2004-10-29 / Columnists

The Rockaway Irregular

by Stuart W. Mirsky

The city has recently come out of its economic tailspin along with the rest of the country (reflecting the improved conditions arising from the Bush tax cuts and other economic strategies). In recognition of its better financial condition New York Mayor Michael Bloomberg is seeking to offer residential property owners up to $400 in one-time rebates on their recently increased property taxes. And he’s talking about allowing other tax increases he had previously pushed through in order to balance a painfully listing city budget to phase out as well. His new budget also contains a number of programmatic restorations, making city agencies happier than they’ve been in a long time.

But city taxpayers may not be happier in the long run if the mayor doesn’t make serious structural changes to city operations now, given the fact that city inefficiencies contribute to the need to keep taxes high... and to raise them every time we get the inevitable cyclical pullback. So far, the mayor has not put any real tax cuts on the table. But a city government dependent on high relative taxation remains absurdly vulnerable to reversals in the economy.

Even though he’s now going into the final year of his four-year term, it’s not too late for Mayor Bloomberg, an experienced business hand, to apply many of the tried and true practices used in the private sector to running this city. This is not an easy thing to do because governments, unlike businesses, don’t have a bottom line. They are service-oriented, not profit making, and so have no underlying reason to pay attention to costs. Still, there’s an awful lot to be learned from the private sector and who better to teach the city’s agencies than the consummate businessman who now serves as its mayor?

The place to start is at the agency level and the way is by identifying structural factors responsible for increased costs. Bring these costs down and the need for more revenue and perpetually high taxes can at last be ameliorated. One area to look at is how the city manages its capital expenditures. Under the Giuliani administration the city combined the architectural and engineering resources of most of its agencies into a single organization, the Department of Design and Construction (DDC), and made it responsible for brokering and managing capital activity for other city agencies with a need for capital investment. Such city agencies may have buildings on their portfolio which need to be maintained, upgraded, etc., or they may be responsible for other kinds of construction activity (such as street cutting and restoration). These jobs are generally scoped by the city’s capital agency, in concert with the “owner” agencies, and then put out to bid. The selected vendors are then managed by DDC for the “owners”.

What’s wrong with this picture? Nothing on the face of it as there are clear benefits to be gained through economies of scale and by centralizing the capital functions. However, there are also drawbacks that have been allowed to become part of the system which bear closer scrutiny. For one thing, DDC has a monopoly on most city capital jobs and so “owner” agencies do not have a lot of choice when they need to get their capital work accomplished. This means there is no competition and, thus, no incentive for DDC to provide superior service to its “customers.”

More seriously, DDC secures a significant portion of its funding based on the value of the projects it manages. Like the vendors that bid on these projects, DDC stands to benefit financially if the projects it manages are more costly. So the inherent bias of the system can cause this agency to prefer larger projects to smaller and, in certain cases, to “spec” projects at a level that may very well exceed need.

There is also little or no incentive in this system to more tightly manage capital job vendors since DDC doesn’t have a profit-driven bottom line to attend to. This can lead to huge cost overruns, on-the-job errors and omissions. At the same time, there are insufficient systems in place to track and identify cost overruns within the various “trades,” to monitor milestone slippages, and to ensure adequate contractor performance. These kinds of omissions, of course, add significantly to city costs because jobs end up taking too long, exceed their budgeted funding and frequently require extensive post-completion work to remedy defects left over from the initial work.

In a number of multi-million dollar jobs throughout the five boroughs, for instance, critical air handling systems were inadequately designed or installed in the mid-nineties, leading to extensive and costly retrofitting after the fact, when the systems failed to perform to specifications. This led to costly facility shut-downs and/or extensive delays in actually opening long completed facilities, as well as unplanned additional costs to rectify the unsuccessful initial work.

Often, too, substandard materials are used by the vendors when no one is looking, leading to deficiencies that are only discovered after DDC’s contractual one-year post completion warranty period has expired. When this occurs, the agency and the city must eat the costs for additional projects to rectify the past errors. In one site in Brooklyn, an alert “owner” agency site manager recently caught just such a deficiency. Discovering continued leakage into his building, after a costly roofing and re-pointing job had been completed and accepted by his agency and DDC, he raised the alarm. When DDC came back to review the situation, they decided to send samples of the mortar material for testing. The resultant report indicated the material was sub-standard. Because the warranty period hadn’t yet expired, the vendor had to re-do this work.

But too many project failures like this routinely get past less-than-vigilant city personnel who are often inadequately trained or just too thinly stretched to monitor the work as it’s being performed. Once such work is completed, of course, it’s often hard, and far more costly, to pinpoint the problems since they may be buried behind closed walls or ceilings.

An obvious solution to all this is to improve DDC’s on-the-job monitoring capacity so that vendor shortcuts or errors like this can be caught before they are sealed behind new walls and ceilings... not after. (Since DDC was formed by taking substantial technical resources from many “owner” agencies, it’s DDC’s job to perform this critical on-the-job monitoring function, given that its “customers” have long since ceased to be equipped for this role.) At the same time, it would be wise to contractually extend post-completion warranty periods and enhance DDC’s own post-completion monitoring efforts. Routine sampling and testing of materials used, during the course of projects, would also appear to be in order.

Of course, deficiencies in the capital process are not limited to vendor oversight problems alone. The project funding process that the city relies on is, itself, often highly politicized and dependent on extensive negotiations between “owner” agencies, DDC and the city’s Office of Management and Budget. Since no project can be initiated without sufficient funds in place, jobs often languish for years as city officials engage in an intricate minuet regarding need and available funding. The resultant prolonged delays and uncertainties adversely affect the ability to plan and “spec” the jobs going into each project. Failure to plan adequately, of course, also leads to extensive mid-project adjustments, which further adds significantly to costs.

The upshot here is that the city’s capital jobs generally cost two or three times what they run in the private sector and take considerably longer than comparable private work to be initiated and completed. But why should the city, which is a major employer and purchaser of capital construction services, not benefit from the immense buying power it commands? To realize such benefits the city needs to take a look at the current structure and strategies it relies on for getting capital work done. A complete review of the capital function should be undertaken and current deficiencies and disincentives for optimal performance identified and wrung out of the system.

At the least, it certainly makes no sense to reward an agency for higher costs as the current system does. In a nation that values competition and the benefits of the marketplace, there is no good reason for New York City to suffer from a lack of competition and marketplace efficiencies in the way it does its business.

Business Practices Instead Of Bureaucracy

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