B&G Report: L.A.'s 300-Year Problem, Problematic Comparisons and Simple Solutions

All the public-sector management news you need to know.
September 4, 2014
Barrett and Greene
By Katherine Barrett & Richard Greene  |  Columnists
Government management experts. Their website is greenebarrett.com.

According to a recent issue of City Journal California, “fixing L.A.’s century-old water pipes, [said the] Department of Water and Power, could take up to 300 years.” That wasn’t a typographical error. In a model of understatement, the senior assistant general manager of the DWP said, “That’s probably longer than we would like it to be.”

The DWP has come under assault in auditors' reports for overspending, overcompensating and underperforming “relative to other utility companies,” reported City Journal. But we don’t want to delve into the obstacles to fixing those pipes or castigate anyone in California for the awful mess its pipes are in. Rather, we’d like to simply offer our opinion that a target date three centuries away represents a timeline that has dubious value. Good luck, California.

With all the changes and proposed changes in state and local retirement plans, it’s hard to have any idea what benefits will look like in the future. One result: Employees affected have become pretty thoroughly uncertain -- and perhaps alarmed -- about their future.

That’s a primary finding of a report issued by the Center for State and Local Government Excellence, which found that only about one in five full-time public-sector workers are very confident about the prospects for their retirement income. They are also particularly concerned about retiree health benefits.

“Fewer local and state governments offer retiree health care and public employers also are shifting more health costs to employees and retirees," said Joshua Franzel, vice president of research for the center and an author of the report. "This … has reduced public workers' confidence in these benefits and raises new questions about how much they need to save for health expenses in retirement.”

Read more of Governing's coverage of the report here.

Matt Fabian is a managing director at Municipal Market Advisers and one of the savviest municipal bond market guys we know. He recently gave a presentation as part of the Ravitch Fiscal Reporting Program in which, among other things, he addressed some of the “sins” of that marketplace. We found the commentary both incisive and valuable.

One of Fabian’s points was that, thanks to the infrequency of default, investors have become a “permissive, passive investor class.” This has created openings for the sale of bonds (including pension obligation bonds, capital appreciation bonds and jail financings), which may be theoretically useful but actually fiscally harmful to both sellers and buyers.

This appears in our free Management e-newsletter. Click to subscribe.

Another sin, according to Fabian, is that “the non-professional nature of end users (issuers and investors) creates reliance on sophisticated intermediaries, who have sometimes attempted to provide overly sophisticated solutions to long-term problems.” The truth is that when buyers don’t understand how their investments genuinely work, that’s a prescription for troubles later on.

"There are three professions that beat their practitioners into a state of humility: farming, weather forecasting and cybersecurity." -- Dan Geer, risk management specialist

There’s been a fair amount of stone-throwing in Austin lately. Some think tanks and politicians claim the state of Texas is financially sound and localities are wantonly disregarding basic rules of fiscal integrity. This has clearly ticked off the Texas Municipal League, which issued a statement in mid-August to try to set the record straight.

Apparently, for the three-year period from 2009-2012, “local debt increased from $174.5 billion to $195.8 billion, a 12.2 percent increase.” But, as the Municipal League points out, state debt grew by 20.3 percent in the same time period.

The organization points out that only a small portion of local debt, $26 billion, is supported by city taxes. The largest portion is school district debt, followed by debt supported by the revenues of city utilities and not property taxes. The lesson here: Simply lumping together an entity’s debt can easily lead to misleading conclusions. To really understand debt, it’s critical to disaggregate.

Chicago’s Mayor Rahm Emanuel has decided it’s a good idea to give extra credit to graduates of the city’s public schools when they apply for city jobs. But parents of parochial school students certainly don’t think so because it puts them at a disadvantage to public school grads. A large group of students “is denied equal treatment under the mayor’s plan for one reason -- they attend religious schools,” wrote Chicago Teachers Union President Karen Lewis. “This is a burden upon the First Amendment right to free exercise of religion.”

From Emanuel’s point of view, his policy would encourage young Chicagoans to finish high school. It could give the minority groups who comprise a large portion of Chicago high school students an edge over suburbanites.

Do you think the mayor is on the right track here? Or do you think he should back off?

It always intrigues us when we see comparisons between cities that aren’t alike at all -- for example, the ten largest or the fifteen with the most revenues. We understand one reason some researchers pick an odd-looking group of cities to compare is simply because they’re the cities that have the most easily accessible data. But that doesn’t make them comparable.

A recent article in the Georgetown Public Policy Review points out that the selections of comparable cities has been a significant problem in much of the coverage of Detroit in recent months. The article says that journalists repeatedly connect Detroit's problems with its large size. They are convinced of Detroit's large size because they tend to compare it to New York City, San Francisco or Boston. But those three cities are abnormally small, so Detroit looks big.

In fact, based on land area, Detroit is a relatively small place compared with other U.S. cities  “Of the 20 most populous U.S. cities, Detroit ranks only 18 in land area," writes author Chad Hughes, “just barely edging out Philadelphia (134 square miles), but comfortably beating San Francisco (47 square miles).”

Had the city annexed surrounding, wealthier suburbs many years ago -- as other cities did -- it might be in significantly better economic shape than it is today.

Anyone who has been reading the B&G Report for any length of time knows we’re interested -- some might say obsessed -- with the quality of contracting at the state and local levels. We’re convinced that, because of limited oversight, many stakeholders in government have no idea how much money is spent for contracted services.

We’ve just come across an audit from Denver that puts that previous thought into intellectual boldface. According to the audit, “the Department of General Services has failed to effectively oversee citywide service contracts. This impairs the City’s ability to consistently monitor vendor performance and ensure the City receives all services required by the contract.” The report also points out that the department has “no policy guidance for General Services … regarding monitoring requirements and expectations,” and has failed to establish “a centralized monitoring position responsible for overseeing the monitoring process.”

We don’t know how such a state of affairs can have come to pass and hope the city will pay heed to its auditor. To take the issue one step further, we’d like to encourage other auditors to emulate Denver’s and see whether anyone is minding the contracting store.

Often it appears that the routes to managerial success in government tend to be profoundly complicated. And yet, as we research topics as the years go by, it’s become clear to us that often the solutions are relatively simple -- even if their implementation isn’t.

Take cybersecurity. The very idea that it involves ineffably complex computers makes it seem like the kind of problem that can only be solved by people with PhDs from MIT. But after a fair bit of research, we’re convinced that it’s mostly a matter of what we call "cyber-hygiene," which means using passwords appropriately or providing clear-cut standards about the types of attachments employees are allowed to open.

Speaking of hygiene, it’s become pretty clear that a potent solution to hospital-acquired infections is no more complicated than the regular application of soap and water to caretakers’ hands.

So, the next time you’re looking for a solution to a problem and all the options seem labyrinthine, our advice is this: Think Simple. (Thanks, by the way, to the Incidental Economist blog for inspiring us to write this item).