Posts Tagged: California

Municipal Finance / Political / State Finance — 0 Comments
3
Jun 10

Time to Revisit Public Sector Reengineering

Almost a year ago, I discussed the failure of government to analyze and remake itself.  See Why Not Reengineer Government? The private sector has embraced this core agenda and has emerged leaner, more profitable and productive.  For political reasons states and cities have been slower in this effort, despite the obvious need to do so.   Only with their budgets publicly in shambles are the savvy politicians slowly and reluctantly embracing reengineering.

State budget gaps have spawned two distinct approaches.   The first is the financial meat cleaver: slash budgets, furlough or lay off employees, and end grants to counties and municipalities.  But Andrew Cuomo, NY State Attorney General and candidate for governor proposes a more thoughtful approach.

How Many Agencies??

New York has more than 1000 byzantine state agencies designed like Rube Goldberg machines.  Let’s take a look at this phenomenon:

Robert A. Caro’s 1974 biography of Robert Moses, “The Power Broker,” chronicled the rise and expansion of the state’s largely autonomous system of public authorities, entities like the Niagara Falls Bridge Commission and the Metropolitan Transportation Authority. These bodies are responsible for the bulk of New York’s debt, and they control most of the state’s infrastructure.

But even state agencies, which are controlled by the governor’s office, have become Rube Goldberg-like bureaucracies. Mr. Cuomo’s report notes that the Health Department has had at least 87 administrative subgroups imposed upon it by legislation over the years, including 46 councils, 17 boards, 6 institutes, 6 committees, 5 facilities, 2 task forces, 2 offices, 2 advisory panels and a work group. One entity is called the Task Force on Health Effects of Toll Plaza Air Quality in New York City.  See Cuomo to Propose Eliminating Many State Agencies.

Now the state is functionally bankrupt.   Cuomo proposes a Spending and Government Efficiency Commission (another agency!) to overhaul and consolidate state government.  To eliminate and consolidate agencies, Cuomo would delegate broad powers from the legislature to the governor.  As a reference for how revolutionary this all is, Governor Al Smith effected the last such overhaul in 1919.

Furloughs and Cuts

California, Wisconsin, Maryland, Hawaii and other states have jumped on the other bandwagon, slashing budgets and furloughing employees. Not surprisingly, public sector unions are passionately resisting.  As indicated in my first post on this issue, California has 489 state agencies that cry out for consolidation or elimination.

Necessity is a Bad Mother

We have discussed the concept of “it doesn’t matter, until it matters.” No one cared about bloated public employee payrolls, rich compensation and benefits packages and proliferating governmental authorities, commissions and agencies.  We could afford it! Unfortunately, now we cannot.

I wish Andrew Cuomo well, but I have some gnawing concerns. Do we really need another commission to effect governmental restructuring?  Why not employ a politically independent consulting firm that is expert in reengineering?  What about privatizing governmental functions altogether?  Will a newly elected Governor Cuomo have the political resolve to convince a reluctant legislature?

If Cuomo merely intends to combine one thousand agencies into fewer ones without further examination of necessity, then he has missed a timely and historic opportunity.  We need a reassessment of what role we want government to play.  Zero based budgeting and a holistic and philosophical look at the role of government would be an excellent starting point.  Certainly, our political establishment has lost touch with the core role of government on its way to creating this unwieldy bureaucratic behemoth.

Necessity will be a bad mother and a frugal one too.

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American Society / Justice System / Municipal Finance / Political / Uncategorized — 0 Comments
10
Mar 10

Can We Afford Our Criminal Justice System?

Based on 2007 data, the United States has 7.3 million (up from 2.4 million in 1982) in jail or prison, paroled or on probation. That is, 1 in 31 adults, compared to an earlier 1 in 77.  With the ongoing financial crisis, desperate state and local politicians are looking for any means to reduce these costs, including early release.  A recent New York Times article, Safety is Issue as Budget Cuts Free Prisoners, highlights the dilemma:

In the rush to save money in grim budgetary times, states nationwide have trimmed their prison populations by expanding parole programs and early releases. But the result — more convicted felons on the streets, not behind bars — has unleashed a backlash, and state officials now find themselves trying to maneuver between saving money and maintaining the public’s sense of safety.

One result: many of the newly released prisoners commit crimes!  How do we keep society safe against the growing cost of incarcerating the bad guys?

The State and Local Financial Crisis

In Where Are We Now? we discussed the budget deficits in 48 of 50 states, while all states but Vermont require them to be balanced.  The situation has deteriorated.  Michael Shedlock (“Mish”) has chronicled these massive budget problems and some state and local responses:

- Illinois – “The state is in utter crisis,” said Representative Suzie Bassi. “We are next to bankruptcy. We have a $13bn hole in a $28bn budget.”The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. “It’s a catastrophe”, said the Schools Superintendent. See Rep. Suzie Bassi: “Illinois in Utter Crisis, Next to Bankruptcy, $13bn Hole in a $28bn Budget

-   New Jersey – Newly elected Governor Chris Christie found that: In the time we got here, of the approximately $29 billion budget there was only $14 billion left. Of the $14 billion, $8 billion could not be touched because of contracts with public worker unions, because of bond covenants, because of commitments we made accepting stimulus money. So we had to find a way to save $2.3 billion in a $6 billion pool of money.

When I went into the treasurer’s off in the first two weeks of my term, there was no happy meetings. They presented me with 378 possible freezes and lapses to be able to balance the budget. I accepted 375 of them. See Governor Christie: “Time to Hold Hands and Jump Off the Cliff” – Chris Christie For President?

-   California – Last year the state assured markets that it had solved its budget problem.  To meet deficits and cash shortages, the state treasurer is contemplating creditors in state IOUs, delaying payments to school programs and demanding that 80% of state tax be paid before it is earned. See California Delays Payments, Ponders IOUs Again, Demands 80% of Income Tax Paid Before It’s Even Earned

The Prison Industrial Complex

In his 1961 farewell address, President Eisenhower warned Americans against the military industrial complex.  We have created a “prison industrial complex,” with its expensive, unmanageable system of incarceration and monitoring.  One Connecticut study showed an average annual cost of $44k per prisoner.  Public sector unions with high salaries, generous overtime, defined benefit pension plans and retiree health care benefits are hugely expensive, and prison staffs are heavily unionized.

A Way Out

We have suggested in the past that government needs radical reengineering.  See Why Not Reengineer Government? Overhauling the criminal justice system should be a part of that effort. And there are possible solutions:

  • Privatize prisons.
  • Decriminalize certain offenses such as illegal drugs and gambling.
  • Non-violent criminals should pay financial penalties, be confined to their homes, placed in half-way houses or paroled immediately.
  • Community service programs should be re-thought to make best use of talents and skills of otherwise imprisoned citizens.
  • Shorten prison sentences for all but the most violent felons.

Our criminal justice system has mushroomed with little regard to the financial costs to taxpayers. We have over-criminalized non-violent behaviors to all our detriment.  A reform in that system can pay both societal dividends, fewer citizens locked up and a financial dividend, lower taxes.  Perhaps this is one silver lining from the financial crisis.

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Banking / Business / Economics / Financial / International Finance / Political — 0 Comments
16
Feb 10

Where Are We Now?

“Where Are We Now?” is my fiftieth blog post.  The purpose of a political and economic blog is to “connect the dots” looking for coherent patterns.  This post will attempt to do just that, warning you that the emerging pattern is disturbing.

Slow Motion Depressions

Policy makers in Washington and other western capitals are recently smug. They proclaim that, through coordinated monetary and fiscal response, we have averted the Second Great Depression.  More bluntly, all we have done is throw a lot of money at the problem through unprecedented monetary easing and a fiscal policy of bailouts and stimulus bills.  The core financial issue remains:  western countries and the US in particular have too much debt and insufficient income to service that debt.  Depressions have their own timetable. In my opinion, government intervention has only slowed the timetable, but definitely has not averted the event.

The Magic Act

Politicians and central bankers are a bit like magicians.  While an observer is firmly focused on the right hand we miss the left hand’s activities, which are hiding in plain sight.   Just look at current economic and financial trends:

  • Increasing Risk of Sovereign Debt Default – In late 2009 a problem arose with the financial solvency of Dubai.  Much like the subprime crisis in the US, financial pundits assured the public that the Dubai default was minor and self contained.  Yesterday, credit protection for Dubai rose to a record high exceeding the November peak. See Dubai CDS Hits 652, Ploughs Through November Highs As Gold Jumps.   Greece too is on the verge of sovereign debt default and is seeking a European Union bailout.  Portugal, Ireland, Italy and Spain are reportedly in dire financial trouble as well.  The United States, Japan and United Kingdom are not immune from talk of default.
  • Crisis at the State Level – The Center for Budget and Politics has projected 48 of 50 states will have budget deficits.  Cumulatively, the Center estimates an $180b shortfall for this fiscal year.  All states with the exception of Vermont have a balanced budget requirement.  Some assistance to the states has been proffered through the American Recovery and Reinvestment Act, but it is questionable whether this aid can continue. See Recession Continues to Batter State Budgets; State Responses Could Slow Recovery. It is more likely that states will follow the lead of newly elected Republican Governor Chris Christie.  Recognizing that the state is on the edge of bankruptcy, Christie has declared a fiscal “state of emergency” and intends to slash $2.2b from the budget. See Chris Christie Declares Fiscal ‘State of Emergency,’ Paving Way for NJ Spending Cuts. The crisis in municipal finance portends trouble in the municipal bond markets.  The unsuspecting public has purchased municipals in search of yield and instead may receive an unpleasant surprise.
  • National Fiscal Irresponsibility – President Obama signed into law a $1.9t increase in the debt ceiling, raising it to $14.2t. As the administration has predicted deficits out to 2020, this ceiling will rise each and every year. Also, it does not include the Christmas Eve bailout of Fannie Mae and Freddie Mac which provided “unlimited financial assistance” to these two entities. We will likely exceed our previous limit of $400b on financial assistance under emergency bailout provisions.  See US Promises Unlimited Financial Assistance to Fannie Mae and Freddie Mac.  Moreover, how can we continue to finance these deficits without an increase in interest rates?  However, such an increase in interest rates could put the US in a “doom loop,” as interest payments become the dominant budget line item crowding out other federal spending programs.
  • China – Recently China has made a number of financial moves that do not bode well for the US and world economy. First, China has ordered its currency managers to withdraw from any US dollar denominated risk assets, such as corporate bonds, equities and only invest in US guaranteed assets.  Second, it has raised its reserve requirements on its own banks to dampen an over-inflated domestic real estate market.   Speculation in Chinese real estate has reached the point that Jim Chanos, a respected investor, predicts an economic collapse.  See Jim Chanos: China Bubble Ready to Burst. Given the size of our deficits, the US desperately needs China to continue purchasing US government securities. The world needs China as a growth engine to continue world trade and prevent a second leg of the recession.

Harbingers of the Economic Unraveling

Before the next phase of an economic crisis there are often clues to impending problems. Some harbingers to consider:

  • Junk Bonds – The Greek crisis has spurred investors to sell junk bonds, highly risky assets, at the fastest rate since 2005.  As a result credit spreads are widening between treasury and higher risk corporate bonds. See Junk Bond Spreads Widening: A Canary in the Coal Mine.
  • Problems in a Treasury Auction – Last week’s US 30-year Treasury bond auction was considered a failure.  Indirect bids, that is, foreign buyers, dried up and the government had to offer a yield of 4.72% compared to an expected yield of 4.687%.  See Dismal $16b 30 Year Auction
  • Credit Card Problems – Capital One, a major credit card issuer, reports that in January delinquencies rose and that expected unrecoverable loans have risen to 10.41% from 10.14% in December. See Capital One: Credit -Card Delinquencies Rose in January.
  • State and Municipal Finance –In its upcoming July 1 fiscal year budget, California expects a $20b shortfall.  Illinois has a $61b pension shortfall, and is borrowing to make contributions.   Harrisburg, Pennsylvania, is contemplating a March 1 bankruptcy filing.  These stories are the proverbial tip of the municipal finance debt iceberg. See Illinois Pension Fund $61b Underwater; State Borrows Money for 2010 Contribution; California $20b in the Hole Again.

Reality

Till now the policy direction of the Obama administration and other western leaders has been to “extend and pretend:”  we will ignore economic realities by permitting banks to suspend “mark to market accounting” and we will send various administration spokesmen to spread the fairy dust of “green shoots” to pacify an anxious public.  Essentially, we have an economic policy of faith and hope that willfully ignores reality.  Economics does respond to the laws of mathematics.  Like a termite that silently eats away the wooden supports of a house, excessive debt has eaten away the structure of the world economy.  There will be more troubled countries like Dubai and states like California before this Depression has run its course.

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Business / Political — 0 Comments
29
Sep 09

Why not Reengineer Government?

I have been accused by some of my readership of being unduly negative, offering problems but no solutions.  In service of a remedy, a proposal: faced with huge deficits and proposed federal and state tax increases, why not reengineer government?

What is Reengineering?

Reengineering is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed.  Back in the 80’s I met the man who coined the term, Dr. Michael Hammer.  At the time, American companies created elaborately overstaffed and redundant bureaucracies. One department of a corporation had no idea what another department was doing.  Many times they were both doing the same thing.  It was also the dawn of leveraged buyouts and corporate takeovers.  Either companies became “lean or mean” or they were takeover targets.

The need for reengineering was encapsulated in Gordon Gekko’s speech (Wall Street-1987) at the Teldar Paper shareholder meeting:

Teldar Paper has 33 different vice presidents each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest.

Applying a good measure of common sense Dr. Hammer and his team examined business processes and determined where overlapping functions could be eliminated and consolidated.  His focus was to eliminate unnecessary work and make the core functions operate more efficiently.  The result often was better service, fewer but more focused employees and ultimately happier customers.

A Stroll by the Department of Commerce

Around the same time, during my work on a case in Washington, DC, I went on a stroll past the US Department of Commerce. In an ugly, New Deal building overlooking the Mall, there were thousands of offices, some with window planters. These folks looked like they had settled into their careers for the next 30 or 40 years.  What did these people do? More importantly now, what do we need them to do?

Between 2004 and 2008 employment in the US Department of Commerce increased 10%, from 30,000 to over 33,000 employees.  The mission of the Department is stated as:

a. Participating with other Government agencies in the creation of national policy, through the President’s Cabinet and its subdivisions.
b. Promoting and assisting international trade.
c. Strengthening the international economic position of the United States.
d. Promoting progressive domestic business policies and growth.
e.Improving comprehension and uses of the physical environment and its oceanic life.
f. Ensuring effective use and growth of the Nation’s scientific and technical resources.
g. Acquiring, analyzing, and disseminating information regarding the Nation and the economy to help achieve increased social and economic benefit.
h. Assisting states, communities, and individuals with economic progress.

I am using Commerce for illustrative purposes, as they oversee many valuable functions such as the census count, the national weather service and the patent and trademark office.  But do we need a federal bureaucracy to promote economic programs, coordinate faith based community programs, advance scientific technology?  It also raises the question of overlapping functions with other federal agencies such as State, Treasury, Defense, and Labor.

The Golden State – California Dreaming

California is mired in a deep budget crisis threatening to bankrupt the state. Nonetheless, the legislature has chosen the path of budget cuts rather than reengineered state agencies. A could be the question of why governmental regulation is even needed in all these areas. One enterprising blogger has catalogued 489 separate California state agencies.  There are commissions, bureaus and agencies on seemingly everything from funerals and cemeteries to cultural resources to the status of women. At one time each agency, commission, council or bureau served a purpose.  But each now has its own political constituency fighting for its preservation.

The Reengineering Solution

Unfortunately, Michael Hammer passed away last year. However, many carry on his work.  One does not have to be an expert to see that applying the principles of reengineering would improve governmental efficiency and public service. Most importantly, it would ameliorate the need for increased taxes.  Government is quick to criticize business for its excesses. It is time for business and concerned citizens to make government also earn its way.  Perhaps, Michel Douglas could be enticed to make a new movie: Sacramento: the Sorrow and the Pity or Nightmare on Capitol Hill.

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