post office. It would be good news to Reaganites if it is true, as the Professor contends, that the U. S. government has one-sixth less civilian federal staff per 100,000 persons in the population than in 1968.

(C-12) This is not the last time that you will run into conflicting statistics. Your job is to check out these conflicting claims and come to a personal conclusion. Cite the sources you consulted in order to discredit or substantiate these claims. Detail the thought process you used to substantiate your choice. Research librarians are trained to guide you to the best sources for your search, but here is a hint: Keep federal employees separate from all government employees. For some comparisons you may have to add local state and federal employees together. Pay attention when a differentiation is made between domestic or civilian and military. Ask yourself whether postal employees are, or are not, included in the sources you consult.

In connection with the "17.5 million" quoted on the second page of this section, Osborne and Gaebler cite the Statistical Abstract of the United States 1990, Table 487. They took the monthly payroll of $32,382,000,000 in 1987 and rounded it to $388 billion a year. That was the most recent figure available to them when they were writing in 1992. They adjusted that figure for inflation between 1987 and 1992 and came up with approximately $500 billion.

How To Cut Back Personnel

The following is an abbreviated list of Mr. Devine's suggestions to President Clinton. I would recommend interested parties, read the January 15, 1993 Wall Street Journal article or contact the Heritage Foundation for its publication. The Harry Singer Foundation would be happy to lend an audio tape of Mr. Devine's "Memo" to any teacher who would like to use it in the classroom.

Institute a total freeze on federal hiring –– except political appointments –– and declare a 3 perent across-the-board administrative cut.
 
Demand that Congress eliminate minimum staffing levels in all departments and agencies.
 
Ask for monthly accounts of full-time employment from the Office of Personnel Management.
 
Demand from Congress the elimination of legislative limits on the number of political appointees, and reduce the executive office of the president by 25 percent.
 
Announce a major drive to privatize and contract out government services. _ Right now the bidding process is rigged: Would-be private contractors must factor all overhead costs into their bids, while government agencies are allowed to exclude many items from theirs. Loading dice in this way often deprives the taxpayer of more efficient (and cheaper) service.

(C-13) Prioritize Mr. Devine's suggestion by placing a number 1 after your personal favorite and a number 5 after your least favorite suggestion.
freeze on federal hiring_______
eliminate minimum staffing levels______
monthly accountings________
limit the number of political appointees______
use more private contractors_______

If Mr. Clinton takes prompt and decisive steps such as these, he can cut the overhead cost of government and help the federal work force to function more efficiently. The federal bureaucracy is a bloated target for management and budgetary reform. Personnel costs (wages and benefits) add up to 15.5 percent of total domestic spending, and other administrative overhead adds 24 percent more, so even minor efficiency gains translate into big saving. _ federal retirement accounts add up to four percent of budget. By simply limiting increases to the maximum amount of the Social Security cost-of-living adjustment, it would be possible to save $1 billion the first year and $20 billion over five years.

(C-14) The personnel costs, other administrative overhead and federal retirement accounts, detailed above add up to what percent of total domestic spending by the federal government? Roughly what is that in dollars as a percentage of a $1.5 trillion budget? (Just for this exercise, ignore the close to $300 billion in defense and foreign aid.)

From Reinventing Government:

With so little information about results, bureaucratic governments reward their employees based on other things: their longevity, the size of budget and staff they manage, their level of authority. So their employees assiduously protect their jobs and build their empires, pursuing larger budgets, larger staffs, and more authority.

The Community Redevelopment Agency in Tampa, Florida and an agency with which it later merged, had a combined 41 employees in 1985. Their job was to loan federal money for rehabilitation on low-income properties. Those 41 employees made 37 loans in 1985. Through attrition, a new city government managed to cut those employees to 22, laying off only five workers. The agency was redesigned to resemble a private bank, employees were retrained, salary levels were increased by 50 percent and the civil service system was replaced by goal-oriented performance. In less than eight years there were fewer happier employees using fewer federal dollars. Productivity increased by 3,000 percent. Instead of 37 loans 22 employees made approximately 1,000 loans annually. Fernando Noriega, head of the redesigned agency, had this to say: "For some reason the philosophy in the public sector is, 'When funds are cut, there's no other way but to cut services.' But in my opinion, sometimes the best opportunities come because you're forced by budget cuts to find new ways to do things."

(C-15) Define attrition. How did Tampa's Redevelopment Agency use attrition to cut bureaucracy?

In a phone survey of all 50 states last year, Governing was told by 25 that they had handed out pink slips. According to a survey of 66 large urban counties done by the National Association of Counties for 1992, 70 percent had reduced their work forces, up from 40 percent in 1991. At least a third of those counties had fired people, according to Glendening, who is chairman of NAACO'S Large Urban County Caucus.

How Not To Cut Back Personnel

The proverbial "smoke and mirrors" is used by government to prevent the public from figuring out what is actually going on. The governor of New York pledged to cut 4,000 government jobs but instead transferred workers to quasi-independent payrolls and left vacancies unfilled. Missouri's Governor Carnahan promised to cut 670 government positions but the St Louis Post-Dispatch discovered that actually 1,200 new state workers were added to the payroll. This is not deliberate deception, according to Jonathan Walters in an article for Governing. " 'Down-sizing' 'terminating', 'reductions in force', 'layoffs', 'firing' and 'outplacing' all mean different things in different personnel systems." San Francisco offers "furloughs". A manager simply tells staff to stay home indefinitely, without pay and the nasty situation is side-stepped.

The following is from Alternatives:

Since 1980 state and local government employment grew by 20 percent----twice as fast as population grew_In Washington DC public employees increased as population decreased. In FY 1991 states laid off 15,000 workers out of 4.5 million which is one thirtieth of one percent of total state employees throughout the country.

The county and cities of New York and San Francisco had 382 and 352 full time workers for every 10,000 residents, respectively; 238 is the national average.

Competition

To placate municipal employees communities might require private contractors to offer jobs to displaced city workers. Sometimes public employees form their own company and bid against private contractors. Some even get their old jobs back with better salaries and conditions. No longer hampered by the restrictive bureaucracy, former public employees are finally able to institute the efficiencies they couldn't implement before. Inefficiency is not due to bad officials or workers or even labor leaders and unions; it is simply one of the consequences of a monopoly system.

The poor are protected best when services are priced at market value. Many governments act as an agent and require bidding by private firms. By the mid eighties 23 municipalities across the country allowed separate utilities to compete for the same customers, utilizing separate meters, lines and generating facilities. Studies showed average electric rates were 33 percent lower in cities with competing utilities. The monopoly status of government should be opposed most strenuously by the poorest constituents, because competition almost always favors the poor.

But there are other ways for government to ensure the poor are protected even though protection services are provided by the private sector. For example, a town might charge a private provider a licensing or entry fee which could be used to provide vouchers for the poor.

(C-16) Give an example of your own. You might want to see how neighboring towns handle the situation.

In the late 1980s Philadelphia's public-employee unions called a strike of 13,000 to protest that city's right to hire private contractors. (Nationwide, AFSCME boasts one million members.) They had all sorts of examples showing private contractors did poor jobs and charged more.

Supporters of private contracts claim the figures were distorted because cities don't reveal the same number and kinds of costs private firms are required to do. To be fair in stating their costs, cities should factor into the equation insurance, overhead, fringe benefits, pensions and taxes (local, state and federal). Public agencies routinely exclude expenses found on the books of other agencies in the same community. Expenses like equipment maintenance, capital expenditures, fuel, utilities, debt retirement, pension costs and employee fringe benefits. Governments too often show service prices as if they were actual costs. This practice is misleading and should be stopped. Because they aren't forced to face competition and don't have truthful accounting practices, most government entities haven't the faintest idea what it actually costs to do anything.

(C-17) Why should public agencies consider the cost of "insurance, overhead, fringe benefits, pensions and taxes" when comparing bids by public and private sectors? Explain.

(C-18) Explain the difference between a "price" and a "cost".

In California, 76 Assembly members and 36 in the Senate became eligible for $386 each by convening an extraordinary session on July 4th. The session for Assembly members lasted only 120 seconds and for the Senate only 180 seconds. Both Houses adjourned at midnight July 3, 1991 and reconvened a few minutes later---the only motive would appear to be the extra pay.

(C-19) Some people would like to see congressional salaries linked to the average salary in the nation. This would provide congress with an incentive to see that the average American raises his standard of living. What is your personal view of this idea?

Inputs versus Outcomes

If a private enterprise makes a mistake it shuts down, but if a government entity makes a mistake it grows attributing the "mistake" to lack of money.

(C-20) Describe one or more ways to change the incentives given in the preceding selection?

There is a natural tendency to exaggerate needs if someone else is footing the bill. Communities may not need storm sewers capable of handling the heaviest downpour on record, and what's wrong with closing some bridges to ultra-heavy trucks? A large portion of the gap between resources and needs will be covered when we find more realistic ways to deal with situations. The alternative is to sign a blank check and be prepared to pay for gold-paved streets.

Federal grants to states, cities, counties and other jurisdictions rose from $77 billion in 1978 to $131 billion in 1990---even though that was a 18 percent share of their budget rather than the previous 26 percent share. Congress passes laws mandating cleaner air, safer workplaces, healthier children without providing the funding to implement them. Estimates were made in 1990 that these laws would cost the states $15 billion over the next five years.

In Minnesota, state expenditures grew 57 percent faster than the rate of inflation. In the 80s states added 600,000 employees to their payrolls –– a 20 percent increase while the entire population grew by only nine percent.

Between 1963 and 1980, Congress created 387 new categorical grant programs---separate pots of federal money, tied up in federal rules and regulations, to pay for services delivered by state or local government. By 1977, they accounted for $1 of every $4 spent by state and local governments. Despite severe funding cuts and passage of a few consolidated block grants, 475 categorical grants still existed in 1991. And as the federal deficit widened, Congress increasingly turned to mandates---in essence, categorical programs without the funds. ... the National Conference of State legislatures (has said) unless there is an important reason to do otherwise, responsibility for addressing problems should lie with the lowest level of government possible.

(C-21) Rank by number (1=highest 4=lowest) the following "levels of government".
County Board of Supervisors____
U.S. Congress____
Governor____
Mayor____

Spending Priorities

Included in President Clinton's $16.3 billion economic stimulus plan is $8 billion immediately for local governments to pretty much use as they see fit, with the hope of $100 billion over the next four years to be invested in community projects.

One study of 68 cities found their true costs to be 30 percent higher than their budgeted costs. Doug Ayres, who owns a company that helps California governments determine their true costs, says that only 4 percent of local governments know the direct cost of each service they provide, and only 10 percent can even tell you what services they provide!

Japan spends $107 per person for earth quake preparedness whereas California spends between 65 cents and $1. Osborne and Gaebler claim California spends $1.9 billion a year on 400 advisory commissions, boards, and councils.

In 1973 Detroit estimated the cost of a 2.9 mile elevated rail "People Mover" at $30 million. By 1979 that figure had reached $110 million. In 1981 the Reagan administration attempted to withdraw federal participation in the "People Mover" only to have Congress appropriate the money anyway. By 1986 the costs had risen to $210 million. Detroit had a $50 million annual transit deficit already with no money in its budget to operate a "People Mover".

(C-22) Give 3 reasons why congress might want to "appropriate the money anyway". Use your imagination!

A Republican administration was tricked into going along with the 1990 budget accord. Congress promised to cut $1.83 of spending for every $1 in new taxes. Instead of decreasing our national debt by $165 billion over five years they may end up increasing it by more than double that amount. The estimates of debt between 1991 and 1995 increased by $271 billion between January and June of 1991. The deficit for FY1991 was predicted in June 1991 to be $348 billion---five and a half times larger than was predicted 18 months earlier.

Estimates of government projects are notoriously low. In the early sixties government actuaries predicted that the proposed Medicare program would be costing the nation $8.2 billion by 1983. The actual cost in 1983 was $38.2 billion. By 1992 the cost had risen to $129 billion with the prediction that if no changes were made in the law concerning Medicare policy the program would be costing the nation $259 billion by 1998.

(C-23) Find 3 additional instances where governments underestimated cost or overestimated savings while attempting to sell their programs. Choose one example from local, one from state and one from the federal government. (See examples in other sections of the workbook if you need help with the federal example. Try phoning your local newspaper office for help with state and local examples.)

Spending On Education

In 1981 we spent an average of $2,491 per public school pupil. In 1991 that figure increased to $5,638 up 33 percent after inflation. You wouldn't know it because the dollars rarely trickle down to the front lines –– to teachers and students. An often-heard solution to our education problem is to cut the number and the pay of administrators.

Chicago's school superintendent makes $175,000 a year and spent another $67,000 in expenses, meanwhile asking 30,000 teachers to give up a scheduled pay raise. When asked to cut his own salary as a symbolic gesture, he was interested but recommended cutting 90 percent of the amount spent on supplies and equipment and deferring building maintenance and repair until next year.

School officials in Quincy, Massachusetts attended school proms in tuxedos paid for by taxpayers even though money for text books was in short supply.

On the other hand, when Bill Anton became Superintendent of the Los Angeles Unified School District last year, one of the first things he did was give up the chauffeur enjoyed by his predecessors. With the school district facing spending cuts, in May 1992, he volunteered to take a 10 percent cut in his $161,390 salary to set an example for district employees that all should work to cut spending. Some believe he should have taken a larger cut but nevertheless any cut is a welcome gesture of economy on the part of a public official.

(C-24) What is the salary of the Superintendent of Schools in your district?

Spending On Health Care

Prior to 1950 total spending on health amounted to 4 percent of the nation's gross national product (GNP). Today spending health care accounts for 13 percent of GNP. Two-thirds of the increase is due to government spending.

Governor Lamm of Colorado used to tell of a woman he knew who fell into a reversible coma back in 1953 and was kept on a machine at a cost of over $250,000 a year for more than 36 years.

(C-25) How do you personally feel about keeping the woman in Governor Lamm's story on a life- support machine for all those years? If the woman in Governor Lamm's story was a close relative of yours, would you feel differently? Explain.

Ruth Garnet, 72 of a small town in Texas, spent six years writing and telephoning Medicare to report rip-offs. She had been billed $950 for an imaginary heart pacemaker and an arm splint when she broke her hip and wrist in 1984. Even though the surgeon and the hospital agreed that a mistake in billing had occurred, Medicare paid in full. Another Texas man was charged for a pregnancy test and delivery-room charges were part of a bill for cancer treatments for another patient. An outraged citizen in Utah tried to get Medicare to stop payment on a $417 charge for a booster shot. The agency couldn't understand why he was upset as they assured him the bill had already been paid. Finally, with a lot of effort on his part, a congressman got the bill reduced to $97. A 70 year old woman in Santa Ana tried to do her part by telephoning about eight times in three days to challenge a $927 bill to Medicare for a back examination which resulted in absolutely no recommendations or help.

(C-26) How much did your state pay out in health care costs in 1992?

Disincentives To Save

Ace-Federal Reporters, Inc. discovered that there was a good market for the transcriptions of FERC hearings (Federal Energy Regulatory Commission). Thousands of law firms argued before FERC and were anxious to get their hands on this information. Because of mounting competition, (two of Ace's competitors offered to perform the service for free) in 1990 Ace volunteered to pay $1.25 million to the FERC. As reported in Reinventing Government:

FERC turned down the offer. As FERC officials explained, they couldn't keep the money. They would have to turn it over to the U.S. Treasury, and they would have to hire a clerk to set up the account and monitor the contract. To FERC, in other words, it was an expense, not a source of revenue. Who needed it?
 
Ace sued, of course. 'I never thought I'd see the day that I'd have to sue the government to force them to take money,' its lawyer mused.

Osborne and Gaebler suggest that

Most public managers know where they could trim 10 to 15 percent of their budget. But why go through the pain of transferring or laying people off, if you can't use the money for something more important? Especially if your savings are going to be handed to some other manager who overspent his budget! Who in their right mind would save any money, under these circumstances?... This explains why public organizations get so bloated: our budget systems actually encourage every public manager to waste money.

If you started a business, you would ask your bookkeeper to track how much you spent on travel, supplies, personnel, and so on. But you surely wouldn't let the bookkeeper control how much you spent under each account. The same is true of family budgets: you may set aside so much for groceries, so much for the mortgage, and so much for car payments every month. But if the washing machine breaks, you find the money to fix it, and if manufacturers offer rebates on new cars, you seize the opportunity. Public managers cannot do this.

Solutions

Of course what public managers can or cannot do varies across the country. For instance, the charter of Monterey California provides an option for officials to move funds between programs if four of five council members agree The city made an attempt to balance its budget by letting some jobs go unfilled, cutting back on street cleaning, community grants and travel budgets of staff and training programs.

Another solution was found in 1979 by an assistant finance director of a rather small town in Fairfield, California, who didn't know any better. He was a recent immigrant from the Philippines and naively suggested that city accounts be set up for major expenditures and that money be shifted from one account to another to take care of emergency situations or bargain opportunities. The idea spread from Fairfield to Visalia in the southern part of the state where it was called the Expenditure Control Budget. Once the money could be saved and transferred from one account to another a new behavior pattern made sense. Before what was not spent was lost. Under Expenditure Control Budgeting it could be saved and used in new creative ways.

Chuck Huchel, Chief of Public Safety, Visalia, California said,

With the federal grants, we prepare a budget in advance, and we put on all the bells and whistles. All the frills---we try to anticipate everything we might need. When we get an authorization, we spend everything that's on the list, whether we need to or not. People don't say, 'Oh I can save some money here, or I can use it another way now,' because it's in the plan. You don't have incentives to make the cost savings, because if you don't spend it you give it back.
 
With the city money, they know that any savings they make can be applied to other programs or other equipment. so you say, 'Hey, I don't actually need this to make the program work, so I'm not going to spend it.' Plus they get creative about saving money.

An example of this new behavior as it emerged in Visalia was given on page 122 of Reinventing Government:

...when the mechanics decided they needed better tools, , even they began to search for savings. For years, one of the shop's heaters had blown hot air outdoors. It had been a standing joke. Now they shut it off, repaired several other heaters, and cut small doors in the shop's huge vehicle doors, so they could close them during the winter. Within 18 months they had reduced energy consumption by 30 percent. They used the saving to buy new tools.

(C-27) Can you think of any reason Visalia might want to use bonuses to reward groups rather than individuals?

Several other California cities, as well as a few states, have adopted the Expenditure Control Budget. Under Bob Stone, the Department of Defense adopted a similar system "which allowed six bases to swap money between line items and one of the six to keep its savings."

(C-28) Explain, in your own words, the concept of Expenditure Control Budgets.

Rule-driven government may prevent some corruption, but at a price of monumental waste. Who can put a price tag on the employees who have given up? Who can put a price tag on the bureaucracies that grow ever larger, because they are so locked up by rules and line items that they cannot do anything new without adding more people and more resources?

A 1989 survey by the National Commission for Employment Policy found that 72 percent of local officials rated the quality of their contracted services "very favorable," 10 percent "slightly favorable," 13 percent "slightly unfavorable", and 5 percent "very unfavorable." The same study found that contracting saved local governments 15 to 30 percent. RIG p 89

Peter Drucker long ago pointed out that "control of the last 10 percent of phenomena always costs more than control of the first 90 percent."

(C-29) The following questions were prompted by Osborne and Gaebler on p.137 of Reinventing Government. Answer either of them in writing.

A If it costs far more to eliminate corruption than we save by its elimination, is worth the expense?
 
B If by making corruption virtually impossible we also make quality performance virtually impossible, have we done a good thing?

In his 1986 book, Checks Unbalanced: The Quiet Side of Public Spending, Herman Leonard tells us that public accounting emerged as a profession in response to the Progressive's need to prevent corruption in the early 20th century. On page 243 of Reinventing Government we read:

But perhaps the worst problem was the treatment of physical assets like roads, waterways, buildings, and machinery.
 
Physical assets are investments: when a government builds a highway or dam, it is creating something of value, almost like a savings account. As that dam ages and wears out, its value declines---because without expensive repair, it will ultimately give way. This use is a form of spending; in business it is called depreciation. But as Leonard points out, 'our accounting system hardly notice.' Since they were designed to track cash transaction, they don't record the declining value of a physical asset.

(C-30) Define depreciation as used above.

Maintenance costs are charged as current expenses which makes it appear less expensive to use up an asset than to maintain it. ISuppose a community center cost a million dollars to build. It depreciates 50 percent over a period of time; 10 percent is due to obsolescence and the other 40 percent is due to deterioration. To replace the building today would cost $2 million. Assume the repairs are authorized.

(C-31)Define obsolescence and deterioration as used above. Do you understand the difference? Explain.

Original Center is Built
View from Congress: spend a million; get recognition for providing a center worth a million
Government Bookkeeping: one million expense on liability side ; zero on asset side of ledger
The Truth: one million spent results in an asset worth one million

Center is Rehabilitated
View from Congress: spend another $400,000; no ribbon cutting nor brass bands accompany repairs
Government Bookkeeping: another $400,000 = total liability of $1,400,000; still zero on asset side.
The Truth: another $400,000 spent turns an unusable liability into an asset worth over one million and saves the expense of building a new center at a cost of two million.

(C-32) Write out the same procedure using a federally funded bridge costing $100 million; assume obsolescence depreciation of $10 million and needed repairs of $1 million. Use the format provided in the example above. Do you think the repairs will be funded? Why or why not?

In the spring 1989 Quarterly Review of the Federal Reserve Bank of Minneapolis, Fumio Hayashi points out that 'the apparent savings-rate gap between Japan and the U.S. is a statistical illusion attributable to differences in the way the two countries compile their national income accounts.' Japan values depreciation at historical cost rather than at the higher replacement cost figure that the U.S. uses. In addition, the U.S. counts investments such as roads, bridges, schools and warships as consumption, whereas Japan counts them as investments. Mr. Hayashi reports that once the accounting systems are put on an equal footing, the notoriously wide difference in the savings rate disappears.

(C-33) Ask any five adults if they believe Japan's saving rate exceeds ours? Have them estimate by how much and report their comments here. (You might want to educate them to the accounting system differences as reported by Mr. Hayashi.)

The biggest cost of running the government is not a bloated, over indulgent bureaucracy but is rather a pension system that provides benefits which in the private sector would only be reserved for top executives. In 1984 the Congressional Budget Office (CBO) estimated that $5.2 billion in outlays could be saved over five years by slowing the rate at which benefits accrue, reducing the COLA escalator (cost of living increases) and adding penalties for non-disability retirement prior to age 62.

Big savings could also be achieved by making changes in the military retirement system according to the same CBO report. It was estimated that between 1984-89 $2.6 billion could be saved by making employees who retire after 20 years of service wait until they reach age 62 before granting full benefits. It was also suggested that military retirees still of working age be given only half the normal COLA.

Government pension benefits are so generous that the Treasury has to make huge annual supplements to the pension contributions made by federal employees and the agencies for which they work. These supplements amounted to over $22 billion in FY1984 and are estimated to cost $30 billion by 1989.

The Office of Personnel Management (OPM) estimates that the government's total liability to current and future retirees totals $514 billion and is rising at the rate of $100 million a day, not counting the military retirement system, which would mean a rise in pension costs of $1 trillion over the next 30 years.

Off-Budget Entities

A paraphrase from Rogers' 1988 book, The American Deficit: follows:

For the past 75 years state and local government have used off budget-entities (OBE) for their borrowing. All these governments had to do is to obtain a corporate charter for the independent and then operate "off-budget" –– off the books! Most state constitutions specify debt limits, but off-budget borrowing doesn't require approval. However, taxpayers are liable for the repayment of principle and interest on the bonds floated by OBEs –– if not legally at least morally liable.

Under the urging of Franklin Delano Roosevelt, state and local government began actively using OBEs in the 1930s. In order to put people to work and get the country moving again, the federal government was providing grants-in-aid to state and local governments. FDR was very much afraid of leading the nation towards the dependency of a welfare state and so he made federal funds contingent upon the states providing local matching funds. In the depths of the depression states borrowed to their limits and many were even in default. In 1934 FDR suggested in a letter to the governors of each state that they establish public corporations which would get around their debt limitations.

(C-34) Which government agencies are most likely to be off-limits to cuts and why? (Hint: Look for agencies that bring in the money or that constituents turn to for protection.)

In their highly recommended book Underground Government: The Off-Budget Public Sector, James Bennett and Thomas DiLorenzo have a great deal to say about this era:

Federal government prodding and the promise of various forms of largesse from the national Treasury has contributed significantly to the explosive growth of OBEs at all levels of government. Between 1952 and 1972 the use of OBEs by state and local government more than doubled. Current statistics concerning OBEs are incomplete.

Politicians prefer it that way. OBEs go by a variety of names –– authorities, trusts, boards, districts or commissions –– and since local governments need no one's permission to establish them (they need only confer a "public benefit---a very broad requirement) data regarding them is sketchy and inaccurate.

According to Bennett and DiLorenzo, although the federal government has collected data regarding OBEs since 1952, the data is not comprehensive. It only includes one particular type of OBE known as a "special district". Special districts have taxing powers and may even have elected directors as opposed to the myriad of OBEs that are not so neatly documented.

The Federal Financing Bank (FFB) was created in 1973 as a sub-agency within the Treasury Department. By law its budget authority and actual outlays are excluded when the unified budget is totaled. To make a loan via the FFB, all another agency had to do was guarantee the loan, then the FFB could provide the funds by selling Treasury debt to the public. High-risk loans were turned into zero-risk Treasuries.

As more spending moved off-budget the electorate lost more control to unelected managers. Although OBEs are supposed to support themselves via tolls and fees, the truth is taxpayers end up shouldering the burden, usually via massive grants and subsidies. To add insult to injury many of the activities of these quasi-corporations compete directly with private sector firms. They have the advantage of borrowing at favorable rates because they are allowed to issue tax-exempt bonds. On page 334 of Reinventing Government we are told that by 1987 the federal government had $234.2 billion in loans outstanding and more than $500 billion in loan guarantees. State and local governments had untold billions more.

According to David Axelrod, professor emeritus at SUNY in Albany, in his recent book Shadow Government, approximately 25,000 public authorities construct and manage infrastructure and provide public services. Because they are free of the restrictions imposed on government agencies, these public authorities borrow more than all state and local governments combined.

(C-35) Describe at least five OBEs which operate in your community.

But many respected economists such as Lester Thurow, John Kenneth Galbraith and Robert Heilbroner suggest that much government spending is justified because of its stabilizing effect on the economy. Governments can be counted on to spend according to a plan and that spending is not affected by fluctuations in interest rates or expectations of risk or opportunities perceived in the marketplace as is investment by the business sector. Additionally government spending serves to balance the teeter-totter when the private sector invests less. A social safety net means more transfers from government as unemployment rates rise.