How Can Local Governments Do More with Less?

Much attention is being paid to Federal budget shortfalls -- but state and local government, who are the agents of management and delivery for many essential programs that benefit the public, face a major challenge in maintaining sound public services with a dwindling resource base.  

The Brookings Institution recently released an analysis of employment losses since the economic downtown that shows that the government sector has lost more jobs than any other segment of the economy since 2009.  Most of these losses have occurred in state and local governments with teachers and policeman accounting for almost 300,000 of the 580,000 net job losses in the public sector.  In fact, government employment is at historic lows, largely due to draconian budget cuts at the state and local levels 

Local government’s fiscal distress is not the consequence of the recent recession, although it has certainly been aggravated by it.  Instead, local governments suffer from a combination of over-extended services, low productivity growth, and a dependence on revenue sources that are likely to experience “flat” revenue growth for the foreseeable future.

Local governments enjoyed an unprecedented period of prosperity in the 15 years leading up to the Great Recession of 2008.  With revenues growing at more than 5% per year, local governments expanded services, raised salary levels, and increased employee benefits.  And yet the sources of that robust revenue growth – rising property values and an historic shift in consumer behavior from saving to expenditure – propelled property and sales tax revenues at a rate that was fundamentally unsustainable and now points to a rather hard landing.

The local government business model needs to be reinvented.  Service levels need to be tied to outcomes (see this example).  Employee productivity needs to be increased by better use of technology and the application of advanced analytics.  Revenue growth needs to be secured not by waiting for the next asset bubble but by investing in the public infrastructure and economic development initiatives that will attract private investment, new residents and new businesses.

In short, local governments need to rethink the business they are in, and by doing so, put themselves on a path to fiscal sustainability.   Based on experience with effective practices, ways that this can be done include:

1. Focus on revenues by making revenue growth an explicit strategic goal. 
2. Adopt a return on investment approach to all spending, supported by advanced analytics. 
3. Restructure long-term operating cost structures by institutionalizing efficiency and effectiveness programs.
4. Recalibrate service levels as targeted outcomes are achieved.
5. Apply the savings generated by efficiency programs to invest in neglected infrastructure. 

Taking such steps can help local governments move forward within budget and without sacrificing the quality of delivering essential public servcices.