Spending More, Getting Less

Editor’s Note: No debate has so defined politics for San Diego city government as the perpetual question of whether the city raises too little in revenue from its citizens or whether its financial problems are due to waste, lack of productivity and over-generous employee compensation. UCSD graduate student Vladimir Kogan submitted an analysis and voiceofsandiego.org solicited the below response from Councilman Carl DeMaio.

Friday, June 5, 2009 | Some argue that the only way to achieve higher performance from government is to pour more money into government. They assert that the only “problem” right now in government is that working families are not paying enough in taxes, and present the public with only two options: service cuts or tax increases.

Those of us who dig deep into government budgets, or have run any organization in the private or non-profit sectors, know that a third option exists: process transformation. In our view, government should always look for best management practices to provide services “better, faster, and cheaper.”

I’ve reviewed thousands of government budgets — ranging from single programs to complex government agencies. When evaluating a budget for potential efficiencies, the most important measure I use is “cost-per-unit of service” (e.g. cost per mile of road repaired, cost per acre of parkland maintained, cost per permit issued, etc.)

Once you get down to a reliable calculation of full costs, you should ask the most important question in government reform: What drives the per-unit costs?

Answering this question usually leads to three primary cost drivers: inefficient processes, old ways of doing business and old technologies. In some cases, costs result from bloated bureaucracies, i.e. too many people doing the same thing. And then in other cases, costs can be attributed to high labor costs on a per-employee basis.

The city of San Diego suffers from three of these cost-drivers. Instead of digging deep into the city’s budget and examining these kinds of issues, UCSD grad student Vladimir Kogan has penned an entire op-ed arguing that the city of San Diego has no waste left to cut — and that devastating service reductions are a foregone conclusion if taxes are not raised. To support this broad assertion, Mr. Kogan points to only one data set — per capita government spending provided in a 2007 report compiled by the state controller.

Comparing macro-spending levels between governments as Mr. Kogan does only serves to compare one inefficient entity to the next. This is as beneficial as comparing General Motors today to Chrysler. No matter which way you compare the two, you come to the same conclusion: they are bankrupt!

A more meaningful per-capita comparison would be to compare the city of San Diego’s historic revenue growth with the historic income growth of average San Diego taxpayers.

As this graph shows, the city’s general fund revenue streams over time have been particularly healthy. Moreover, revenues have outpaced inflation in our region — meaning that city revenue grew faster than the cost of living in our region. Most importantly, city revenues kept pace with the growth in personal income in the region. In other words, the city’s financial fortunes have fared no worse than the financial fortunes for the average San Diego working family — all of whom must live within their means and balance their annual household budgets.

Setting aside broad “per capita” comparisons, you need only pick up the city’s budget to find examples of millions of wasted tax dollars.

• Pension Benefits: The city’s annual pension payment is now more than $154 million annually, and expected to increase to $250 million next year. “General” city employees with 30 years of service can retire at 65 with a single-highest-year income replacement ratio of 119 percent, adjusted for cost-of-living every year. There are also other sweeteners such as the Deferred Retirement Option Plan (DROP), Purchase of Service Credits, guaranteed annual cost-of-living adjustments, etc.

  Mr. Kogan points to a massive deficit in the coming year — estimated at $100 million or more. While this is true, he ignores the primary driver of that budget deficit — the expected spike in the Annual Required Contribution (ARC) to fund the pension benefits described above.

• Inefficient Bureaucracy: As an example, the city’s trash collection division currently utilizes a shorter work schedule than private sector haulers (8 hours vs. 11 hours). Switching management practices to fall in line with industry standards would produce significant annual savings in every city department.
• Health Care: The city spends over $59 million annually for health care benefits for current city employees — and another $50 million per year for retiree health care, which carries a long-term liability for taxpayers that is presently only 2 percent funded. City workers were offered free healthcare for life after only 10 years of service — with a guarantee of 50 percent healthcare coverage after only five years of service.

  The city also provides a “flexible benefits plan” well in excess of state and local government benchmarks for most classifications of coverage — with many city employees actually pocketing thousands in lump-sum payouts after 100% of their health care costs are covered from these accounts.

• Vacation and Personal Leave: City employees currently receive 28 – 38 days of paid annual leave and holidays, depending on years of service, which is far more generous than most employers offer in the San Diego labor market.
• Other Perks: City policies and labor contracts provide for auto allowances, take-home vehicles, paid-time-off for union presidents, uniform allowances, etc. The city pays more than $40 million in overtime annually. With the city mired in a financial crisis, my office recently learned that over 1,400 employees in the Utilities Department will be receiving bonuses ranging from $1,200-$6,200 each.
• Special Interest Subsidies: The city currently operates Qualcomm stadium at a loss of nearly $16 million annually — and after a short five-year reprieve will be once again responsible for nearly $12 million in debt service on Petco Park.

What can be done about waste in city government? First our city leaders must embrace and accept the need to find “better, faster, and cheaper” ways of providing city services. Atop the list must be the continued trimming of labor costs to sustainable levels. We have made some progress — and have done so through a unanimous vote of the City Council and with the support of three of our five labor unions. But more can and must be done.

In addition to cutting labor costs, the city must transform its day-to-day processes through business process re-engineering and managed competition. Although voters overwhelmingly supported managed competition in 2006, not one service provided by the city has yet been forced to compete against the private sector. We must jump start this voter-mandated reform initiative which has the potential to save tens of millions annually.

Mr. Kogan’s declaration that the city of San Diego is a beacon of efficiency is egregiously premature — though it is certainly an outcome we all agree is desirable. If the issues described above are successfully addressed, we can hopefully provide that kind of efficient government to San Diegans.

Carl DeMaio represents San Diego’s 5th District on the City Council. You can e-mail him at: carldemaio@sandiego.gov.