When the Savings Don’t Materialize

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COMMENTARY | Sometimes, state and local governments don’t end up seeing the results they hoped for. Then what happens?

Is there a magic formula for cities, counties and states to save money while trying to keep the budget balanced? Or to spend about the same, but improve services? While some initiatives are certainly helpful, over the years we’ve seen government leaders boast about a new effort that’s going to lead them on the path to greater efficiency—only to later discover that it doesn’t come near to delivering the promised benefits.

It can be particularly painful when presumed, but unfulfilled, savings are built into the budget and leave the state or locality forced to figure out how to fill the hole, whether finding a legitimate solution or using a gimmick.

“Even with well-conceived recommendations, you’re going to have to do system change, and that’s time consuming and difficult,” explains Randall Bauer, a director at consulting firm PFM Group and former Iowa budget director. What’s more, many savings efforts don’t really make a huge difference, even if successful, because they are only effective at the fringes. In most states, the vast majority of total expenditures—covering key items like Medicaid, education, public assistance and child and family services—are largely mandated by state or federal requirements.

One of the most notable examples of a disappointing savings effort was the Illinois legislature’s proclamation in 2018 that it was going to reduce the amount it needed to contribute to the state’s poorly-funded pension plan by $445 million in 2019, without deferring the goal to fully fund the plan by 2045. The solution passed by the state’s lawmakers seemed sensible enough at first glance: The savings would follow by allowing “workers to give up future benefits in exchange for immediate payouts,” according to a July 18, 2019 paper by the Civic Federation.

The reality: The state’s savings came in close to $13 million, an almost indescribable shortfall.

This huge gap was largely attributable to the fact that the savings figure was effectively plucked out of the air. “The legislation they passed had no actuarial analysis,” says Laurence Msall, president of the Civic Federation. “It was passed at the very end of the session and was not publicly debated.” There had been a prior, unsuccessful proposal for a pension buyout, for which an actuarial analysis had been done, and the new numbers for the new plan were based on the old one. But that old estimate was created for a substantially different buyout approach and didn’t really apply anymore.

A few other areas in which we’ve seen inflated estimates of savings have been in privatization efforts, consolidation of services so they’re shared by multiple agencies and reforming Medicaid systems. Another frequent target for budget trimming is prison costs, which many states are trying to rein in through criminal justice reform. A few years ago, a report in Oregon noted that the actual savings from reducing the growth in incarceration rates were over a third less than anticipated, dropping from a projected $817 million to $522 million.

Efficiency initiatives, particularly technology improvements, can also turn out to be disappointments. Some years back, many in North Carolina believed that a new Medicaid provider reimbursement system would speed up and improve services offered to residents. It was originally estimated to cost about $171 million and be online by 2006.

That was not to come to pass.

North Carolina decided to adopt a system that had been in use in New York. “The first contractor said all they needed to do was bring it to North Carolina, make some tweaks and you’d have a Medicaid provider reimbursement system,” recalls John Turcotte, the non-partisan state evaluation director. “But the state terminated the overwhelmed contractor because the New York system had been written in (an antiquated) programming language called COBOL.” It took the state until 2014 at over double the original estimates, $484 million, to finally get the system to function.  

Sometimes, states and local governments don’t even make it a point to keep track of the actual savings as compared to the projections. It’s much more fun to hold the scissors at a ribbon cutting than to see whether the ribbon should have ever been cut in the first place.

The Minnesota Department of Transportation, for example, was required by the legislature, in 2017, to “implement efficiencies,” aimed at cutting costs. But while the DOT reported on cases in which savings were achieved, ‘the department did not attempt to identify any instances where the department had spent more money than anticipated because of cost overruns or poor decision making,” explains David Kirchner, a principal evaluator at the state’s Office of the Legislative Auditor, which released an audit about this issue in 2019.

One of our major concerns: In many cases, throughout the states and localities, savings initiatives are put it place, but nobody looks back to see how well they worked. Even state performance auditors, engaged by governments to do this kind of work, are often only allowed to perform such a follow-through if the legislative branch asks for it. So, if the legislature doesn’t want to risk news of a failure, why seek out evidence that there might have been one?

Katherine Barrett and Richard Greene of Barrett and Greene, Inc. are columnists and senior advisers to Route Fifty.

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