Identifying cost savings in public sector agencies

While we seek to identify critical lessons from the Great Recession, the reality is many government entities have not fully recovered. By second quarter 2015, inflation adjusted tax revenue in twenty-three states had not bounced back to pre-recession levels.1

For three states in particular—Alaska, Wyoming, and Florida—the impact far exceeded that of their peers. In each of these states, inflation adjusted revenue had declined by 15 percent or more. 

But even for states where tax revenue has “recovered” and now exceeds pre-recession levels, there are new and ongoing financial concerns. According to the Tax Policy Center, several factors, including pensions, long-term debt, infrastructure, and healthcare costs, are straining state and local budgets.2

Pensions and long-term debt: One recent study suggests nationwide state pension obligations were 72 percent unfunded.3 In Illinois, a state where pension liabilities are estimated to be 39 percent funded, the burden falls on the taxpayers to cover unfunded pension costs. Since 1998, taxpayer contributions to the state’s various pension funds has increased more than 400 percent.4 In Illinois, and other states in a similar position, the state is forced to divert state taxes to cover pension obligations.

Infrastructure: A report published by the Rockefeller Institute suggests transportation, water infrastructure, and other infrastructure spending has fallen since the Great Recession. Inflation adjusted capital spending on transportation and water infrastructure fell by 23 percent from pre-recession levels. Similarly, construction spending fell by more than 15 percent, with investment in education facilities accounting for more than half of the decline.5

Healthcare costs: The Government Accountability Office estimates healthcare costs will continue to rise and will double as a share of gross domestic product by 2060. One estimate suggests state tax revenues would need to increase by up to 1.5 percent to cover state and local government retiree health benefits.6

Regardless of the cause—residual effects of the Great Recession or other increased spending pressures—state and local governments are pressured to do more with less. As a result, state and local governments should seek to cut costs where possible. There are four cost-savings measures every state and local government must explore: strategic sourcing and contracting, technology, alternative service delivery, and improved internal control.

1. Strategic sourcing and contracting

A government that understands its spending is able to reduce the costs of recurring, big ticket items. From healthcare, school busing services, and office supplies to consulting and professional services, local governments can seek cost savings through improved procurement processes and contract negotiations.

Key questions

• In what cost categories is the most money spent?
• Are there opportunities to consolidate contracts and negotiate pricing with a single vendor or small group of vendors?
• Can we purchase in collaboration with other local governments to reduce costs?

2. Technology

Investing in new technology is typically a long-term cost saving endeavor for every government to consider. When used correctly, technology allows governments to automate processes, reduce paper use, and condense the physical space required to maintain files. Over time as technology takes on previously manual processes, a technologically advanced government can also decrease the number of employees through hiring freezes or position elimination. Additionally, reducing the number of standalone systems can shrink the licensing fees and resources required to maintain those systems.

Key questions

• How has technology changed since the last system update (particularly with regard to enterprise resource planning)?
• What opportunities exist for increased efficiency through the implementation of new technology?
• Are individuals performing tasks manually that can be automated in a system?
• Can costs be reduced through consolidation of standalone systems?

3. Alternative service delivery

Governments have traditionally outsourced services to private contractors (e.g., waste management, engineering plan review, payroll processing, and facility management). Governments have also sought shared service arrangements with other local governments. However, there are new ways to optimize alternative service delivery by analyzing past performance to identify new and creative solutions.

Key questions

• How have purchasing trends changed since the last discussion about outsourcing, privatization, and shared service?
• What new opportunities for outsourcing and privatization are available?
• What new opportunities for shared service arrangements are available?

4. Internal control

Management does not typically think about cost savings when approving an invoice or making a procurement decision. Instead, the focus is on process and accuracy. Governments should impose internal control over costs to improve the decision framework—even if it means adjusting purchase and approval thresholds that allow management time to research alternatives.

Key questions

• Do purchase and procurement thresholds encourage a detailed review, including a cost savings analysis?
• Does the procurement process provide the most economical results possible?

It is imperative for governments to consider implementing cost savings measures to avoid challenges such as government shutdowns, mass consolidation, and strikes. By being proactive, state and local governments become fiscally sustainable and bring new meaning to “doing more with less.”

For more information on this topic, or to learn how Baker Tilly state and local government specialists can help, contact our team.

1Fiscal 50: State Trends and Analysis, PEW Charitable Trust, February 2016

2Governing with Tight Budgets, Tax Policy Center, September 2015

3Size of long-term Obligations Varies Across States, PEW Charitable Trusts, February 2016

4Taxpayers Bear the Brunt of Increasing Pension Costs, illinoispolicy.org

5The Economy Recovers While State Finances Lag, Rockefeller Institute of Government, June 2015

6Governing with Tight Budgets, Tax Policy Center, September 2015