by Robert Selvaggio
When economists thinks of municipal finance, we think of public goods and natural monopolies, cost-benefit analyses and methods of ensuring that the incentives of those serving the municipality are aligned with the best interests of the taxpayers. The Voters Choice Party candidates, Bob Berg, Brice Kirkendall-Rodríguez, Carlos Ramírez and Bob Selvaggio are either themselves economists or think about municipal finance as do economists.
Municipalities provide “public goods” — essential services that are non-excludable (no one can be prevented from consuming them) and non-rivalrous (one person’s consumption does not reduce another person’s enjoyment of the good). The private market will not supply these at sufficient quantities because public goods are not excludable, and “free-riders” can enjoy these without paying for them. Examples of public goods include law enforcement, parks, road construction and maintenance, streetlights, public schools, and public libraries.
Municipalities also provide some services in which they have a “natural monopoly” (meaning they can produce the service for all residents at an average total cost that is lower than would be the cost of provision by several competing entities). Firefighting and trash collection are generally thought to be examples of these. Neither is a “public good” because both are excludable, but both also serve a public purpose.
Of course cities and towns should tax and spend only for public purposes. Public funds must never be used for a private purpose, and the basic test is whether such expenditure is required for the general good of the inhabitants of the city or town. It is generally not the case, for example, that a charitable donation to a non-profit organization such as Scarsdale’s Teen Center, a veterans group or a non-profit sport club would qualify as having a public purpose. Youth groups and sports clubs organized specifically to reduce criminal activity, however, are often thought to have a bona fide public purpose and are sometimes tax-funded.
Scarsdale provides both public goods and services best provided by natural monopoly because the private market on its own will not produce efficient quantities of these. But which public goods should be funded to match the priorities of our citizens, how much of and what quality of each good should be funded, and are the resources allocated to each being used efficiently to provide services? Our bond-financed library renovation and expansion provides a good example of how these questions have been answered in one case – a survey of Scarsdale citizens was conducted to determine village appetite for the project, a decision was made about the extent of renovation and expansion, and presumably plans are in place to assure efficient construction and to protect against cost overruns. We believe that all these questions are best answered by cost-benefit analysis, by which the benefits of each expenditure are weighed against its costs, and funding is allocated to each good or service up to the point were the cost-benefit tradeoff of an additional dollar spent on any one public good or service is equal to that spent on any other good or service. Going back to the library project, let’s suppose the Village pays all costs in excess of the $7.5mm of donations of private philanthropy up to about an expected $10mm– it was important to consider whether each marginal dollar spent on the library could have alternatively been spent on a project adding more benefit to the Village, and that this consideration was formally documented. Of course, cost-benefit analysis and equalization at the margin across all expenditures is not done with mathematical precision in municipal finance but rather up to rough approximations. It requires community input beyond the level of informal surveys, and an accountable and responsive Board.
It is important that personal agendas and perquisites of Village officials do not find their way into municipal budgets, but rather that objective decision-making results in the provision of truly essential services to citizens as efficiently as possible so that their rights to enjoy the hard-earned fruits of their labors in the private market are respected. Here, the Teen Center provides an excellent example of funding determined not by cost-benefit analysis, but rather by the personal preferences of well–meaning politically connected individuals. Little consideration was given to true public purpose, whether existing school-based activities serve the same purpose or whether funds could be better spent elsewhere or better returned to the taxpayer.
Very importantly, to assure the tax-efficient provision of public goods and services, Village Boards must exercise their fiduciary responsibilities by establishing appropriate tension between municipal govenment and department heads seeking additional funds for their areas including additional compensation for their employees. Many municipalities find that their Boards have little to no appetite to force municipal management to stand athwart unreasonable requests for operating funds and increases in staff compensation (or to remediate staff underperformance) preferring to walk the path of least resistance and enjoy the approbation of municipal employees. This leads inevitably to spiraling tax increases and poor performance of Village government. There have been suggestions that Scarsdale Village management needs the strong support of the Village Board in order to hold the line in compensation negotiations, conduct performance reviews of staff, and make tough human resource decisions. The Voters Choice Party candidates all have experience in these areas and believe it is of utmost importance that we work to establish healthy and appropriate non-adversarial tensions in order to hold the line on costs where possible and to hire and retain only the best talent. We will help the Village Manager clean up and remediate the Assessor’s Office, for example.
The voting booth assures that Village Boards remain accountable for performing their fiduciary duties, e.g., that they fund public goods and services that have a true public purpose, that they encourage appropriate tension with department heads seeking additional operating budgets and higher employee compensation, and that they conduct fair and ethical competitive contracting processes. Village Trustees are agents of the taxpayers, and competitive voting keeps them from advancing their own personal agendas or the agendas of a particular entrenched party at the expense of the public. Our belief in competitive elections is a good part of why the Voters Choice Party mounting its campaign.
A number of innovative municipal Boards are adopting new budgeting techniques that encourage active cost-benefit analyses with each new annual budget.
The traditional incremental form of budgeting simply alters allocations to the previous year’s spending based on changes in circumstances or results of negotiations. This approach often allows programs such as the Teen Center to become entrenched and persist over numerous budget cycles without objective cost-benefit evaluation. It also tends to encourage a “use it or lose it” mentality – e.g., department heads know that if they do not spend their entire budgeted allocation, then that allocation will likely be reduced in the next budget cycle.
We think there’s a better way.
A zero-based form of budgeting guided by the principal that resources should be allocated based on a determination of where they are used most effectively starts with a zero allocation for all expenditures (except those mandated by the state government). Anticipated tax receipts are then allocated from the ground up among departments with levels of thought and care that are not generally associated with incremental budgeting – every proposed expense is scrutinized line-by-line on a cost-benefit basis. In principle, zero-based budgeting (ZBB) eliminates the “use it or lose it” mentality and leads to more efficient use of tax revenues (for example by identifying and eliminating ineffective and unnecessary entrenched programs) and thus cost savings. Pure ZBB, however, is complicated and requires a large and costly investment in time. Most municipalities adopting ZBB make cost-benefit concessions in order to reap many of its benefits without incurring its full costs. Some allocate initially 50% to 75% of the previous year’s budget to each department (excluding state mandates) while requiring line-item ZBB for additional funding, some implement ZBB as a review every few years rather than on an annual basis, and some rotate ZBB through different departments over a 3 or 4 year cycle. The Voter Choice Party candidates will introduce elements of ZBB to Scarsdale Village budgeting.
We have examined the importance of: competitive elections; accountable and responsive Boards with incentives aligned with those of the taxpayers; an ability to discern among services which do an do not serve a public purpose; an understanding of the importance of cost-benefit analysis and the budgeting methodologies that are most consistent with cost-benefit decision making. These are among the necessary conditions for sound municipal finance, and those that Bob Berg, Brice Brice Kirkendall-Rodríguez, Carlos Ramírez and Bob Selvaggio see as first guiding principles.
Robert Selvaggio is an economist and co-owner of Rutter Associates. His firm and he provide advisory services in the areas of market risk management, credit risk and credit portfolio management including analysis of CLOs and other structured products, economic capital and risk adjusted performance measurement, valuation and model review of exotic derivatives and hard-to-value assets and liabilities, and litigation support.