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Municipal finance officers have a critical role to perform in productivity analysis. The
cost of a service or activity is inextrieably part of any productivity study. The finance ( or
budget ) officer often has the responsibility of coasting-out existing service provisions and
estimating alternative service service options. In those cases where the total cost of a
particular service is diffivult to determine. The finance officer is required to make
assumptions about both cost behavior and forecasts of future fund flows.
The finance officers role in productivity analyses raises at least tow questions. Does a
finance officer have a special professional responbility in doing productivity-related financial
analyses? Are there profesional standards which might provide guidance to finance officers in
conducring productivity analyses? They essay answer each question. Support for the answer
is provided by an examination of the diselosure responsibilities of public finance in doing
productivity analyses.
A public finance professional is a person responsible for developing budgets and
maintaining the integrity and accuracy of public funds in their receipt, recording, and
reporting. Professional responsibility of finance officers can be demonstrated through a
review of applicable professional accounting criteria. This paper reviews the accounting
professions qualitative disclosure standards as a model for assessing a productivity financial
analysis used in a case study. Since the context at issue is productivity analysis, a case study
is presented of a common productivity enhancement effortcontracting out of solid waste
collection services. The results illustrate the fit between professional disclosure standards and
productivity analysis.
Professionalism
An efficient and effective public service depends to a great degree on responsible,
professional public officers. Responsibility relates, in part, to a set of standards, or codes of
behavior, to guide professional actions. Peer group acceptance flows from acceptance of
these behavioral decision-rules while peer group sanctions result from non-compliance. As
such, codes of behavior constitute one attribute of a profession.
A professionals reputation is determined by the nature of relationships achieved between
the professional and his or her client. The application of inaccurate or poorly conceived
advice subjects the professional to the risk of malpractice or peer group sanction.
A professional has responsibility not only to a client but also to the public. Are
professionals merely hired guns? Does confidentiality dictate that client or employer desires
overshadow a responsibility to report to the public? In her new book, Secrets, Sissela Bok
confronts this issue. Bok notes that while the prevailing ethic is confidentiality on behalf of
the client, formal codes of ethics are more insistent that the professional has a responsibility
to the public. On the same point, a proposed Certified Governmental Accountant profession
calls for a professional code of ethics which would increase the confidence of society in
government and its participants.
Professionals cannot explain away responsibility by relying on the problem of many
hands. As presented by Thompson, the problem of many hands arises through the actions
of many different people whose individual contributions may not be identified at all, and
certainly cannot be distinguished significantly from other peoples contributions. Rather
than collective responsibility, professionals face personal responsibility for their actions. This
is a problem in the public sector where political demands can conflict with professional
norms. Dennis F. Thompson illustrates the point by reviewing the fiscal crisis of New York
City. The mayor, at the time, Abraham Beame, had tried to use the problem of many hands
to explain past fiscal actions, but as Thompson points out, the Mayors past positions in the
city had included serving as controller and budget director.
Uncertainty Absorption
Decisions rendered under conditions of doubt are susceptible to error and mistake. Using
inference rather than evidence to guide decisions leads to uncertainty absorption.
According to James G. March and Herbert A. Simon uncertainty absorption applies
when inferences are drawn from a body of evidence and the inferences, instead of the
evidence itself, are then communicated. As data are taken from a data base (e.g., accounting
ledgers) and used in a financial report (e.g., a financial analysis supporting the desire to
contract-out refuse collection services) accuracy can be diminished and uncertainty can be
absorbed by inferences. March and Simon summarize the point:
... (T)he recipient must, by and large, repose his confidence in the editing process that has
taken place, and, if he accepts the communication at all, accept it pretty much as it stands.
To the extent that he can interpret it, his interpretation must be based primarily on his
confidence in the source and his knowledge of the biases to which the source is subject,
rather than on a direct examination of the evidence.
Uncertainty absorption involves a power relationship. The person summarizing the data
occupies a position of influence especially if the assertions are accepted as premises of
decisions.7 In other contexts, this is referred to as the power of agenda-setting, that is,
controlling information plays a basic role in structuring the agenda of decision making.
The power relationship is exacerbated when the language used is not common to all, as is
the case when non-professionals do not understand the professionals technical language. For
example, finance officers utilize a technical vocabulary of funds, transfers, depreciation, etc.
The language barrier does little to limit uncertainty absorption.
Case Study:
Productivity Proposal
In the case study, a metropolitan central city proposed to convert residential refuse collection
services from public collection to private, contracted-out collection. The avowed purpose of
the city administrations proposal was to achieve certain cost savings while maintaining or
improving productivity.
All city wards received residential refuse collection services by city crews until 1978. In
November 1977, a private refuse collection firm was awarded a contract to serve
approximately 15,200 households (essentially two city wards of white, middle and upperincome households). City crews provided refuse collection services to the remaining city
wards. Both the city and the private contractor were to pick up refuse once a week per
household. The private firm received a five-year contract (January 1978 to December 1982)
to provide residential collection services for a contracted price per household.
As the citys fiscal condition tightened in 1980, one response was the Mayors convening
of a financial advisory committee. The committee, composed of prominent business and civic
leaders, made several recommendations in a December 1980 report.
One recommendation encouraged the city to investigate an expansion of its use of private
firms in areas where they can provide services at a lower cost than the city can provide
them. The committee also recommended the city retain a portion of these services in order
to maintain the citys delivery capacity and to avoid a private sector monopoly.
The city administration took action on the recommendation. By the end of the first quarter
of 1981, a cost analysis had been prepared on the estimated cost of city refuse collection
services. Table 17.1 provides an itemized listing of the cost calculations. The cost of
providing city refuse collection services to 80 percent of the city in the first quarter of 1981
was calculated at $632,912. Based upon providing city services to 46,946 customers, the cost
during the 13-week quarter was calculated at $1.037 per house per week.
To determine yearly costs, the first quarter figures were revised to reflect assumptions
about future cost behavior. The finance department estimated that the remaining threequarters of 1981 would cost the city $1,999,600, or $1.10 per household per week. As shown
in Table 17.2, two assumptions were employed, namely an 8 percent salary increase and a 20
percent increase in vehicle operating costs.
Combining the first quarters estimated actual costs with the forecasted figures for the last
three quarters resulted in a yearly city collection cost of $2,632,512. Since city refuse
collection was supplemented with an existing private collection service for two wards
($692,640 for 12,000 customers), residential refuse collection costs (public and private) in the
city were projected at $3,325,152 in 1981.
The finance department then compared city costs to contract prices. The comparisons,
also in Table 17.2, show cost savings for three options: 20 percent contracted services (the
current figure); 50 percent contracted; and, 100 percent contracted residential collection
service. The saving to the city for 1981 by having 50 percent of the residential refuse
collection per-formed by city crews was estimated to be $149,407; for totally contracted
services, the 1981 saving was estimated to be $417,620. Cost savings in 1982 and thereafter
also were calculated to be substantial, as indicated in Table 17.2.
Bids were accepted from four private hauling firms. Table 17.3 indicates the bid price per
household. The bid labeled number one is from the private firm with the existing refuse
collection contract (for 20 percent). The price per household bid by this firm was used by the
city in calculating the estimated savings to accrue from contracted services. Either the bid
price was known prior to formal bid solicitation or the private firm had excellent luck or
financial acumen in costing-out its bid.
The Mayors proposal to contract-out residential refuse collection services was not acted
upon by the City Council. Not surprisingly, the affected union contested the figures and the
need for contracted services. Some members of the Council opposed the Mayors proposal. In
the end, the Mayor did not force the issue. Subsequently, the contracting-out proposal arose
during union negotiations and again during a city administration request to the City Council
for higher user charges for residential refuse collection. As of this writing, no further action
has been taken on the contracting-out proposal.
Accounting Disclosure
While this case study might serve as an interesting example in the political realities of
productivity proposals, it is used here only to determine how financial officers can (and do)
practice uncertainty absorption as opposed to the efficient market model of professional
practice.
Disclosure operates to minimize uncertainty absorption. The accounting profession has
addressed the disclosure issue by adopting standards for members to observe in
communicating an organizations financial operations and condition. A well-developed body
of generally accepted accounting principles (GAAP) and generally accepted auditing
standards (GAAS) have evolved to ensure that financial reports fairly and completely
present the entitys financial position and operations.
The adequacy of financial disclosure and reporting is assessed by certain criteria.
Outlined here are the qualitative criteria of financial disclosure as opposed to the specifics of
handling accounting entries (the quantitative characteristics of financial disclosure). Each of
six qualitative criteria of adequate disclosure is first defined. Under each of the criteria, the
above case study is analyzed in terms of how disclosure as practiced fell short on the
respective criteria. Brief illustrative examples are presented to show the potential for using
disclosure criteria in evaluating financial analyses of productivity proposals.
Employees and their union representatives are becoming more interested users of
financial information for contract negotiation and for following the jurisdictions financial
condition. Some unions have experienced fiscal experts on their staffs or under consulting
contracts.
Legislators also need financial information because of their responsibility to the electorate
for allocating public resources for services and activities along public interest guidelines
(however difficult to define and generalize). A periodic flow of financial information is
necessary for legislators to make informed decisions on matters affecting taxes and services.
In applying the criterion of relevance to the case study, the citys contracting-out proposal
gives the appearance that city collection costsespecially pay and benefitswere
uncontrollable. A contrary picture emerges by reviewing relevant sections of the citys past
budgets. For the period in question, the personnel service percentages of the total sanitation
service budget declined (from 53 percent in 1981 to 47 percent in the 1982 budget) while
non-personnel costs increased (from 47 percent to 53 percent). Thus, pay and benefit costs of
refuse collection were not the costs deserving the most attention. Rather, administrative
expenses increased over the period. Despite the need for sufficient cost controls in areas not
affected by any proposed private contracting-out arrangement, attention was focused on
already controlled budget items. Users of the financial analysis were not given such pertinent
facts.
A review of the citys May 1981, cost analysis (see Table 17.1) provides several examples
of material data: (1) inclusion of indirect and overhead costs (e.g., tipping fees) in estimates;
(2) use of assumptions in projecting future costs; (3) existence of unsubstantiated costs; and,
(4) other important items.
1. INDIRECT AND OVERHEAD COSTS. The sanitation services budget did not reflect
overhead or indirect costs. To arrive at the total cost of city-provided refuse collection
services requires a determination of indirect costs. The indirect costs itemized in
Table 17.1 appear quite specific when, in fact, the figures were only estimates..
In addition, the city neglected to show indirect cost determination assumptions.
One principle of contract cost estimating is to include only directand measurable
costs associated with the service to be contracted. Furthermore, each cost item
should eather increase or decrease with the contarct decision. If the cost item
stays the same regardless of the decision, then the particular item should not be
factored into the totalcost of an option.
The case study provided an example of how the contract cost estimate rule was
violated: the inclusion of tipping fees in the financial analysis. The city
misleadingly stated that the city imposed tipping fee would be saved. In fact, a
private firm had no choice but to pay the city fee since a city ordinance
mandated all private waste haulers deposit certain types of refuse in the city
finance Recycle Energy System (RES) which was designed to produce energy out
of burned refuse. This cost was the same whether the city contracted-out the
service or maintained city crews ( since the city would use internal transfers from
the sanitation collection service to rhe RES). Followibg a pre bidconference
between ptensial private bidders and city officials, the city revised big
specifications to exlude tipping fees. Private firms recognized that the city could
later revise the tipping dees and make the firm cover the higher fees out the
fixed contract price.
2.
3.
4.
PROJECTION ASSUMPTIONS. To use one quarter of costs to estimate a yearly cost assumes that the
first quarter of cost to reflection of cost behavior fot the remainder of the year. An analysis of cost for
each quarter ( or month) for the past several years may or may not justify this cost assumption. It is
possible that vebicle expenses, overtime, etc, during the winter months do not mirror the cost of other
quarters of the year, This was not addressed explicitly in the financial analysis
UNSUBSTANTIATED COSTS. Not substantiating eatimates leads to questions, for example, the citys
financial analysis showed transfers to the Motor Equipment unit ( an internal service fund) of $
118,172. The sanitation service unit operated thity four vehicles, most o which were no older than two
years. More disclosure is needed to substantiate the reasons for the cost, whether the cost are the result
of driver misuse (a responsibility of the motor equipment unit), or the equipment ( perhaps a function
associated with the purchasing departments lack of bid specification monitoring)
OTHER IMPORTANT ITEMS. The analysis disregarded other items which might be material. A costbenefit analysis, if conducted, would have indicated that the city would incur certain costs as well as
benefits from contracting-out refuse collection services, many of which are not easy to measure. For
example,the city would incur the loss of flexibility in responding to emergencies or other quick
response situations. In an emergency, the city might need to mobilize all of its employees.
Another material impact is illustrated by the citys liquidity problem, the city
faced a cash flow problem at the time of the contracting-out controversy. The
questionable remedy was to change the wage and salary period to effectively
delay paying employees. The city administration used its management flexibility,
and the interpretatiosn applied, and about the underlying factual information,
then the impact of surprisepleasant or unpleasantwill diminish greatly.
Proposals to contract-out public services can be something other than a desire to
achieve cost economies. Edward H. Weseman, a city manager who wrote a book
on contracting,notes that it is not unheard of for an employee or union,
Financial analyses designed to achieve objectives such as union busting; cinflict
with the criterion on neutrality. While not stated, some close to the contractingout case study believed that the criterion of neutrality was not central to the
administrasion.
CRITERION SIX: COMPARABILITY
The disclosure of information should facilitate comparisons by users. Accoring to
AICPA (c)omparability means to have like things reported alike, and unlike
things reported differently. The degree to which a financial statement fulfills this
criterion depends upon how consistent in nature and format information is from
one time period to another and among entities.
The need for consistency includes the use of a consistent accounting base from
which to draw information. Obviously the more comparable the information, the
more valuable it is and its usefulness increases. Noncomparable information
between entities and between periods significantly reduces its usefulness in
decision making.
The financial analysis prepared for contracting-out refuse collection services did
not provide any comparisons to similar efforts in other jurisdictions. Also not
shown were cost efficiencies likely to result from contracting-out other municipal
activities (e.g.,accounting, billing, legalservices, etc).
Adherence to a comparability criterion requires more analysis than is typically
found in most contracting-out analyses. Disclosure principles sugest that issue
should be addressed in greater detail than has beeb the practice to date.
DISCLOSURE STRATEGIES
How much should be disclosed? It is difficult to provide a clear, empirical
response, yet there are two basic strategies: tactical and systematic disclosure.
Tactical, selective or ad hoc disclosure by finance officers ( or management) can
result in selective use of data. For example, selective disclosure practices may
focus on delaying the dissemination of negative information while quickly using
positive information. Selective disclosure fuels the fire of skepticism abou
management presentations. Several surveys reveal that union leaders, for
example, suspect the veracity of management figures showing little or no money
for economic settlement.
Employing a systematic disclosure strategy also present problems. Does
systematic disclosure merely require the availability of highlighted financial
Conclusions
Since public finance officers serve as gatekeepers of financial records, there should be
professional attention on proper disclosure standards. A professional code of ethics for public
finance officers might provide a general statement with more detailed standards contained in
a set of recognized practice guidelines.
The qualitative criteria used in this paper-relevance, materiality, mean-ingfulness,
reliability, neutrality, and comparability-are part of the general body of knowledge of the
accounting profession. The accounting profession, however, does not require application of
the disclosure criteria for judging interim financial reports, such as a cost analysis of
contracting-out refuse collections services.
At least in the public sector, the benefis of applying disclosure criteria to financial
analysis of contracting-out proposals may outweigh the costs. Avoiding disclosure opens the
financial officer to the charge that he or she is a willing participant in using (and potentially
misusing) data to support only one policy argument while ignoring a potentially more
important positions: what is best for the public interest.