Here is a simple example of the changes that have resulted in an increase in the cost of government without an increase in services to the tax-paying public. To simplify, my example uses constant 2011 dollars. This is not a bedtime story and you may want to read it slowly. You will likely shake your head slowly when you are done reading.
It is 1975 in Hometown, Georgia. The Public Works Department of Hometown has 2 laborers who spend the vast majority of their time repairing and maintaining sidewalks. Their total pay and benefits (adjusted for 2011) is equivalent to $20,000 each per year or $40,000. The tools and equipment they use were purchased at a cost amortized over 5 years of $8,000 per year. They use about $2,000 annually in materials. So, without getting fancy, Hometown spends $50,000 a year and the city has a nice looking, well cared for sidewalk system. The 25,000 resident tax-payers of Hometown are pleased with what they get for the $2 per capita annual expenditure on sidewalk repair/maintenance.
In 1980, the City Council decides to save money. They let both laborers go and they contract out for sidewalk services. They budget $40,000 for sidewalk repair and maintenance. Seven local contractors bid on the work. The winning contractor has added one of the ex-city employees to his contracting crew and can do the job with existing equipment. The contractor will just have to work a bit harder and more hours, but he has incentive since this contract will increase his profit by almost $5,000 a year. The sidewalks are equally or better maintained and the City has saved $10,000.
In Neartown, just 20 miles from Hometown, there is a big scandal in 1982. The Public Works Director is found to have given a sewer cleaning contract to his brother-in-law for about 25% more than the contract bid at the previous year. In response to the outcry in the neighboring town, Hometown passes a new law that all contracts over $10,000 must go out to bid. All contractors must apply and qualify to bid.
By 1985, the Public Works Director feels overworked and begs for help in administering City Contracts. The City hires a Contracts Administrator for $35,000 per year. The low bid on the sidewalk repair contract for 1986 comes in at $45,000. The increase is due to the increased costs of the paperwork needed to qualify to bid and the increased number of inspections and specifications required by the contract. Since the contract administrator has 10 major contracts to watch, we assign $3,500 to the cost of the sidewalk repairs. Hometown is now spending $48,500 annually. City savings have dropped to $1,500.
In 1988, the city’s employees are organized by the SEIU and the first City Labor Contract with the SEIU is negotiated. Since the City is a bit strapped for money, it tries to hold off on wage and salary increases, but it does allow for a large increase in benefits and pension promises. The actual cost to the City of the Contracts Administrator (her new pay grade is Administrator III and she now qualifies for a step increase because of her 3 years of service) with all benefits is now $42,500 per year. The new contract cost comes in at $47,500. Add to that the 10% of $42,500 for contract administration and Hometown is now paying $51,750 annually to keep up the sidewalks. The City now pays $1,750 more per year than before and has accrued a pension liability for the Contracts Administrator that is equal to $4,250 per year. Fortunately, City revenues have increased as property values have gone up, and, the pension liability won’t come due for many years.
In 1990, the SEIU opens negotiations with the City on its contract with a demand for a 10% increase in pay and benefits plus a simple 7% cost of living allowance (COLA) for each year of the contract. The SEIU claims its demands are very reasonable since 50 miles away in Atlanta the contract is approximately 15% more expensive than the contract with Hometown. There is a protracted period of negotiation. The SEIU members are encouraged to slow their work down to put pressure on the City. Finally after 6 months, the contract is settled and signed. The City accepts a 5% increase in pay and benefits and a 6% COLA for a three year contract. Part of the deal the City had to accept included hiring of an assistant (Administrator I) for each of the five City employees rated as Administrator III and above. The Contracts Administrator is assigned one of the Assistants, along with his $30,000 in pay and benefits. The low bid on the sidewalk contract comes in at $51,500. Again, contractors complained about all the new requirements, the new inspections, and the costs of increased paperwork to do the job. Ten percent of the cost of the Contracts Administrator and her Assistant now comes to $7,462.50, not counting the ever growing pension liability. Now the city is paying $58,962.50 for sidewalk repair. Because of the slowdown during contract negotiations, repairs and maintenance are behind schedule and sidewalks are starting to show significant wear and tear.
The City does not have the revenue to support the increased costs. The City Council debates four choices: 1. Defer a large part of maintenance and repair of sidewalks; 2. Increase revenue through an increase in property tax; 3. Add to the sales tax; or 4. Float a City Bond of $1,000,000 to pay for a number of repair and maintenance projects around the city. The City Council determines that the most politically viable solution is to ask the taxpayers for an increase in property tax. The vote is very close, but the forces in favor of the tax convince enough people to vote and the tax measure passes. Tax proponents were successful in making the argument that the extra money will help the city keep sidewalks and parks and the library, etc. in much better shape thus protecting the City’s investment in infrastructure. Among their strongest arguments was that this very small tax will improve property values and a taxpayer would more than recover his tax dollars when he sells his house.
Each ensuing year, with the increased costs of the COLA and new pay raises granted with each new contract, the initial surplus created by added property tax goes away. Two years after the property tax increase, the City asks for and gets a 0.5% addition to the sales tax. Three years later the City Council needs to further defer sidewalk repair and maintenance. It seems the addition of the second administrative assistant to help with Contracts Administration plus the increased costs of asphalt and concrete have increased costs beyond the City’s ability to pay.
By the year 2000, the City, in a move to save money, consolidates all Contracts Administration under a new Purchasing Division. All three Contracts Administration employees now work for the new Director of Purchasing for the City (an $80,000 job plus benefits). The Purchasing department now employs eight people. The new department finds time to write a complete new set of purchasing guidelines, specifications, and inspection requirements. The application form to bid on City Contracts is now an 11 page document that must be notarized to be submitted to the City. A $50 fee for submitting a bid has been added to defer the cost of handling the paperwork. Four bidders on the sidewalk maintenance contract decide not to bid this year because they can’t afford the paperwork overhead. Only the two largest contractors (both from Atlanta, not Hometown) are approved to bid and not surprisingly, the new contract for 50% of the work previously done (more deferred maintenance) goes for $75,000 in 2000. ABC Construction, the winning Sidewalk Contract bidder the previous year closes shop. One of ABC’s ex-employees gets a new job with the City as an inspector for City Contracts. He is hired due to his experience with sidewalk repair and maintenance. Inspectors now make $47,500 a year to start.
In 2010, the SEIU and the City almost come to blows as the combination of higher union demands and lower tax revenues would require that either the City lay off 25% of its workforce or reduce pay, benefits, and pension contributions. The SEIU leads its members out on strike. It lasts almost a month. The parks are overrun with trash, sidewalks go unrepaired, the city sewage plant overflows and sends raw sewage into the river. The strike is finally settled and the City agrees to a “modest” 2% increase in pay plus a “reduced” COLA of only 4% per year. To pay for the higher costs, the City must do as it threatened and lay off almost 25% of City employees. The Council is now considering the idea of the Bond Measure to raise needed revenue to meet their budget.
Don’t think this could happen?
It just did, while you were going about your daily business.
So how do we stop and then reverse this? Any ideas?