Monday, July 10, 2017

It Costs Money to Save Money: Why Across-the-Board Budget Cuts Don't Work

In case you are new to my blog, let me introduce you to my husband, a certain Englishman.  

Who does NOT have an English accent, by the way.

He earned a Master of Professional Accounting degree at the #1 Accounting school in the nation, University of Texas-Austin.  He is also a Certified Managerial Account.

He decided not work with a public accounting firm because he loves to work with start-up companies and entrepreneurs.  Which means we have not had a steady income since... well let's just say Justin Timberlake was known as the lead singer of this group.

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We have known times of plenty and definitely our share of lean times too.  But we have always paid our mortgage, bills, and have had food on the table.  I credit this to the fact that a certain Englishman did a great job of managing our budget.

He taught me that during lean times we don't cut parts of our budget that will end up costing us more money in the long run.

For example:  We may stop going out to eat or cancel our vacation, but we keep paying our utility bill.  While staying at home during Spring Break is no fun, it's not as horrible as a bad credit score. 

He has had clients with lean times too.  His specialty is keeping small tech companies running by managing their budget and cash flow.  He knows what to delay and what to pay immediately.  His incredible talent at negotiating and working with vendors and creditors is why he's now a successful CFO consultant.  

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Households and businesses aren't the only ones that experience lean times.  Governments do too. And just like personal and corporate budgets, they have to figure out what to cut.

Except, they don't get to cut their budget the same way a household or a business gets to.

To read how government funds differ from corporate and personal funds, click here.  

They have different regulations and laws that prevent them from being able to take the excess in some funds and transfer it to others.   They just can't manage them like a business can.  

To read why governments can't run like a business, click here.  

When a city has a financial crisis it must cut its budget.  The attractive answer is to do what's known as an across-the-board budget cut.  Every department has to learn how to do with less.  Seems fair, right?  
Rep. Kelda Roys of the Wisconsin State Assembly said that across-the-board budget cuts are politically easy but intellectually lazy.  

But they are even more serious than that.  They can actually end up costing a city more money than it saves.  

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Here's an example.  In 2008, the nation experienced a recession that caused significantly lower revenues and smaller city budgets.

In the beautiful city of Colorado Springs, they were hit with a $28 million gap.

They decided one way to save money was to turn off every third streetlight.  

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Sounds like a good idea, right?  That cuts their streetlight electricity bill by 33%.  Imagine spending 33% less on your electric bill.  Who wouldn't want that? Definitely the tax payers.  

Well, guess who also wants Colorado Springs to save 33% on their electricity bill?  

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That's right, copper thieves.  Because they no longer feared electrocution, they dressed as utility workers and opened the bases of the street lights and took the copper wires.

Let's see how this one budget cut affected the city budget.

Remember we have a gap of

$28 million


Turning off every third streetlight saved

$1.24 million

or

4% of the total deficit.

The copper wire that was stolen cost

$5 million to replace.  

For an added cost of

$3.76 million

thus increasing the budget gap to almost

$32 million.

I don't need a master's in accounting to know that $32 million is higher than $28 million.  

But that's just one isolated example, right?  

Let's move up north and look at Montana.

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Taryn Purdy, the principal fiscal analyst at the Montana Legislative Fiscal Division, conducted a study and found that at a certain point the state spends $3 dollars to save $1 in revenue cutbacks.

Time to take a trip to California.  

During that same recession, Gov. Schwarzenegger created furloughs to save cash quickly.  But Nancy Vogel, principal consultant for California’s Senate Office of Oversight and Outcomes, said that it either didn't create actual savings or ended up costing the state more.

One example is that they had to spend a lot of money to hire more employees and pay overtime to process all the unemployment insurance claims of state employees that lost their job because of the furlough.  

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Now on to one of my favorite places on earth.  The pretty, great state of Utah.  


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In response to the recession, the State of Utah cut the 
Alcoholic Beverage Control Agency's budget by 2%.  They did it by closing 1 of their 44 state liquor stores.  

But here's the problem, state liquor stores actually make money in Utah.  It cut a revenue-generating enterprise.  

Then a couple years later in 2011, the State decided to cut the same agency's budget by 7% which would have closed 9 stores.

The citizens got together and fought the budget cut.  Who do you think they were?  These guys?


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Nope, it was people who would never step foot inside a state liquor store.


Note: I have no evidence that this particular family fought the budget cut.  Source

Why would Mormons be upset that liquor can't be sold in the State of Utah?


Because 10% of all liquor sales go to the school lunch program.

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  • What if your city decided to cut standard cost of living raises to the city employees?  They will want to leave and work for other cities who pay competitively.  Your city would then have to pay more to hire and train new employees who don't have the same knowledge base.  
  • What if your city decided not to buy new cars for your police department but get older ones?  Those cars will most likely break down more often requiring costly repairs.  Plus, do you really want your cop in an old car if he needs to chase someone down?  
  • What if your city decided to cut a training program of its employees because they had to travel to another town or state?  This could result in costly mistakes made and lawsuits due to the lack of up-to-date knowledge in their industry.  
  • What if your city decided to cut the public works budget resulting in a loss of staff?  The pipes and number of homes would stay the same, but the ability to fix a water main break would be slower resulting in costly damage.  
  • What if your city decided to switch to a volunteer fire department to save money?  The response time would be slower meaning fires would cause more costly damage and possible loss of life.  

Are you catching the vision of why government budget cuts are complicated and we can't afford to be intellectually lazy?

So should we elect more representatives like my husband with a background in business accounting to manage our city budget? 

Let me ask you this:


Would you want an orthopedic foot surgeon to perform your brain surgery?  

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They both went to medical school, they both know how to prep and use a scalpel, so why not?  


Because they have different specialties.  


I'm not saying a certain Englishman wouldn't be a good city council member, I'm just saying it's not because he has a background in financial and managerial accounting specializing in SaaS revenue recognition, corporate financial budgeting, and cash flow management of small start-up tech companies.  

He doesn't even do our own taxes.  Why?  Because he's not a tax accountant.  

Instead we look to our municipal finance directors and city budget analysts to recommend budget cuts to our city councils.  That way we actually save money and keep those copper thieves away.  

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To learn more about government accountants, what they do, and who they answer to, click here.  

To read more about what Colorado Springs and other states did to cut their budget during the recession, read these articles: