Planet Princeton

Op-Ed: Why the Savings Aren’t There with Consolidation

By Alexi Assmus

It slips easily off the tongue. “You must save a lot of money if you eliminate a mayor, a police chief, an administrator.” It feels right intuitively. But in this case one’s gut feeling is wrong. Let’s do a back-of-the-envelope calculation that requires only arithmetic to get a feeling for the numbers.

Eliminating one administrator saves $206,000 in salary and benefits. To be simple, let’s just spread the savings evenly across all 2000 taxpaying households in the Borough and 5000 in the Township and include the 1000 commercial properties in the two municipalities for a total of 8000 taxpayers. * Divide $206,000 by 8000 and we get about $26. So a taxpaying household would save about $26 a year if there were one administrator instead of two. Now we have to be a bit careful because an administrator of a town that has double the number of employees will ask for more salary since it is a job with more responsibilities. Let’s say she asks for 20% more salary. We wouldn’t do that calculation here, but that would shave off $5 from our $26 savings. So we’d only save $21 per household by eliminating an administrator position. Now chief of police makes a bit more and let’s also include the engineer in our calculations. Her salary and benefits at $177,000 are a bit less, so to be simple we’ll just multiply the $21 savings by 3. What do we get? Eliminating the three high-level administrative positions saves each household $63 a year. Something, but not what everyone thinks when they say, “Wow you’d really save a lot of money if you could eliminate an administrator, a police chief, and an engineer.”

And remember, if you double the size of an organization you need to at least double the size of management, if not more since a group of managers needs a manager to manage them (rule of thumb is 4-6 reports per manager). They don’t have any VPs at Small World, but they do at Starbucks. So you can eliminate a chief of police, but you’ll still need well-compensated senior management below her to handle a police department twice as large. Realistically you’ll replace the chief with another well-compensated position.

Other well-compensated positions? Well a clerk makes about $100,000 in salary and benefits. So a clerk costs us about $13 a year per household. It may well be that if we have a government twice the size we can’t really eliminate a clerk’s position. We might need to have two clerks or a deputy clerk. A police officer with several years service costs about $100,000 too. So it costs a household about $13 per year to have a police officer on the streets. There, we’ve got some numbers to keep in your hip pocket when you want to think about the financial benefits of consolidation.

Now what about the mayor? Well the mayor only makes about $10,000 a year. Divide that by 7000 households and we are only paying $1.25 a year per household to have two mayors in our community. Not much, eh?

We wouldn’t cut down on overhead by doubling the size of our government organization. Quite the contrary. One larger service organization will have more overhead, more middle management and will be less responsive to those it serves than two smaller ones. Economies of scale come in manufacturing and in service industries where there is some benefit to size, like the electrical utilities, telephone, and FedEx. Small can be incredibly efficient, as in the case of small businesses and our municipal government.

* Commercial properties pay more than residential so we are overestimating the costs to homeowners in our calculations. We could do a more complicated calculation and compute the savings to the average homeowner tax bill, but we wouldn’t get a much more meaningful a number. The Commission has estimated tax savings of about $200 a year to the average property tax of $15,000 (if 16.5 positions are eliminated and there are no transition costs), but if your bill is $9,000 a year, the Commission’s estimated savings is only $100. If your tax bill is $60,000 a year, the estimated savings is $800.

Alexi Assmus is a borough resident and member of Preserve Our Historic Borough.

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  • Vance Dagger

    Alexi — your elitism failed in the face of basic fiscal conservation. You didn’t just lose; you lost big.

  • I took my back-of-envelope calculation directly from Commission report and the staff cuts they recommend for the two municipalities— gave an estimate of savings per household for the three highest paid jobs that the Commission eliminated: administrator, Chief of Police, and Engineer.

    Vance take a look at a financial analysis of the Commission’s own Impact Statement (link below).

    http://preserveprincetonborough.wordpress.com/financials/

  • Vance Dagger

    The problem with this thinking is that it assumes that the task-coverage rules that apply to private corporate management also apply to public administration. They don’t. Public administration and business management are different disciplines, which is why universities have that have a school of business may also, and often does, have a school of public administration, as does Rutgers. This author seeks to apply the rules of private business management to public administration, a doomed effort. As between public administration and ordinary, to use the author’s example, coffee sales, the multipliers and orders of magnitude are different. Accounting — particularly public accounting — does not lend itself well to gross oversimplification. This essay gives me nothing to go on in terms of empirical facts — these are admittedly unstudied back of the envelope calculations: it’s a lot of “let’s suppose,” predicated in assumptions that don’t apply.

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