A Conversation With…

The Government Finance Research Center works with researchers from a variety of backgrounds to analyze the role that public finance plays in our lives. In the interviews below, we talk with experts to dig deeper into pertinent topics and get their perspective on the past, present, and future of government finance.

Andrew Kleine, Managing Director – Government & Public Sector at EY-Parthenon, a global advisory firm

Andrew Kleine

Q: You’ve been following government efficiency for some time now. How efficient do you think state and local governments are right now?

AK: Let’s just say they’re not as efficient as they could be. Efforts to make government more efficient go back a very long way, at least to the Progressive Era and probably farther back than that. I want to credit government with a lot of success, but it’s still too isolated. There is a lot of potential for more efficiency, understanding that government is not a business and has a lot of critical priorities particularly around equity and inclusion. But within those priorities, there are many things local governments can do to get more value from the dollars they spend.

 

Q. Any examples spring readily to your mind?

AK: I like to point to concepts like managed competition, where public employees compete with private vendors. In doing so, they find innovative ways to become more efficient. Rather than outright privatization, the real answer is often fostering healthy competition to drive better results.

 

Q: I know that in the past you’ve been an advocate of gain sharing in which the savings governments can gain from efficiencies can be shared in part with the workers and part from the department itself. Has that worked out in many places?

AK: There have been periods of interest in gain sharing. It’s got great potential, and though I can’t talk about my specific clients, several cities that I have worked with love the idea of gain sharing. We had success with it back in Baltimore after a lot of conversation between labor and management. But the program was disrupted during COVID, and talking to my former colleagues today, they say hardly a day goes by when an employee doesn’t ask when’s gain sharing coming back.

 

Q: What have been the challenges?

AK: I think there’s a political challenge around this impression that we’re giving ‘bonuses’ to public employees. That’s always been a challenge, even for pay-for-performance programs in government which have come and gone. When budgets get tight, as they inevitably do, they’re easy things to toss to the side.

 

Q: So, for the moment gainsharing is kind of an aspirational approach. But are there other things that are actually happening and working to further government efficiency?

AK: The ways to achieve premium efficiency are to measure it, invest in it, source it, lean into it and share it. Do these things and you can get cost savings, improved service delivery, and a stronger organization.

 

Q: So, let’s dig in a bit about measurement.

AK: I have found that cities do not do a good job, generally speaking, of measuring efficiency. And to me, that’s where it all starts. You need to know the unit cost for delivering a service before you can reduce that cost. You need to know, for example, what it costs to trim a tree, change the oil in a vehicle, fill a pothole, or resurface a lane mile of road.

 

Q: Why is this complicated to measure?

AK: Let’s take vehicles as an example. In many local governments, the services using the vehicles are not directly charged for their purchase, maintenance, repair, or fuel them. That money is budgeted centrally in the fleet division.

If a department isn’t directly responsible for the cost of a vehicle, you run into the ‘tragedy of the commons.’ The vehicle is effectively free to the department, so there is less incentive to optimize its use or stay on top of preventative maintenance schedules or even drive it carefully, because the cost is falling somewhere else.

 

Q: Changing gears a bit. If agencies grow more efficient, is there a chance that at the end of the year, they’ll spend down the savings or risk that the funding will be taken away from them in the next budget?

AK: Yes, unfortunately, that does happen. Sometimes departments have limited incentive to come forth during the budget process with cost-saving efficiencies or conserve money during the fiscal year, as those funds are frequently clawed back. This lack of benefit to the individual department explains the spike in year-end spending as teams move to utilize their full allocations before the fiscal year closes.

That’s one of the advantages of gain sharing. Agencies benefit from savings that they generate by actually being more efficient.

 

Q: Do some agencies purposefully overstate their expenses while underestimating anticipated revenues, like retaining vacant positions on the books, even if they’re not being filled, in order to protect themselves from unexpected costs?

AK:  I think budget officers would agree that you have to have some wiggle room in a budget.      Reserves are really for bigger emergencies, but there’s a lot that goes on in a government every day that is unpredictable which is why budget directors will often underestimate revenue and overestimate cost. The last thing they want is a budget deficit at the end of the year. Similarly, departments find ways to pad their budgets to be prepared for unexpected expenses. I like the idea of pooled risk, whereby department budgets are lean, and they can apply for contingency funds if needed.

 

Q: One of the accomplishments in your years in Baltimore was building a so-called “innovation fund.” Will you tell us a little about it?

AK: This started back in 2012 during a difficult budget cycle following the recession. We established a $2 million internal revolving innovation fund to finance departmental projects that could directly reduce costs or generate new revenue. There have been a dozen or more projects, and nearly all of them paid back the investment. The fund actually grew over time, has survived three mayoral transitions, and is still operating today. It proves that an internal loan model can successfully fund public sector modernization.

 

This interview was conducted with Richard Greene, senior advisor, GFRD and principal of Barrett and Greene, Inc.

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