Control Freaks

States and localities probably spend more money enforcing incredibly restrictive rules than they lose on waste and fraud.

We have a 15-year-old son. When we get together with his friends' parents, the conversation frequently rolls around to the same topic: How much freedom can you give your kid without sacrificing sufficient control? If they're out on their own, do they need to call in only when they're going to be late? Or do you buy them a cell phone and make spot checks? Or do you keep them in their room until they leave for college?

Curiously, there's a parallel here for states, cities and counties: When they grapple with the how-tight-the-control question, it's for their agencies. The issue comes up in a whole host of areas: Absent higher-level approvals, can agency heads shift allocated money between programs, between line items in programs or not at all? How free are managers to make purchases without elaborate approval processes? When must they go through formal bidding processes?

Many enlightened entities approach these questions with an eye on making sure that fraud and waste are kept to a minimum, while keeping administrative red tape out of the way as much as possible. Although everyone is ostensibly aiming at the same bull's-eye, some do it with a slingshot; others, with a longbow.

Maryland leaders pride themselves on their flexibility. Although the budget office has become more watchful in tight budget times, managers can still authorize all kinds of shifts of cash. Transfers between programs require authorization of the department secretary and the approval of the governor, but programs are defined very broadly: a state hospital or a prison or the parks in one region of the state. "The agency head may manage their funds essentially any way they would like within the program consistent with personnel and procurement laws and standard travel regulations," says Neil Bergsman, director of budget analysis in Maryland. "If they want to move money from personnel to contractual services, they can do that without even telling us about it."

Not surprisingly, many of the states and localities that have the most rigid controls do so out of fear of scandal--or reaction to it. Cleveland's very stringent controls are in place in large part as a result of the city's brush with insolvency more than two decades ago. Any purchase greater than $1,000 must be put out to bid in a formal process. One insider startled us a couple of years ago with the institutional memory of a depressed elephant. There's no question that there is "a lot of managerial oversight," he concedes, adding, "we're still only 21 years removed from the default and that is still looming."

The question, of course, is whether the end justifies the means, and many of the folks who have given this matter some thought have come to the conclusion that states and localities probably spend far more money enforcing incredibly restrictive rules than they would be likely to lose on waste and fraud. We're not coming out in support of waste and fraud here, but sometimes the perfect is the enemy of the good. As Steve Kelman, professor of public management at Harvard University's John F. Kennedy School of Government, says, "Management by scandal is right up there among the top causes of poor government management. It makes no sense to deal with fraud by making every little order go through a procurement process." Kelman notes that prior to a variety of reforms in the federal procurement process, "something like 30 to 40 percent of the total resources of procurement shops were going to process orders under $2,500. I bet you'll find that at the state and local level. It's a totally absurd situation."

One particularly worthwhile innovation, which is being used by a growing number of states and localities, is procurement cards. These are just like credit cards, which can be used for purchasing reasonably small items--often under $1,000 but sometimes as much as $2,500. Again, control versus flexibility is an issue, and the benefits of reasonable flexibility are also apparent. Shelby County, Tennessee, for example, instituted procurement cards for purchases under $1,000 (with a maximum of $5,000 a month). The county cut its number of purchase orders--which cost it about $150 apiece--by some 5,000 annually. At the same time, it cut the average purchase time on those orders from nearly two weeks to almost no time at all.

"The biggest argument against procurement cards was that you might have a bad apple who would abuse it," says Nelson Fowler, deputy administrator of purchasing there. "My response is that you have to trust your employees and you have to set up some safeguards to make sure the person using the card is not the same person auditing the monthly bill."

His bottom line is similar to Kelman's: "The savings you generate on the purchase-order side would far outweigh the amount of abuse you could have."

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