NLPES Question of the Month

May-July 2002

HOW, IF AT ALL, DOES YOUR OFFICE REPORT ESTIMATES OF COST SAVINGS THAT HAVE RESULTED FROM YOUR RECOMMENDATIONS?

Bob Thomas, Washington Joint Legislative Audit and Review Committee

At least annually the Washington State Joint Legislative Audit and Review Committee reports quantified savings as a measure of performance. We have reported these savings both cumulatively and for biennial periods. Here is an example of what the cumulative report looks like:

 

Quantified Savings, Potential Savings, and Cost Avoidances

From

JLARC Reports 1990-2002

One-time savings, cost avoidances or efficiency savings

 

 

Annual on-going actual savings or realized cost avoidances

 

 

Annual on-going potential savings or cost avoidance if recommendations were implemented

$368 million

(One-time)

 

$81 million

(Annually)

 

$164 million

(Annually)

 

Note: All dollar amounts are calculated in terms of “present value.”  Estimates are based on low-end or mid-points if ranges are used. In some cases, these assumptions lead to very conservative estimates.

   

 

Uses of cost saving information: Members of JLARC frequently use information about cost-savings in their constituent newsletters. Committee members also use this information when they promote the work of JLARC within the legislature in order to encourage other legislators to be involved in and follow the committee's work. Our office uses information about savings when we publish our Impact Reports for the Legislature.

Potential pitfalls: Savings are only part of the picture, so focusing on them alone would only give a partial picture of what our committee accomplishes. We address this issue by publishing Impact Reports in which we detail the many ways in which our reports are used to effect changes in policy and government operations, many of which cannot be quantified in dollar terms. Our Impact Reports also address how our recommendations lead to better returns or outcomes from the investment of public funds.

Importance of cost savings to the Legislature: A focus on the efficiency and effectiveness of agency operations is specified in JLARC's authorizing legislation. Moreover, many of the study requests and mandates for the committee are in response to current fiscal and policy issues. In recognition of the importance of this focus to the legislature, JLARC's mission statement says "the committee makes recommendations to the legislature and state agencies that should result in cost savings and/or improved performance in state government."

 


Heather Moritz, Colorado

Because legislators are interested in the cost saving potential of recommendations, we strive to identify and quantify cost savings whenever possible. In fact, one of the goals of our office is to ensure that the benefits of our audits exceed the costs of conducting the audits. We report data on this measure each year in our annual report (available on our Web site).

The data we report include: savings identified by audits, our Office's operating costs, and the ratio of savings to costs. To compile this information we review all audit reports as they are being released to identify the recommendations that have cost saving potential. When it is time to put together the annual report, we review these recommendations again to determine which ones have actually been implemented. We use a variety of information to ascertain implementation status, including reviewing follow-up reports and subsequent legislation.

One way that our cost saving recommendations have been used by the Colorado General Assembly is through the budget briefings that are held each year by Joint Budget Committee (JBC). The legislators who serve on the JBC are the key decision-makers in Colorado's budget process. When the JBC staff are preparing these briefings, they routinely review all the audit reports that have been issued on a particular department. Oftentimes, they will identify a recommendation that has cost savings attached to it and they will incorporate this information into their presentation to the members of the JBC, which may eventually result in a change to an agency's budget. Our staff also work actively with JBC staff throughout the legislative session and year-round to keep them abreast of cost saving issues that we are finding in our audits. 


John Turcotte, Florida

Since 1994, OPPAGA has tracked cost savings recommended in our reports. OPPAGA publishes an annual fiscal impact report termed the "Green Sheet." See: http://www.oppaga.state.fl.us/reports/r01-47s.html OPPAGA performance measures include savings recommended and achieved as outcomes. See page 3 of our most recent business plan at http://www.oppaga.state.fl.us/reports/pdf/oppaga_businessplan2001-02.pdf

Since 1994 OPPAGA has recommended $2.5 billion in potential fiscal impact, of which $270 million was implemented by the Legislature and state agencies in 2001. We make determinations of implementation as a part of our statutorily-required 18-month follow up examinations. It is very important to our Legislature for OPPAGA to suggest savings. Saving money is also one reason for Florida's "Sharpening the Pencil" program whereby OPPAGA examines school districts for adherence to best practices. However, our Legislature does not insist that OPPAGA produce savings from every report.

There are numerous pitfalls and risks [to reporting on cost savings]. Because there are no generally accepted definitions for savings, any characterization of fiscal impacts is problematic. Most legislators and the media define "savings" as money that is tangible and spendable by the Legislature or converted by the Legislature into a tax or fee decrease. Timing is a problem because an agency may act to reduce costs as suggested but then immediately reallocate displaced resources during the fiscal year to other activities that the agency perceives are under funded. The agency knows that if it reduces costs as recommended by OPPAGA without reallocating savings internally before the end of the fiscal year, the Legislature and Governor may capture those savings by lowering the agency's succeeding appropriation and redistribute the savings, perhaps to a different program or use the savings to cover revenue shortfalls, to reduce taxes or fees, or to increase the size of the year-end balance. In the meantime, OPPAGA's "Green Sheet" will show the "savings" as "implemented" by the agency. It is a matter of contention whether such same year reallocations are indeed "savings." OPPAGA asserts that they are, yet there are those who disagree. OPPAGA has experienced the "we were already aware" notion about savings recommended by OPPAGA that the agency contends were actually its idea. OPPAGA will not claim a savings under such circumstances unless we have evidence that the savings measures commenced after our project began.

Offsetting general revenues with fee and fine increases is difficult to convey conceptually. Some programs start off totally financed by user fees, then may gradually receive support from general revenue appropriations. OPPAGA has suggested "saving" state general revenue by returning such programs to totally-user fee financing, particularly, for regulatory programs that exist to facilitate commerce or to assure product safety. In the case of fines and penalties, OPPAGA has contended that it is inequitable for general taxpayers to subsidize programs when it is feasible to use fines and penalties instead. The best example is truck weight limit enforcement. OPPAGA reported that fines paid by overweight truck operators did not cover enforcement costs, much less offset the cost of exponentially-increasing pavement damage done by gross violators. We recommended a graduated fine system to replace the nickel per pound overweight penalty that had not been changed since 1953. We also recommended increasing overweight permits to cover program administration and pavement damage.

Savings proposals do not have instant sponsorship. The Legislature is highly specialized and any savings proposal must run the gauntlet of standing committees and subcommittees that work closely with the agencies and stakeholders most resistant to the savings ideas. Furthermore, the Legislature tends to reject ideas that are subject to strong opposition.

Features of a savings proposal that is likely to be implemented:

  • Attracts collaborative sponsorship from the Governor or groups wanting to use the savings to cover a resource shortfall, reduce tax rates, or start a new program;
  • Is of sufficient magnitude to attract support--$1 million in Florida;
  • Saves general revenue because, unlike federal and trust funds, there is no need to contend with third parties when reallocating savings to other purposes;
  • Can be accomplished without changing state law;
  • Has little or no "start up" costs;
  • Does not require the program to hire new employees;
  • Is methodologically sound;
  • Is accompanied by turnkey documentation (draft legislation, appropriation amendments, and fiscal note);
  • Has some basis in experiences of other states or in the private sector;
  • Is perceived as surgical rather than ham-handed. Has very few side effects;
  • Stakeholders have been consulted and their positions recorded and considered.

John Schaff, Utah

Our office requires an effect statement, if possible, for every finding in the report. The effect can be either a dollar savings or some other significant impact upon the public (i.e., public safety). Sometimes the effect can be quantified, other times we have to estimate the effect and on occasions we have no idea what the effect is. Regardless, we always attempt to identify and report the potential effects. Just like all other elements of the audit finding the cost savings or effect needs to be well documented and supported in the working papers.

At the end of each year we conduct a follow-up of each report completed the previous year. The annual report identifies which recommendations have been implemented and the total dollar savings reported for the past year. For audit purposes we classify dollar savings as either one-time or on-going savings. On-going savings are expected to repeat in future years. Although on-going savings re-occur annually, for our reporting purposes they are only counted once (for the year in which they were reported).

On a number of occasions our reported effect statement has been challenged by the executive branch. Some years ago the executive branch hired several independent consultant to validate both the finding and the reported dollar savings for two of our audits. These independent studies concluded that our findings were correct and our cost estimates were conservative. The effect statement is often the most time consuming and difficult part of the finding to complete. However, we have found that when well documented effect statements (cost estimates) are included in a report, both the legislature and the executive branch are far more willing to implement the recommendations.

The credibility of the entire report rides on the provability of all the elements of your findings. If your effect statement is weak and can be shown to be inaccurate, then the rest of the report may be questioned. Consequently, it is important not to over sell your effect and in most instances it may be wise to be conservative.

 


Ken Levine, Texas Sunset Advisory Commission

Each of our Sunset staff reports contains fiscal impact estimates of each recommendation. In addition, the fiscal impact of the entire report is discussed in the report summary. We use the same methodology as the Texas Legislative Budget Board (LBB) uses for fiscal notes during the legislative session. If our staff recommendations are adopted by the Sunset Commission, the recommendations are drafted into legislation and introduced in the next legislative session. Therefore, using the LBB's methodology allows us to provide the fiscal information to the LBB, which often becomes the basis of the fiscal note on a Sunset bill. Also, we are often asked to testify on the fiscal impact of Sunset recommendations before the Legislature's appropriative committees and subject matter committees.

Due to the legislative uses of our cost-savings information, we, of course, strive to be as accurate as possible, given that estimates are an attempt to predict the future. As a result, the Legislature has adopted appropriations bills riders to reflect fiscal impacts of Sunset bills, thus affecting (to a small degree) the bottom line of the state budget.

You can read information about the LBB's fiscal note methodology at: http://www.lbb.state.tx.us/Fiscal_Notes/Documents.htm 


Jane Thesing, South Carolina

We have been reporting for several years on cost savings identified in our audits. This is, of course, different from cost savings implemented as a result of our audits. We plan to start measuring cost savings implemented in FY 02-03 as we carry out our newly adopted audit follow-up process.

We report cost savings identified using a four-year average, to smooth out the ups and downs associated with the cost savings identified in our reports. In some years our audits may not have as many objectives that are directly related to costs as in others.

We measure the cost savings because they are integral outcomes of our work. Also, they can be convincing indicators that we as an agency create funds for state government instead of dissipate them (our overall costs are consistently less than the savings we identify). As to the importance to our legislators of our cost savings, that varies. In times such as these, it may be very important to the General Assembly when there is not enough money to go around. At other times, it may be less important. The importance of our identifying cost savings also varies with individual members of the General Assembly. At any one time we usually are working on projects where finding cost savings is integral as well as projects that are not directly related to cost savings.

We are interested in developing a consistent and appropriate methodology for measuring cost savings implemented. If any NLPES agency has a method that has worked well, we would appreciate knowing about it. Thanks! 


Bryan Beyer, California

Each year, the California Bureau of State Audits identifies potential ways to save the State money. Our audits are designed to look for more efficient and effective approaches for an entity to fulfill its mission. Towards that end, we make recommendations to improve the performance of government entities or programs, which may or may not result in quantifiable savings for taxpayers.

Yet for a variety of reasons, we do not routinely report to the Legislature the total cost-savings identified from our audit reports. One reason is that we do not believe that quantifiable cost-savings alone is always a good measure of the impact of our reports. Audit reports that do not have cost-savings may have just as much positive impact to the State as those that do generate cost-savings. For example, we issued an audit report on Child Care Licensing in August 2000 that did not contain quantifiable cost-savings. However, the recommendations in this report led to new legislation and changes that will positively impact tens-of-thousands of families in California.

In addition, the California Legislature does not require us to report on cost-savings resulting from our audits. However, as a courtesy to the members of the Legislature, we prepare an annual report that summarizes the corrective action taken by our auditees on the major findings and recommendations from our audits and investigative reports. Our latest report, issued in February 2002, entitled "Implementation of State Auditor's Recommendations" covers audits released in 2000 and 2001. These reports are generally read by the Legislative budget committees to determine, for example, the status of a department's implementation of corrective action recommended by us that impacts the department's budget. In fact, these reports are becoming more and more popular with not only Legislative budget committees but also with policy committees.

Although there is no question that cost-savings is important to the State, it is equally important that we not lose sight of other non-quantifiable issues that may provide as much benefit to the State. 


Joel Alter, Minnesota

The enabling statute for our office says that the legislative auditor "shall recommend ways to improve the effectiveness of the programs, reduce the cost of providing state services, and eliminate services of one agency that overlap with or duplicate the services performed by another agency." Interestingly, however, our audit commission (which selects our program evaluation topics) has shown limited interest over the years in topics with cost savings potential. We have made many recommendations in our reports that, in our view, could contribute to cost savings or greater efficiency, but legislators have often selected topics for review largely on the basis of concerns about program implementation and results, rather than potential cost savings.

We have discussed examples of our office's cost savings recommendations in our annual reports and in legislative presentations of our agency's budget. But we have not produced regular reports estimating the total amount of money that our recommendations saved (or would have saved, if implemented). In part, this reflects reluctance on our part to claim responsibility for actions taken by the Legislature or agencies. In addition, we have viewed cost savings as one of many benefits resulting from our reports