It's not a spending problem . . . It's a revenue problem

We sat on the brink of closing down the Federal government and all we heard from the right side of the fence was "CUT TAXES--CUT SPENDING." So how do you manage to do both and maintain services?

We often hear from this same side that we need to either run government as a household or as a business. So let's examine what the tea party and the right is suggesting in that light:

HOUSEHOLD MODEL

Say you're running a household with both parents working and you're feeling a budget pinch. The first thing you'll do is to start cutting expenses. You'll forgo that night out at the fine dining restaurant, you won't buy that new car, you might put off a vacation. OK, cutting spending seems to be working, but then things get a little worse, you have to start cutting more. Now you cut out the trips to McDonalds, you put off some of the car maintenance hoping to get a few more miles out of it before something breaks, you deny the kids their high school yearbook. But it's not enough. So the father gets a second job to increase the family income. You DON'T, while cutting expenses, decide that the wife should quit her job and become a stay-at-home mom. That would be insanity.

BUSINESS MODEL

You have a small business, making widgets. You have a workforce which is costing you about 20% in wages and benefits and you're making good money. Because the markets expect you to not only make good money, but to have year-over-year increases (otherwise you become a takeover target), you need to increase revenues, but the business is slow and your market share is fixed. So you cut expenses. You begin by looking at your biggest expense which is labor. So you don't give increases and reduce staff, you then look at benefits and negotiate lower health care costs or reduce the retirement benefits. In a business environment you never consider deferring equipment maintenance. But as things get a little worse you need to cut even more. However, you see an opportunity to expand and need to purchase more equipment. Is this the time to cut prices? Your staffing is at minimum, your equipment is older, and you need to modernize. NO business ever reduces income during an expansion phase.

So why do we think that we can both cut costs AND taxes (revenue) at the same time we're in financial trouble AND we're fighting two wars? At no other time in history has any government ever cut taxes while trying to fight a war. If we learn nothing else from history, we should at least learn that the downfall of the great societies, Rome, Greece, etc. has been because they could not sustain economically while fighting expensive wars.

More on this subject in my next posting which will cover where we've come from and where we're actually at regarding revenues and spending.

Thoughts on Outsourcing--Part III

I've given a little of the history of why cities have employees and what the core mission of a city should be, to protect the commons. I've also given some of the background as to how we got to the situation we find ourselves in today. So now let's take a look at what's happening in our city and some suggestions on how we might move forward.

Moving Forward?

So, today we have a "Great Recession" with lowering wages in the private sector, an unwillingness of those who have to pay their share (cut taxes) of the costs of preserving and protecting the commons (although they are the biggest users of the commons) and spiraling costs in healthcare and a reduction of income from investment for government pension plans. Basically, we don't have the money to make good on the promises that we've made to our city employees. So how shall be deal with it?

The answer today seems to be, fire the bunch of 'em and bring in cheaper workers. But, because of the "commitments" to the unions, we can't do that. So, the alternative, is to eliminate their job and outsource it to cheaper labor. And this is different, how?

One of the earliest examples of this in Pomona was (and I recognize that the reasons were not econmic in this case, but the example still holds) the outsourcing of the Fire Department. We got rid of our firefighters, equipment, and said we'll hire an outside department to come in and take over this job function, (again, in history fire fighting was one of the first functions considered to be a "common" need for all citizens, or a core function of a city). So today, we have an entrenched vendor, who raises prices every year and who does not have the same responsiveness to the needs of our community. Yes, they are good at firefighting. Yes, they are a good department. But they are also a department that has a large geographic area that it is responsible for, and Pomona is only one very small part of that.

Let's compare the costs of our city Police Department with our outsourced Fire Department.

In the past several years, as money has become tight, the Police Department has taken a large number of cuts to staffing and funding. During that same period, the Fire contract has maintained the exact same staffing and has had year-over-year increases in the price it charges the city. Why? With the Police, our city creates the police budget, looks at all items and trims where they feel they can. With the Fire Department, the county negotiates these items, not our city, and "supposedly" passes on the savings or increases in the amount that is charged Pomona.

With the Police Department, our city negotiates the salaries of our police officers and staff directly, working with the unions to get concessions on pay and benefits. And, they are dealing with a union that is local to Pomona, that understands Pomona. With the Fire Department, their contracts are negotiated by the county, and with unions that are spread over the entire greater Los Angeles area with thousands more members than our local unions. And, we're not at the table. We have to take whatever the county agrees to and have those costs (or savings) passed down the line. The proof is in the putting, our bill from the county has increased each year of the contract while our police (and I recognize that police is still the largest part of our budget) has gone down.
Of course, there are those who are still advocating for outsourcing our police department as well.

Another long-term outsourced service has been our city attorney. Unfortunately, we don't have anything to compare it to (not like police and fire) but there have been questions about whether or not there have been any cost savings in this area.

As I mentioned in a previous post, when we as homeowners have a reduction of income, we tend to bring outsourced services back in-house. With cities it appears to be the opposite. So now we in Pomona have outsourced our fire, city attorney, building and safety, much of our park maintenance, street sweeping, and some other functions, all in an effort to reduce cost and get rid of those damned expensive city employees. Sounds a little like union busting to me, but since most of our city council people are democrats who were supported by unions, that certainly can't be the case (a note of sarcasm, in case you didn't get it).

So we've given away the ability to deal directly with those who work for us and have abrogated that responsibility to some outside vendor. Let them deal with the hiring, firing, wages, equipment, etc. And the trade off? We, the citizens of Pomona don't have a say in any of it. We can now either fire the outsourced company and hire a different one, or live with whatever service we get. We've sold out the commons to the highest bidder.

I know that I promised to look at where we go from here. But it's not an easy thing to do. Our city's infrastructure is falling apart. We need more services, not fewer. Unfortunately, Pomona has a very low economic demographic. We don't have the kind of money that we need to do the work that has to be done. We've decided to go from an city where we control our destiny to one where we let those who think they can make a profit off of us do the important work of protecting us. I think that there must be a better solution out there, but it will take some thoughtful work to accomplish it. It will also mean that we've got to decide if we're willing to pay the price that it will take to make the improvements we need.

Right now, as I've said, no one wants to pay their share. We all want to not have to pay for the services we get. Increases taxes so we can have more police protection? Not if it means I have to get rid of my smart phone. Increase fire protection? Not if it means I have to limit myself to over-the-air TV. Fix our parks and streets? Not if I have to brown-bag my lunch.

One of the things that I've always admired about the American spirit is the way that we've always been able to come together for a common cause. The ideal of America is NOT a place where no one pays taxes. It's not a place where you can become wealthy on the back of someone else. It's a place where people recognize a problem, and solve it. We need to get that American spirit back!!

Thoughts on Outsourcing -- Part II

Last time I talked about how cities started hiring their own workers and some of the reasons behind it. Now let's look at what's going on.

Why Outsource?

Having worked for many years in the corporate world as a manager, I have had to deal with outsourcing on several levels. Traditionally, for most companies, outsourcing is done for two major reasons:

1. A function is outside the core competencies of the company. That is, if you are in the business of building cars, is it really in your interest to also build the radios that go into the cars, or would it be better to let a company whose sole expertise is in radios?
2. You don't do enough of the specific job to make it worthwhile to bring it in house.  You are a printing company, someone needs a book to be bound. The majority of your work does not require bookbinding. So for the few jobs that you get, it's more economically feasible to have it done by an outside source.

When we look at personal outsourcing, we find that there are a variety of other reasons. By personal, I mean the way you and I run our households.
When things are good, we have good paying jobs, and are making ends meet, we might outsource some of the everyday functions such as:

• food preparation (that trip to McDonalds or somewhere better)
• having a caterer take care of that holiday party
• gardening
• light housekeeping (calling in Molly Maids)
• home repairs (painting, landscaping, etc.).

With cities (and where we say cities we might include most government jurisdictions), the initial idea was to save money for taxpayers by hiring employees directly for those services which are "core" to the running of the city just as a business conducts its core competencies. It made more sense to control costs by eliminating the profit that is required when you outsource. The larger the city, the more this made sense. You could, as a larger city, get volume pricing in materials.

While cities (and schools by extension) are taxpayer based and do not involve a need for profit there were savings. In addition, lower wages were often offered. In order to still get qualified workers, cities often would add other benefits to employment to offset the gap between what a person could make in private industry and civic work. Citizen's demanded that they have good, qualified policemen, firefighters, building inspectors, etc. So cities offered job security, and pensions as a "deferred" payment to entice workers. But even then, the total cost of an employee or function was still below that of the private sector because they didn't have to show profits for investors.

Where Did It Go Wrong

Over the years, civic employees negotiated higher wages and better benefits as did all Americans. As wages and benefits increased in private industry, civic employees also negotiated better deals and the cities were more than willing to provide them so that they could keep "top notch" people to serve the public. In some cases, the cities overstepped with promises that may have been ill-advised, including not taking into consideration the impacts of the aging baby boom generation.

As with anything, once you've given something it's very hard to take it away, so as the private sector saw wages stagnate, pension plans disappear, and benefits no longer being offered in the same way they had been, it became expensive for cities to maintain their highly paid, highly benefitted workforces. Even though they were still, all in all, commensurate with the best of private sector.

So how to reverse that trend in an era of "no new taxes." Cities have decided that if they can't take away the benefits, then they'll just take away the jobs! By outsourcing, the city doesn't have to worry about how much those doing the job are paid, what kinds of benefits they have, etc. So outsource vendors can hire the cheapest labor, not offer job security, not offer health benefits, and NOT offer pensions. Supposedly, this results in a cost savings to the city.

Let's Look At The Logic Of This

So a not-for-profit city can not do the same job as a private, for profit, company doing the exact same work. How can this be? There are several possibilities. One is that they somehow can manage things better. How do you mange street sweeping in a way that saves the kind of money that we're talking about? Can a company see extra savings by sweeping more efficiently? Hmmm. In reality, the only way that they can do the same job AND make a profit, is to pay their workers a lot less money. So what kinds of workers do we get when we go to an outsourcing plan? Since workers are getting low wages, one would assume that they would always be looking for an opportunity to advance out of these jobs and you would see a fairly high turnover rate. Since the company that is hired is only in it for the money, and are not committed to our community any more than they would be to any other community, you can't expect to see the same commitment to quality.

It just doesn't make sense to me that you can cut costs by making a profit that you couldn't realize by NOT making a profit. Again, unless you're doing it by taking something away from someone else.

So cities (and government) has decided that outsourcing is good. Well, at least they're outsourcing the extras, right? Things that they only do periodically and that don't require full time attention? Things that city employees just don't have the expertise to do?

No, And this is where I really fail to understand the logic. In our personal lives when things get tight, we often will forego the McDonalds trip and cook at home, buy our own paint and brushes and do a DYI project, mow our own lawn, and clean our own house. But for some reason we're told that in government, when things get tough you go to McDonalds, and hire a gardener. WTF?

In business, sometimes when things go wrong, they do cut jobs and sometimes outsource. We've seen a lot of outsourcing of core competencies to places like India and China in the private sector. The reasons are to side-step US regulations and to go where there is cheap labor, where there is no guarantee to workers of social safety nets (health care, social security), etc. Is this what we really want for our cities? This is something we all need to decide.

Next time What Should We Do?

Thoughts on Outsourcing

As the city of Pomona moves forward with a "policy" of outsourcing city services to save money, it's time to look at the history of civic services, how we got into the situations we're in today, what are the perceived benefits of outsourcing, and my perception as to why we're taking the current actions.

Today, A History Lesson

When cities were originally formed, the main purpose for creating a city government was to manage the "commons," that is those things that are common interest to all the citizens. Things such as police protection, fire fighting, the management of "common" property (this probably included public pastures for grazing, town squares, and parks), etc. As cities grew, other common interest items were taken on such as maintenance of the roadways, public lands management, ensuring cohesive development, etc.

To do the work of the city, under our form of government, citizens formed community councils (sometimes they included the entire city in town-hall meeting type situations, today it's city councils) which went about determining needs, setting taxes to pay for those needs so that everyone contributed to the "shared" costs, and hiring either companies or individuals to do the work necessary to carry out the needs of the community.

Hiring police, firefighters, maintenance people, etc. in a political situation such as a city is fraught with dangers. Early on, much of this work was done through political appointment which became what is today called a "spoils" system whereby the winner of an election can distribute the spoils to his/her supporters. Soon the electorate determined that this type of system resulted in corruption and in many areas a "civil service" system was instituted so that these important jobs were given to "qualified" people rather than through the problematic spoils system.

Individuals who were hired for civic service were often hired at salaries that were well below what was common in the private sector. So cities began to offer other incentives to attract and retain good employees. Retirement plans, healthcare plans, assured job security plans (such as tenure), were all ways that cities attracted people out of the private sector and into civic service.

Enter collective bargaining: As unions became strong, city employees formed unions so that they could collectively bargain for their wages and benefits. City council's bargained with the employees and, in good faith, employees agreed to terms of employment. Unions only got what cities were willing to give them. Any city, at any time, could have held out for different conditions. The idea that unions somehow coerce their way to benefits is as ludicrous as the idea that cities coerce employees to take cuts. It is a negotiated process. Each side tries to get the best deal that they can, and in the end both sides make a promise to act in accordance with the final contract.

Over the years, during good times, unions were able to negotiate contracts which included some very good benefits. The cities were willing to give them these benefits because they felt that this was the way that they could compete with private industry for workers, many of whom were getting the exact same benefits but higher pay.

Subsequently, private industry started to cut benefits and pay. As the economy started to falter, the gap between benefits and pay for public employees was catching up with the private sector and for some jobs surpassing it. Where in the past cities could work "on the cheap" by hiring their own workers, now that benefit has dissolved and cost savings can be made by "hiring out" or outsourcing the work.

Next time: Why Outsourcing