The Secret to Cutting Government Waste: Savings by a Thousand Cuts

In 1991, Texas faced a whopping $4.6 billion budget deficit. The legislature asked state Comptroller John Sharp to review the budget to find some face-saving cuts before they raised taxes. Sharp assembled a crack team and not only found a few savings here and there: He found enough to close the entire deficit. And then he kept going.

Over the course of the next decade, Sharp's Texas Performance Review (TPR) saved the state $10 billion and won awards for government innovation from admirers as diverse as Harvard and the Heritage Foundation. Sharp and his colleagues were called to Washington to help advise President Clinton and Vice President Gore on a National Performance Review -- whose most famous image was the $400 hammers at the Pentagon -- which resulted in $106 billion in savings the first year and helped to reduce the federal payroll to its lowest level since the Eisenhower Administration.

TPR staff also advised California's Republican Governor Arnold Schwarzenegger on a similar state review. My firm eventually absorbed some former TPR staff and adopted its methodology. We have since conducted similar reviews of individual agencies, local governments, or entire state bureaucracies in about a dozen states. Such reviews routinely identify annually recurring savings totaling roughly 5 percent of total operating spending. (By "annually recurring," I mean that cheap gimmicks and one-time savings like selling the state capitol don't count.)

Let me give a few favorite examples: By unscrewing the tiny light bulb behind the big plastic display that covers almost the entire front of most soda machines -- which serves no purpose but to make the can of Coke look more delicious -- Texas saved about $200,000 a year in energy costs. (There are a lot of soda machines on state property!) Colorado used three different entities to deliver mail on the state office campus, including two government agencies and a private firm (proving that privatization alone isn't always the answer). You could literally stand outside the capitol and photograph three mail trucks following each other around from building to building. And West Virginia had never properly calibrated the salt-spreaders on its snowplows, so that whenever it snowed it was dumping far more salt on the highways than needed. Simply adjusting these devices saved the state about $3 million a year. None of these make a significant dent in structural deficits -- but put together 100 small changes like that and, as the saying goes, pretty soon you're talking real money. It's hard for anyone to be against that (well, except salt companies).

Of course, while such items make for good stories, and can certainly add up, that's not where most savings arise. The biggest item in any review we've conducted is, not surprisingly, fraud -- particularly in health-care programs. The biggest savings are generally achievable in health and human-service programs, in part because, as Willie Sutton said of banks, "that's where the money is." But it's not just entitlement programs beloved of liberals that are inefficient and costly -- prisons and other correctional institutions tend to be money sieves. Worst of all is where these fields intersect: To paraphrase President Kennedy, correctional health services tend to have all the efficiencies of our health system and all the charm of our corrections systems.

So there are many places to look to reduce costs without threatening public services. One cardinal rule: Look for how to do better rather than simply how to cut. Cuts are easy to find -- but they don't necessarily save money. Every state in the country could cut its budget by one-quarter or more overnight by eliminating Medicaid -- but taxpayer subsidies to hospitals for uncompensated care would skyrocket. Reducing governmental costs doesn't necessarily involve doing less; usually, it involves doing better.

The biggest impediment to "doing better" is that those in government -- as well as advocates and critics -- tend to think in terms of programs and functions that can, or might have to be, cut. To most, that's what government consists of. But this view of government -- and of how to trim government budgets -- is reminiscent of an old New Yorker cartoon, in which a father tells his family, gathered around the kitchen table, "Because of the recession, we're going to have to let one of you go." No family, of course, would really approach a tight budget that way, but that's pretty much how most discussions of government cuts proceed -- cutting budget "line items" wholesale.

Many programs should be terminated on the merits -- but that's not where to find waste or inefficiency, which don't have budget line items. Neither do most of the places where you'll find it in government. There is no line item in state budgets for electricity for Coke machines (or, in most cases, for the electric bill, period), or intra-office mail delivery, or purchase of road salt. It's an old adage: What gets measured gets done. And most budgets don't identify, track, and measure wasteful practices. That's why the waste occurs.

What should be cut is what's not in the budget. Another rule of thumb is that most of these savings will not be found in particular agencies or administrative units. While some large standard departments like health, human services, corrections, and transportation are reliable producers of inefficiencies, the real savings come in government-wide functions that affect all departments and, as a result, tend to be budgeted by none. Personnel and procurement functions are always good places to look for improvements to save money (remember Rule No.1: improve performance, savings will follow); utility costs like energy and phones also tend to be neither well-monitored nor cheap. These are not what most people think of when they think of government waste and inefficiencies -- but they are where most of the money disappears, just like in most organizations and probably your own household budget.

How do you ferret out all these hidden expense items? I'd like to say that it requires a team of well-versed experts like me, but, really, the first place to go is to public employees themselves -- the very people the public likes to imagine as lazy, stupid sinkholes for tax dollars. In fact, most public employees are conscientious and can tell you exactly how to make government work better and more efficiently. Unfortunately, in the current climate of disdain, they're rarely asked.

When we did ask, we learned about the salt spreaders. (I don't know anything about road salt otherwise.) We learned from state employees in West Virginia and city employees in Chicago the variety of pipes and lighting fixtures ordered and stored, and how greater standardization could lead to shorter lead times, lower storage costs, and more efficient replacement operations. One state employee in Colorado's transportation department had a great idea for using leftover asphalt from road-paving to stop weeds growing under highway dividers -- making use of something that was otherwise wasted to reduce weed-whacking costs.

Of course, probably not unlike your workplace, not everyone's in it to win it. All efforts at meaningful efficiency improvement require a top-down commitment. Some governors, like Chet Culver in Iowa, took the time to sit down with us and go through every single recommendation for savings and discuss how to make it work on implementation. Unfortunately, such a commitment from the CEO is needed. My favorite example was the department secretary who insisted to me that her agency couldn't possibly hit the savings targets we set, then bragged to me a year later about how she exceeded them. The kicker: When I complimented her and said that that ought to make it easy to hit the following year's targets, she protested, "Oh, no, we can't possibly do that!"

Former West Virginia Governor Joe Manchin, now a U.S. senator, found a clever way to deal with that: He gave all agencies and their staffs a fair chance to shoot at the savings ideas and dollar targets, but then they had to sign "contracts" committing to the agreed savings. If they weren't met, the savings were cut from other parts of their budget. Actual savings a year later exceeded projections.

That's another basic rule: Don't listen to naysayers. Philosopher Arthur Schopenhauer described three stages of response to a new idea:

1. Ridicule.
2. Outrage.
3. The declaration that it's obvious.

Recalcitrant bureaucrats have coined a variation on stage 3: "We've done it already." That usually follows with head-spinning speed after rejection of their preceding, months-long insistence that "it can't be done."

But it can be done, which is why it must be done. Again and again: Texas carried on the TPR for about 20 years -- and found new ways to save money every time. Some might say that shows just how inefficient "government" is, but that misses the real point: Every human organization -- including governments and businesses -- has inefficiencies. Those that aren't constantly finding, and correcting them, aren't, well, worth their salt.