A Capital Writing interview with the author of The Municipal Financial Crisis.
A Capital Writing interview with the author of The Municipal Financial Crisis.
As part of a project for Capital Matters, called Capital Writing, I’ll be interviewing authors of economics books for the National Review Institute’s YouTube channel. This time, I talked to Mark Moses about his book, The Municipal Financial Crisis: A Framework for Understanding and Fixing Government Budgeting. Moses has held several financial positions in municipal governments over many years. Below you will find an edited transcript of a few key parts of our conversation as well as the full video of our interview.
Dominic Pino: You’re joining us from out West where you live, and you’ve had a lot of experience out there with various different kinds of municipal governments in different areas. You’ve also had some private-sector experience as well. So could you just give us a little bit of background on your experience that led you to write this book?
Mark Moses: Yeah, well, I came into government with a very different perspective than a lot of people who I interacted with in government. As you mentioned, I came from the private sector: banking, real estate investments, small business consulting. So I had about a decade of that before I set foot into a municipal agency. And I also had an interest in practical economics. I read Henry Hazlitt’s Economics in One Lesson when I was in college. And so I was really just amazed at the lack of basic economic understanding, basic lack of business understanding that cities brought to the table when they made decisions. And even in managing their own finances, how the political environment really blinded them to a lot of basics that a lot of the people knew when they were in other environments, like council members were successful at running businesses.
But when it came down to it, they didn’t really understand how their government organizations operated. And so I saw this, I saw the frustration, I was frustrated, and kind of in the spirit of if you see something, say something, I just thought it’s really important to bring out an inside perspective of how these decisions are made, how what I characterize as “systemic scope creep” emerges and is upheld over time. And that helps explain why the traditional remedies are not working. And I wanted to put out a positive kind of vision of what that would look like, what a solution would look like.
DP: So you talk in the book about the scope question as the difference between talking about how government does things versus what government should actually do. Or you also talk about explaining the purpose of why a local government exists in the first place, why do we have local government, what is it for. And so how would you answer that question?
MM: I think it’s very, I don’t know what the best word is, awkward, that I spent 30 years in and around local government, and nobody talked about this issue. And so the floating mission or the floating, nebulous scope was just an accepted reality of, oh, this is just the way we operate. We don’t pretend to delimit what we do or focus on what we do. We just keep it all open-ended.
And I think we’ve lost sight of what makes government different from a nonprofit or a commercial activity. And, you know, what is government? Government is the local authority empowered with the ability to legislate and enforce laws in a local jurisdiction. And that makes it good at some things, makes it good at defining property rights, protecting property rights at the local level, maybe crafting resolutions or regulations related to noise in certain areas. But it doesn’t make it good at central planning. It doesn’t make it good at commercial activities. It doesn’t make it good at what you might characterize as charitable activities. And I think people really misunderstand the extent of what those powers really are good for and where they stop.
And I kind of get it from the residents’ point of view. They want to get their “money’s worth” out of what they’re paying in taxes. So often they’ll bring problems to City Hall that City Hall is not necessarily good at fixing. But all that really does is propagate the idea that through this government legislative authority and enforcement authority, you can solve all problems, which is a complete misconception of how to best solve these problems when you wind up really monopolizing the activity.
DP: So you mentioned how city budgeting often is designed around just getting to next year, or it’s designed around meeting existing commitments and just kind of keeping that going and not really considering why they’re there in the first place. One of the issues that you raise in the book in this area is the question of revenue, which you might think would be a really central concern in the budgeting process. If you have any kind of an organization, you want to know where money’s coming from. You want to know how it’s getting there, and if it’s coming in below, you want to figure out why, and if it’s coming in above, you want to figure out why. But you make the argument in the book that a lot of these cities have revenue coming in for historical reasons that don’t really have anything to do with day-to-day operations, and a lot of times, cities are just kind of winging it.
MM: Exactly. And that’s why running a government is not a business. Running government is not like running a business. You’ve got cities, municipalities that seem to be resource-rich because they happen to have a major industry in town or a university in town that just helps support them revenue-wise. The fact that they’re not insolvent doesn’t mean they’re well managed. It really is sometimes an accident of geography. And then you’ve got some cities that are revenue-starved just because of the formulaic way that revenues are often applied. So you can’t look at revenues as any real measure of a market or measure of really anything other than just a historical accident.
When a budget manager sits down to prepare a budget, the revenues are just taken as a given. And it creates the perspective that anything the organization does, if just marginally, if five people are satisfied in an activity — doesn’t matter what it costs — that that’s success. Because the perspective isn’t that, oh, wait a minute, we’re extracting economic resources out of the local economy, whether from residents or from businesses. And so the perspective that anything we do that is positive to somebody is somehow successful is just part of what sustains the mode of scarcity, the mode of always scrambling to prioritize, because there’s only so much you can suck out of the local economy before you create other problems.
Part of what I try to establish or communicate in the book is that avoiding insolvency itself is not a sign of financial success. When you have serial tax increases, when you have degradation of services, when you have deferred maintenance as just techniques of balancing the budget, then that is a financial failure. That is an organizational failure.
And just to cap off the point, this is why I think alienation grows between the residents and business owners and the cities because think about what happens: If the city goal is to maximize services, and to do that it has to extract from the local economy, then the residents and business owners become the means to the ends of the government organization. So you get a complete flip in terms of who exists for whose sake. And I think that explains a lot of the alienation and a lot of the frustration. But even when you have a small city and it’s a representative form of government, it doesn’t take long before the council members get in this mindset of, we’re here to maximize services. And all of a sudden they start viewing their fellow residents and business owners as a means to their ends.
DP: You describe the budget process as a “ritual.” You say that this is something that cities do every year and it’s almost treated as though completing the process is itself a success, even if the actual result of it ends up being something it’s not very sensible, and that a lot of it is focused on politics and not on good financial sense. You propose an alternative way of doing budgeting. But first, let’s talk about some other ways that have been proposed, which you also talked about in the book. One of them is zero-base budgeting, which is something that gets thrown around at the federal level a lot. The idea of starting the budget every year at zero and deliberately trying to justify each part of spending. You point to that as an example of that sounds good in theory, but doesn’t work very well in practice, right?
MM: That’s right. It sounds good because it provides this image that you’re really going through and scrubbing through everything, analyzing everything. And so to that extent, it sounds like a rigorous process. If you don’t dig too deep into it or look at, what does that really mean for a government organization.
But as a local government, when you begin to implement something like that, you find, okay, the budget manager — who, by the way, doesn’t have a whole lot of authority in terms of deciding what really goes in. And so by the time they sit down to prepare a budget for the upcoming year, look how much is already in place. I characterize it as: They’re just accounting for commitments that have already been made. Your largest expenses are your labor expenses, and those are already in place. It’s already too late to change those, because those are typically multi-year contracts that not only define how much you compensate employees, but there’s a lot in those agreements that affect the way service is provided, whether it’s the schedules of the employees or the way work gets done. That’s all codified into these agreements. So before you even, before your seat even gets warm from sitting down, you’ve got 80 percent of your budget already spent.
Then you’ve got some perhaps politically sensitive issues, where it’s some money, but not a lot of money, and so no one really wants to go there. Do we continue to subsidize the local golf course or something? And so this is where it’s not truly zero-base because truly zero-base says you analyze everything with rigor. Everything’s on the table. But of course, the golf course isn’t on the table, even if it’s a small constituency that it satisfies. It’s usually justified as, well, it’s not a whole lot of money, we’ll just roll that over another year. That’s how these things sustain themselves over years. So by the time you get to the end, you’re lucky if you still have anything left over on the margins to program in terms of something new or different.
And, and then more often these days you find a squeeze where, oh wait, we’re, we’re at 102 percent spent. And so now we’ve got to scramble and figure out how to adapt. But it’s not really adapt in a way of questioning the scope of activity. It’s how do we shave off on the margins so that we can “balance the budget,” which is really just a mathematical balancing. It says nothing about deferred maintenance and how much should have been spent on some things where there was responsibility taken or how sustainable it is.
DP: Let’s talk about balanced budget because that’s another thing that you talk about in the book as something that sounds good in theory but in practice doesn’t always mean what it seems like it means. In one sense, cities have to have balanced budgets in the sense that we talk about it oftentimes with federal spending because the federal government can deficit spend in a way that cities can’t. So there’s that kind of difference constitutionally. But just because a budget is balanced on paper doesn’t mean it’s actually responsible and doesn’t mean it’s actually funding the obligations that need to get funded.
MM: That’s exactly right, because I always wonder what’s not in that budget but should be. Mainly that category is infrastructure maintenance or equipment replacement or vehicle replacement. But the cities, even though they can’t print money like at the federal level, they have their own way of deficit spending, and part of that is through deferred maintenance. The other part is what we’ve seen with the funding of personnel retiree obligations, where everything is not being funded in real time. Costs are being really shifted out to the next generation of taxpayers and ratepayers. And so there is a way through deferring maintenance, pushing activities out, sometimes borrowing. In fact, borrowing is a good example in that sometimes cities will use their entire borrowing capacity to address one infrastructure issue and leave no borrowing capacity for any other capital-replacement items. So all of these techniques can be done in the context of, well, we approved a balanced budget as an outcome, but underlying it are ticking time bombs related to deferred maintenance or obligations that will are not going to be paid until down the road.
DP: And so your alternative is what you call “budgeting for scope.” So what’s that?
MM: Well, “budgeting for scope” means taking the perspective that activities drive costs. That, first of all, that none of this is a mystery. There’s a cause-and-effect relationship here. Activities drive costs. A dictate to just control spending misses the real cause of spending. The cause of spending is the scope of activity that the organization takes on that creates those activities that generate costs. And so I’m suggesting or recommending that cities really think about what they do. What is truly a governmental activity? What is really the kind of activity that is justified by the exercise of legislative authority and enforcement authority? And where have you crowded out commercial activities or nonprofit charitable activities that you’re not even very good at.
I mean, my best example probably right now is when I think about recreation services. In most of the cities I’ve seen, their general fund will subsidize those to the tune of about 35 or 40 percent, and I think it’s probably higher than that if you factor in all of the costs. And so from a distance, it sounds like they’re subsidizing recreation. Well, that must be making it more accessible or less expensive to the residents. But no, you’re running recreation in a bureaucracy that’s not really designed for those types of services.
Again, it’s a legislative and enforcement body that’s subject to public-records requests, it’s subject to public meetings — all for good reason, when you’re conducting legislative and enforcement authority. But that hampers a recreation director who’s trying to provide recreation services. I used to go head-to-head with a recreation director who couldn’t understand all of our hiring rules. But the hiring rules were all oriented toward a public agency and weren’t really conducive to a lot of the issues that come up when you’re running a recreation activity. She didn’t understand why she had to go out to bid for uniforms for the recreation activities.
And so what it comes down to is the reason you need that 40 percent or more subsidy isn’t to make this more accessible or available to the residents. It’s to compensate for the fact that you’re providing recreation services through a bureaucratic organization that has all these rules to comply with. When nonprofits do it, you don’t make the size of your pool a political controversy because that’s something a nonprofit can work out. But I’ve seen it where, in one city where they’re paralyzed when it comes to renovating and doing the required maintenance on their pool because they can’t decide whether the pool should be Olympic sized or some other size. And so those are the kind of issues that come up when you go outside of what a local legislative authority with enforcement powers can realistically do.