I have written before about how to improve efficiency in government. People like me are at the ready with all sorts of fancy solutions: artificial intelligence, Lean Six Sigma, studying the “bright spots” of existing leading practices within an organization, even strategies as esoteric as going to the Gemba, which in the process-improvement lexicon simply means observing the work first-hand. Yet one powerful efficiency tool is often overlooked: making costs visible. Knowing how much a particular government service actually costs, and understanding what drives those costs, make it possible to incentivize resourceful behavior and measure value — results per dollar spent.
Ostensibly, government budgets tell us how much services cost, but do they really? I have looked at more than my share of city and county budgets, and two things stand out when it comes to cost.
First, many budgets do not present service-level detail. They show proposed amounts for departments and maybe divisions, but if you want to know exactly how much is spent on, say, health clinics or street sweeping, you’re out of luck.
Second, even if a budget does provide service-level detail, the amount proposed for each service is not its full cost, because governments budget centrally for many costs that should be allocated to the services that consume them. These can include things such as pension and health benefits, vehicle rental and maintenance, space utilization, IT services and workers’ compensation.
What are the costs of ignoring costs? Let’s look at five of them.
The tragedy of the commons. Economic theory warns that shared resources can be overused and depleted due to self-interest. Governments that do not charge services directly for vehicle use, for example, may find money being wasted due to underutilized equipment, missed preventive maintenance or vehicle abuse. After Baltimore, where I was budget director, set up an internal service fund to charge departments for their square footage, many departments found ways to reduce their footprints.
Monopoly behavior. Because of the partial-costing practices described above, government functions appear to cost less than they actually do, which can protect departments from cost-cutting pressure and competition. To deal with this issue, Indianapolis used activity-based costing to determine the full internal cost of pothole repair, identifying more than 35 discrete activities involved in the process. The data allowed the city to find inefficiencies and prompted it to bid out the work, with city employees competing against private vendors, in many cases successfully. In another city, an ABC analysis of street resurfacing led to the reuse of milling material, saving tipping fees for dumping the material in a landfill.
Giving away the store. Local governments charge fees for a wide range of services, from fire inspections to swimming lessons. But cities that perform user-fee studies often find that their fees are not fully recovering the costs of providing the services and haven’t been adjusted in years or even decades. A 2023 report by the Greater Milwaukee Committee found that the city could generate $417 million in additional revenue over 10 years if it adjusted its sanitation, forestry, snow-removal and streetlight fees to reflect full costs.
Full cost recovery is not always the goal of local-government fees, of course; these charges must be balanced with making services broadly accessible. That said, knowing what services cost can enable governments to create fee models that maximize revenue from users based on ability to pay and subsidize those with fewer resources.
Mortgaging the future. A common mistake by local governments is failing to account and budget for the life-cycle costs of capital projects. The results are crumbling infrastructure and deferred-maintenance liabilities that don’t show up on balance sheets but threaten long-term fiscal health.
A total-cost-of-ownership approach will lead governments to spend more up front to reduce maintenance and energy costs down the road and to set aside funding for facility upkeep and upgrades. I long to see a mayor cut a ribbon on a roof replacement that didn’t require more borrowing or put strain on the maintenance budget.
Lost value. Cost is the denominator in the public-value equation of results per dollar spent, which brings us back to the notion of prioritizing the budget. Arlington County, Va., employed cost data to set community center hours and staffing based on usage per dollar. Comparing services by the efficiency with which they deliver benefits, not merely operate, can give decision-makers an objective way to repurpose and reduce spending.
As my examples make clear, detailed cost analysis can be complicated. There is no book called Cost Analysis for Dummies, but a few of my budget analysts in Baltimore learned enough about activity-based costing to apply it and write a guide for departments. My advice for local governments is to start small. Comparing the unit cost of a program or a specific function — maybe changing the oil in a vehicle or pruning a tree — across your organization or against benchmarks can reveal efficiency gaps and bright spots.
Cost accounting and cost allocation may be the unsexiest of strategies for local leaders struggling to meet rising service demands as revenues stagnate, but there’s magic in those numbers.
The views reflected in this commentary are those of the author and do not necessarily reflect those of Ernst & Young LLP or other members of the global EY organization. Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
