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Can Budget Cuts Increase Waste Fraud and Abuse?

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Shelley Fulla
November 4, 2014

As a whole, local governments have been hit hard by the Great Recession. According to the National League of Cities and their annual City Fiscal Conditions survey, between 2009 and 2013 city finance officers annually reported decreasing the size of their municipal workforce. They also indicated that revenue and spending trends pointed to a continued weak fiscal recovery.

One of the main strategies that governments have employed to address the financial crisis has been spending cuts. Some were targeted and others were across the board. Many of these cuts were necessary to avoid insolvency. However, to what degree have these cuts negatively impacted government operations?

A recent study by the Center for American Progress looks into this issue at four federal departments. They find that across the board spending cuts can actually increase waste, fraud and abuse. This is not to be alarmist – rather to argue for targeted and meaningful spending cuts.

Fulla oct2The study looks at four distinct sectors of the federal budget where spending cuts have increased deficits: the IRS, inspectors general, program integrity for major health care and disability programs and support agencies to the legislative branch. In total, the article found that the collective budget cuts of $6.3 billion that these sectors incurred FY11-14 resulted in $27.2 billion in increased waste, fraud and abuse. This represents an interesting proposition when considering the effects of cuts on local governments.

While the study focuses on Federal departments – there are a number of meaningful interpretations for municipalities. Below I provide some municipal parallels to the study. These parallels are meant to be thought provoking and not necessarily an example of a similarly sized impact at the municipal level:

Federal Example: The study found that cuts that decreased staff dedicated to ensuring the integrity of government services (e.g., inspectors general) substantially increased waste, fraud and abuse. Utilizing their conservative return on investment, the Center found that the budget cuts experienced by the inspectors general prevented inspectors from finding $1.6 billion in savings throughout the federal government from FY11-14. This was the more conservative estimate provided by the study.

Municipal Parallel: Staff reductions have been substantial and often across the board. In a number of organizations that I have worked with, department heads have been told to decrease budgets and/or staff by 3 percent or eliminate all vacant positions. Such a broad brush approach to spending cuts can be extremely dangerous. A position might be eliminated just because it was vacant, without considering the effects to operations.

The impact has been significant to some as many organizations are grappling with internal controls. For example, one organization has been struggling to meet three-way matching guidelines because there aren’t enough people in administration to support separate staff from ordering, receiving and releasing payment. Another organization, similar to the inspectors general example, found a reduction in staff dedicated to investigating complaints of fraud and abuse. While still successful, the number of complaints investigated decreased by 20 percent.

Municipal Parallel: One of the strategies that municipalities have taken to reduce administrative overhead is the decentralization of activities such as purchasing. This approach has allowed for a lighter staffing in a procurement office, where staff are dedicated to training and risk management.

However, with such a shifting of responsibilities to non-technical staff, there can be difficulties in meeting procurement standards which can lead to disallowed costs. One agency found that this approach actually had a substantial effect on its solvency when they found one grant program audited by the awarding federal agency. As a result, the municipality had more than $2 million in disallowed purchases that they were required to pay back.

Federal Example: The study found that budget reductions have actually increased deficits at the IRS. Simply put, there is not enough staff available to maximize collections. According to the study, “the IRS estimates that every dollar of its overall budget yields $4 in additional tax revenue.” Budget reductions have left staff at the IRS working to keep up with deadlines, investigations and bridging the tax gap.

Municipal Parallel: One large municipality had a number of staff eliminated in revenue collections positions. The thought was that with the advent of e-payments, there should be less demand upon live collections agents. What the decision didn’t take into consideration was with the downsizing of these positions, who would take on the responsibility of aging. While initial attempts to reduce staffing were logically tied to where there were staffing reduction opportunities, there was no follow through on reallocating duties to other staff. As a result, collections decreased by approximately 12 percent.

For decades, the mantra of local government has been to “do more with less,” which has led many counties and municipalities to limit or reduce spending in their operating budgets. Local governments continue to face serious fiscal challenges that will require hard choices and not all options are appropriate for all communities. The study by the Center for American Progress highlights that budget reductions for the sake of budget reductions are not always the most efficient route to good government. In order to mitigate some of these risks the following steps can be taken:

  • Avoid across the board cuts – while they may achieve parity in terms of cuts across the organization, there are likely some areas that will yield decreased productivity which can have substantial effects to the bottom line.
  • When looking at staff reductions consider assessing which positions are mission critical versus vacant – this may help to focus reductions on those positions that least support the mission of the agency.
  • If reductions are necessary, develop a plan for what, if any, work previously completed by that job title will be reallocated to other staff. Developing a clear line of expectations is important for those left to support the mission of the organization.

Author: Shelley Fulla is a Senior Manager with Baker Tilly Virchow Krause, LLP and works with agencies around the country addressing issues related to performance and operational efficiency. She is a certified Strategic Workforce Planner and published in the areas of organizational effectiveness and technology, and can be reached at [email protected].

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The American Society for Public Administration is the largest and most prominent professional association for public administration. It is dedicated to advancing the art, science, teaching and practice of public and non-profit administration.

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