Making New York City More Efficient

New York City's public offices have 8,000 vacant desks, roughly 11% of the workstations in the city government's 19 million square feet of office space. The city has nine separate agencies to handle vehicle maintenance, operating 125 separate maintenance garages, some across the street from each other. Each city agency has its own HR department, with an overall ratio of HR workers to employees 2.5 times higher than is typical in the private sector. Police officers still report their hours worked on an error-prone, paper-based system that involves pairs of officers driving boxes full of paperwork between precincts and One Police Plaza.

These findings and many others are contained in a report from New York's newest Deputy Mayor, Stephen Goldsmith, whom Mayor Michael Bloomberg has tasked with finding efficiency opportunities in the city's operations. Overall, Goldsmith believes that resolving these inefficiencies and others can save the city $500 million over the next four years, all with moves that are close to painless.

Goldsmith, unusually for a Deputy Mayor, is the former elected mayor of Indianapolis. During his mayoralty, Goldsmith pioneered various measures to improve efficiency in government, including the use of competitive bidding where city agencies compete with private contractors to do work for the city. (In the interest of disclosure, Goldsmith has had a longstanding association with my employer, the Manhattan Institute.)

$500 million (or $125 million per year) isn't chump change. And that's probably an underestimate of the available efficiency savings: many wouldn't be implemented until partway through the four-year period, meaning the recurring annual savings would be higher; and some more speculative saving proposals don't have dollar figures attached to them yet.

But, with a city budget of $63 billion, these savings won't go very far toward closing New York City's structural budget gap. Of course, Goldsmith's report does not claim to be a cure-all for New York City's budget woes. But the fact that identifiable efficiency savings are so small compared to the total budget only underscores the need to rein in employee compensation costs.

As with so much in local budgets, New York City's budget woes largely come back to employee compensation. 58% of New York City's budget is spent directly on salaries and wages -- and the effective figure is higher than that, as some non-compensation costs are subsidies to other government agencies that spend the funds on compensation.

The City faces runaway growth in compensation costs, especially health care and pension benefits, but also wages that are growing faster than the private sector norm. Meanwhile, the Wall Street engine that long fueled outsize growth in city tax revenues remains stalled.

Making the city's budget sustainable will involve making some hard choices in addition to easy ones like consolidating the city's human resources apparatus. Fortunately, Goldsmith's report provides some clues about much larger savings that could be available with some legislative changes.

One is the report's call for civil service reform. The now-closing "rubber rooms" of the New York City Department of Education -- where teachers who can't legally be fired but are too incompetent to teach have been sent to draw a paycheck while doing nothing -- are the most egregious example of an unaccountable workforce.

But in general, city departments labor under rules that make it difficult to manage personnel issues. A relaxation would allow the city to be nimbler and save money. (In New Jersey, Governor Chris Christie also wants to relax civil service rules as part of his "Toolkit" to help municipalities save money.)

Goldsmith is also calling for New York City to save with judicious privatizations and public-private partnerships. This was a hallmark of Goldsmith's mayoralty in Indianapolis, which subjected non-core governmental government functions to competitive bidding. If a job could be performed by the private sector, the existing government entity doing it would have to bid and demonstrate it was the most efficient provider available.

Some functions, like printing, ended up being outsourced to private vendors who provided more value at less cost. Others, like road maintenance, saw the bidding won by existing government agencies -- though to win the bids, public employee unions and management had to work together to identify ways to improve efficiency.

Unfortunately, in New York, the deck is often stacked against outsourcing and privatization. State and federal laws make it unworkable, for example, for the Metropolitan Transportation Authority to outsource bus operations in order to cut costs, even though this tactic has been used to great success in London, with private operators bidding to operate routes at the lowest subsidy possible.

Today, the MTA pays transit workers total compensation averaging $94,000 per year, and $120,000 per year for commuter rail workers. Pressured by rising compensation costs and weak tax revenues, the MTA cut dozens of bus lines this summer.

How uncompetitive is the MTA's cost structure? So much so that, when the MTA announced its service cuts (which focused on "unprofitable" bus routes requiring the greatest subsidy per passenger mile) a private bus operator announced that he would take over three of the axed routes with no subsidy at all.

Of course, when he started picking up passengers, the city sued to shut him down. The case is being litigated now.

The MTA is not a City agency, but the hostility to private operation -- driven by public employees who do not want their wages competed down -- keeps costs high across New York government.

Large fiscal savings will necessarily involve cutting compensation costs, either by having fewer employees or by paying them less. Many of Goldsmith's proposals would involve doing exactly that: consolidating HR operations would allow the city to shrink its HR headcount by attrition; consolidating repair shops and outsourcing certain repair work would likely reduce repair staffing.

But only so much saving can come from painless cuts in staffing. Unlike in HR, the city cannot cut police, fire or teacher headcount by half without degrading service quality. Instead of cutting staffing, the focus here must be on cutting compensation costs per employee.

To make the city's budget sustainable, New York needs legislative reforms that open government up to more competition, so agencies are pressured to keep compensation reasonable. The city needs to phase out its unsustainable defined benefit pension system (the city's required payment into the pension funds has grown from $1.4 billion in 2002 to $6.3 billion in 2009, and will approach $10 billion in 2016). And it needs binding arbitration reform so it can get a handle on exploding wage and health benefit costs.

Until then, the City should keep looking for efficiencies -- $500 million, after all, is a lot of money, and it will be hard for reasonable people to object to most of what's in the Goldsmith report. But in addition to these easy choices, many hard choices will also be necessary to make New York City government work for the long term.