Jul. 5, 2012

BUDGETS

STOPPING GOVERNMENT FRAUD AND WASTE

 

       Today's rant will be reasonably short and sweet.  I thought that today we might take a look at the fraud and waste that is commonly accepted as being a part of our national/state/city/school district/etc. If we accept that there is waste and fraud in the system then the obvious result should be that we want to reduce it so that our tax dollars will be better spent and we will be able to improve our welfare.

 

       It is important to understand that all government agencies are essentially monopolies.  Having monopoly power, even if they aren't strictly a full monopoly, leaves them with the same drawbacks all monopolies face.  Over time they will begin to deliver less product or a lower quality product at an elevated price.  Economists dislike monopolies but not for the reason most people think. Most people will cite the higher price while the economist has little regard for the price if you are willing to pay it.  In contrast the economist dislikes a monopoly because it results in an inefficient and/or inequitable distribution of resources.

 

        Let us take a typical government run budget.  For this example I will focus on education but understand any government budget will fall into essentially the same pattern.  An education budget has no resemblance to what funds are needed to deliver the optimum service. The standard budgetary process is to address newly desired funds and elevate all other line items by a standard percentage.  As a result we see education budgets grow by + 5% each year.

 

        To illustrate an example; I once took over a budget for maintenance within a government agency.  I was advised that I needed to have a budget prepared within the following 60 days.  As I reviewed the various line items I noted one line item for "dirt".  This line item was listed at $3600 for the previous year.  I asked what we needed dirt for and was told it was a "standard" line item.  Looking back six years I noted the beginning of that line item and learned that six years earlier they had built a parking lot and needed fill dirt. The original amount was $2400.  The line item had been carried over each subsequent year with additional funds being added each year. I deleted the line item, everyone was elated that our budget had shrunk and we had no loss of capacity or needed funds.

 

       Anyone who has ever worked for a government agency has gone through the "spend your budget or you may lose it" lecture.  This is a result of a mindset that says the budget must be increased each year and unless we spend what we have we won't get more funds.  Unfortunately, the largest majority of governmental managers have no knowledge of zero based budgeting so this process is perpetuated without any regard to efficiency.  Sadly, if these budgets were addressed properly more funds would be available for the necessary items and consistent and focused growth could be achieved.

 

        I know you are now asking," So Al what's the solution?" It really is very simple, but it will require a change in the focus of the Managers.  When we discuss reducing the national debt or deleting waste and fraud we have to understand that the budgets are huge and anyone not intimately familiar with the organization will be unable to find the waste.  First because they can't identify the needed cuts and second because each agency will spend enormous efforts to justify their expenditures. In the above example I was told to raise the budget by 5% across the board because, "The board will only address one or two of the items and this way we won't see any loss of funds."

 

        There is only one solution and believe me it will work.  Of course, it will require educating our leaders to be honest in their dealings.  Not spending ALL of your budget this year and giving back funds to the administration should not have a detrimental effect on next year's funding. Now, the solution: Because we know that there is waste and fraud and we have established that the administration is probably unable or unwilling to do the budgetary review work necessary, every budget period to eliminate it, there is only one choice.  That choice is to make the people who spend the money reduce the waste and fraud.  How, simply reduce their budget by 20% with any additions to be requested line item by line item as needed.  Project the following years budget at exactly the same level unless departments can justify an increase. Believe me, there is easily this much padded into every governmental budget that "is spent instead of lost" every year.

 

        Be prepared, the first reaction will be to threaten the administration with the loss of services and reduction of force.  Each department is well aware, even if subconsciously, that the administration doesn't really understand their needs.  Because of this, they can "blackmail" the administration by screaming that services will be limited and they will have to lay off employees. In rare cases they may even conduct those actions to force the administration to return the funds.  It is amusing, however, to watch those organizations that don't give in to these demands.  In virtually every case by the end of the first budget period services will not have been eroded and the work force will be at the same level.  Why, because it has forced the separate departments to find and eliminate their waste and spend their money more efficiently.

       

        A simple solution but remember that all organizations are dynamic and that situations change.  When departments budgets are limited it will become much more critical that the administration examine requests for additional funds and perform "line item zero based" auditing each budget period.

 

        Just another thing to think about.

 

The "Grumpy Old Man"