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Grading the Cities introduction THE GOVERNMENT PERFORMANCE PROJECT
Introduction: 35-City Average Grade: B
Still, you’d think that if city budget officers ever had the opportunity to be a jolly crowd, now would be the time. With a handful of exceptions, the economy in the nation’s large cities has been strong. Unemployment rates are low and revenues are rising. For the past couple of years, most cities have been taking in more money than they had been expecting — not less.
Having learned their lessons during less bountiful years, most municipalities are responding to affluence more like John D. Rockefeller than like Diamond Jim Brady. Some of the local governments hit hardest by recent recessions have made the biggest improvements in their financial management (which is not to say they’ve achieved fiscal nirvana). Philadelphia, New York City, Washington, D.C., and Detroit all fit this bill.
Cities have been using surpluses for one-time expenditures, eschewing the temptation to build new spending into their budgets. New spending in this situation could be a prescription for disaster somewhere down the line, when the surpluses stop rolling in. With some exceptions, the cities have kept expenditure growth under control and debt at conservative levels. Better technology is helping provide better data for decision making. And all of this is capped off by a growing trend toward improved financial forecasting; most cities now project their budgetary balances three to five years into the future.
So are budget officers in the affluent cities leaning back in their plush leather chairs, chatting about the weather and generally having a good time? In a word, “Ha!”
“Budget people are just naturally morose,” says Cecile Pettle, budget and research director in Phoenix. “There’s got to be a black cloud out there somewhere.”
In fact, financial officers see potential black clouds all over the current blue skies. For one thing, they are convinced — and of course they’re right — that eventually the good times will stop rolling. In Austin, for example, general fund revenues came in almost 7 percent ahead of estimates in 1998. That was a big miss, largely attributable to underestimates of the sales tax. So, now the city is predicting that sales-tax revenue will grow by 9.2 percent in 2000. “It scares the hell out of me,” says budget officer Charles Curry. “At some point it’s going to slow down — we don’t know how to predict when that’s going to happen.”
Then there are fears of what politicians and labor leaders might do to derail careful management policies. In Detroit and elsewhere, leaders fret that overfunded pensions may tempt unions to ask for increased benefits or payouts from the current pot of cash. Other cities are concerned about raids on the rainy day fund. After all, voters don’t rush to the ballot box to pull the lever for elected officials who retain cash in the bank; they are more likely to reward those who bring tax cuts and new programs, however risky those policies may be in the long run.
A few cities, such as San Francisco, have tried to forestall such raids by spreading their contingency reserves into many tiny little funds, perhaps in the hope that no one will notice how much is actually in there. San Francisco has a designated fund for contingencies, a disaster fund for emergencies, a fund for extraordinary one-time expenditures and a reserve for subsequent-year budgets.
Similarly, many budget offices are hesitant to advertise optimistic long-term projections. Boston, Detroit and Honolulu — all strong labor cities — really don’t want to agitate unions by boasting about the future. In Detroit, five-year revenue and expenditure forecasts are used mostly for internal purposes. They aren’t even shared with the city council. “There’s somewhat of a concern when you put in these five-year projections and make them public,” says Ed Hannon, Detroit’s finance director. “If you’re assuming that payroll is increasing 3 percent, it becomes the floor for labor negotiations.”
Although this may fly in the face of conventional democratic processes, you can hardly blame financial managers for wanting to keep a low profile. Detroit’s Hannon expresses chagrin at the complaints in the press some months ago when the recreation department didn’t apply for a state grant that required a 50 percent match. The city didn’t have the capacity for coming up with that other 50 percent. They got criticized, Hannon says, “for being financially prudent.”
Baltimore took a different road and is still paying the toll. It faces a $31.5 million gap between its revenues and expenditures in 2001 as it works to absorb the cost of additional police officers brought in by federal grant. These declining grants require cities to pick up the full tab after three years. Baltimore has already absorbed 205 new police and will take on the funding of 19 more in 2001. But it hasn’t been easy. “We’re going to be very cautious in the future in terms of taking on those federal grants that have those hooks in them,” says budget director Ed Gallagher.
That makes sense. It’s easier for cities to learn from their mistakes when they don’t put the mistakes into the legal code. There are laws out there, from coast to coast, that inhibit good management — many of which have been on the books for decades.
Why don’t these cities repeal counter-productive ordinances? There are various reasons. Where the laws are a part of the city charter, changing them can be an arduous project requiring a vote of the citizens. In other places, city councils are reticent to make changes that will add to the authority of the executive branch budget office. And in still others, finance officials actually like the old ways. Some Atlanta budgeters seem to appreciate a law that forces them to budget conservatively, regardless of where truth lies.
In virtually every big city, contract management is an important future concern. Most of them are increasing the percentage of the budget that goes to contracts. Chicago has been notably successful in turning over processes and services to private management. Indianapolis has specialized in pitting private vendors against government agencies to get the best deal for the city. Memphis is considering handing over its entire IT operation to a contractor.
City officials are learning that contracting out doesn’t mean they can take the day off from good management. A few years ago, Indianapolis hired a private firm to take care of the city’s stock of abandoned cars. The firm kept poor records and citizens had a hard time even finding their vehicles in a timely way. “We didn’t have a good contract-monitoring process and we learned that was stupid,” says Sarah Burnham, special assistant to former Mayor Stephen Goldsmith. “You can cut back, but you can’t sacrifice service delivery to your customers. You’re paying the bill. It’s still your responsibility.”
The best way to exercise that responsibility is to be vigilant when the initial contract is signed. A few years ago, Cleveland had a recreation center built. Ice catchers for the metal roof had been in the design, but weren’t in place when the center opened. The contractor argued that the ice catchers had never been necessary. Fortunately for Cleveland, a storm broke out during negotiations and the point was proved.
“You need to write very very clear performance measures for contractors,” says Phoenix’s Cecile Pettle. “You have to be ready and willing to impose financial penalties, and if they’re in default, you have to get them out of there.”
But the biggest weakness in contracting is also the biggest weakness we discovered in financial management overall: cost accounting. Curiously, many budget directors seem to regard the costing out of activities (filling a pothole, for instance, or sweeping a mile of street) with the same suspicion that was focused on performance measurement generally a few years ago. But the logic of cost accounting is rooted in common sense. If a city is going to pay someone else to do some work — with the premise that it’s going to save money — it needs to know how much the job is worth in the first place.
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It’s not an easy job running the finances of a city. For one thing, you’re at the mercy of a state legislature that can make your life miserable at a moment’s notice (consider Anchorage, which has been facing multimillion-dollar cuts in state aid for the past couple of years). Labor unions can turn your city budget upside down. You may find out in April that the fiscal year spending estimates were a wee bit low — maybe just 5 percent or so.