MRSC has joined with Tracey Dunlap, Director of Finance & Administration at the City of Kirkland, Mike Bailey, Finance Director, City of Redmond, Glenn Olson, Deputy County Administrator, Clark County, and Angie Sanchez, Principal, FCS GROUP, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*
Regionalizing Local Government Services
By Glenn Olson, Deputy County Administrator, Clark County
Governments often assume they will realize savings by regionalizing services. In Clark County we thought we should test that hypothesis. We made the study of regionalization an important part of the county's reconfiguration project (documented in past Finance Advisor articles). What we found was the relationship between regionalization and cost savings is complex.
First we conducted a literature review of regionalization and consolidation projects around the nation. The overarching message was that regionalization and consolidation are not the same, and that success in either was not uniform across projects, or among project partners. For example, it turns out that the financial benefits of regionalization favor the smaller partner(s).
In one study, small cities teaming up for regional services with their respective counties gained eight dollars in benefit for every dollar they spent, but their partner counties gained only $1.80 for each dollar spent. Additionally, the 8 to 1 ratio for smaller jurisdiction applies to a relatively large portion of its budget, but the far more modest 1.80 to 1 ratio applies to a relatively small part of the larger jurisdiction's budget.
The reason for this disparity is small jurisdictions often only pay for the incremental cost of an item or service they share. They are not assessed "fully loaded" costs, and typically that is their expectation. Larger jurisdictions, on the other hand, usually already have the item or service being shared, or could afford it on their own. They are simply trying to recover some of their costs in exchange for better government.
Another interesting finding was that regionalizations and consolidations are very different. Regionalizations occur when two or more jurisdictions share the cost for a service or item. Consolidations occur when jurisdictions combine their employees and their inventory into a single entity. Consolidations are typically more costly than just leaving things as they were (although there still may be good reasons for them). The reason is all the labor costs in a consolidation tend toward those of the highest-paying entity being consolidated, and the "overhead" savings from shedding management and administrative staff are seldom realized.
Notwithstanding these kinds of limitations, it is clear regionalization can provide better services, at a better overall price to citizens. Regionalization can successfully:
- Lower costs and increased efficiencies
- Increase purchasing power, allowing for higher-end acquisitions
- Make professional staff from larger jurisdictions available for technical assistance
- Improve access to State and Federal grants
- Increase citizen satisfaction
The key to regionalization is to understand what you do not want to do. There are plenty of ideas for regionalization that, prima facie, are wonderful. The trick is to triage these and pick the ones that really will work for you and your organization.
To that end we assembled a template; a checklist of things an organization should address in advance of regionalizing a service:
1. What is the department or service that is being regionalized?
Certain functions are far more amenable to regionalization than others. Overall, if the service being regionalized involves the acquisition and maintenance of institutional knowledge, don't do it. For example, information application services (maintaining computer programs) is intimate; it involves understanding the core business processes in a jurisdiction, a bit of institutional knowledge most jurisdictions cannot part with. Regionalizing information infrastructure (servers, networks), on the other hand, often works well.
Services that do work for regionalization are costly, specialized services, or services involving costly, specialized equipment: GIS; SWAT teams; road maintenance or construction equipment; airplanes and helicopters; communication networks and information storage, to name a few, all of which point to the next item on the list.
2. What is the nature of the regionalization?
If it is A or B, you probably are on safe ground. If it is C, see the results of question number 1. If it is D, be very careful. Operations are intimate and almost always involve the acquisition and maintenance of institutional knowledge.
3. Who are the regionalization partners?
Are the regionalization partners a small city and its county? Or two, similarly-sized cities? Is the larger partner or the smaller partner providing the service? These differences matter. Subordinate entities providing services to superordinate entities usually do not work; even peer-to-peer regionalizations tend not to work. In order for them to work there must be a substantial and sustainable financial benefit.
On the other hand, states regionalizing services with counties, or counties regionalizing services with cities usually do work well. The reason for this is superordinate entities have a vested interest in their subordinate entities succeeding: states need their counties to succeed (especially in Washington, where counties are virtually an arm - the implementing arm - of state government). Similarly, counties prosper when their cities prosper. On the other hand, a large city realizes no particular gain by helping another, smaller city, yet it is subject to the same disparity in benefits ($1.80 vs. $8.00) that a county or a state would be. This is exacerbated in peer-to-peer regionalizations, and becomes unworkable in regionalizations where a smaller entity is providing a service for a larger one.
If you can get through the first three items on this checklist, then the rest of the list is simply a recipe. You need only ensure that you have all your ingredients:
- Do you have a track record for these partners with respect to regionalization efforts?
- Do they all support the regionalization proposal?
- Do their employees support the proposal?
- Are the corporate cultures compatible?
- What type of regionalization is being proposed?
- Consolidation: two or more organizations combined into a single organization
- Collaborative Service Arrangement: jurisdictions trade services or resources to support services
- Contract: one jurisdiction contracts with another for services
- Who is the major investor in this regionalization? (Who fronts the money?)
- What are the documented benefits of this proposal (financial studies, ROI, Cost Benefit, Savings, etc.)
- What are the intangible benefits of this proposal?
- What type of governance is being proposed? How are costs and services "trued up," and how often?
- What are the consequences of not regionalizing this activity?
- What are the drivers for this proposal?
- Legal mandate
- Some other change
- What are the potential risks in adopting this regionalization?
This may seem like overkill, but these questions go pretty fast. Mostly, they give us pause, just to make sure that a proposed regionalization passes the laugh test. If you can honestly answer these questions and still believe it is wise to move ahead, be aware of the likely stumbling blocks. First among these are the people, and the political and turf issues they bring. Few people like change that affects them in any way, so they often will bring any ammunition to the table that they can to submarine a regionalization proposal. Anticipate this and try to cut all those deals before you get to the table.
Related to this is people's fear of loss of control. Real or perceived, loss of control is usually a death knell in public service jobs, so it is wise to be ultra-gentle with people in this area. Also related to this are union and wage issues, which are favored tools for confounding regionalizations.
Software licensing restrictions are a growing problem in regionalizations. We often assume that sharing the very expensive application that one jurisdiction owns is a great money saving idea - and it would be if most software manufacturers had not figured out how to create licensing agreements that preclude those savings.
Have I taken the luster off any plans you may have for an upcoming regionalization proposal? I hope not. Clark County has a long and successful history of regionalizing services. It is only through having tried it so many times that we have learned the lessons about what not to do. Regional efforts are wonderful way to save money and better serve citizens. And, yes, it can be difficult. But then, if it was easy, everyone would do it!
Mike Bailey is currently the Finance Director for the city of Redmond. Previously he worked as Administrator of Finance and Information Services for the city of Renton and as the Director of Finance for the city of Lynnwood. Mr. Bailey also served as president of the Washington Finance
Officers Association and is the Vice Chair of the GFOA Budget
Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey
co-founded the annual Budget and Fiscal Management Workshops held
each summer. Mr. Bailey conducts numerous workshops and has authored
various articles on local government finance, including Effective
Budgeting in Washington State Cities published by the Association of
Tracey Dunlap, P.E. is the Director of Finance & Administration at the City of Kirkland. Prior to joining Kirkland in 2006, she was a principal and shareholder in FCS Group, a regional financial and management consulting firm (14 years). An industrial engineer registered in the state of Washington, she has worked with jurisdictions throughout the Northwest to develop and implement cost recovery and fee strategies, set utility rates, and improve organizational efficiency and effectiveness. Tracey's experience also includes working for a large defense contractor (5 years) and a major financial institution (3 years). She has presented on a wide array of topics for organizations including WFOA, APWA, APA, WABO, and AWC.
Glenn Olson is the Deputy County Administrator for Clark County. He has been in Clark County since 1997, serving in various leadership positions during his tenure there. Previously Mr. Olson served 15 years in the Governors Office of Financial Management overseeing budget forecasts. Mr. Olson chaired the Washington State Public Works Board for Governor Locke. Currently he is the gubernatorial appointee representing local governments on the Select Committee for Pension Policy and on the Law Enforcement Officers and Fire Fighters Plan 2 (LEOFF2) Board, and he is the president of the Washington County Administrators Association.
Angie Sanchez Virnoche is a principal and shareholder at FCS GROUP, a consulting firm specializing in public sector financial, economic and management consulting. Angie has provided financial utility business advisory services to municipalities since 1993 for water, sewer, solid waste, storm water and electric utilities. Her project work includes multi-year financial planning, cost of service studies, conservation based rate design development, capital/infrastructure planning, funding alternatives, cost benefit analysis, and community education and involvement. Angie has presented at numerous conferences and workshops throughout her career on topics related to financial management and rate-setting including WFOA, ERWOW, WAPUD, NWPPA, WOW, AWWA, PWC, WASWD.
*The Articles appearing in the "Finance
Advisor" column represent the opinions of the authors and do not
necessarily reflect those of the Municipal Research and Services Center.