People sure are funny about money
A few weeks ago the line outside the Portland State University Ben & Jerry's stretched from the shop to the PSU Recreation Center and then looped back around a few weeks ago, when the ice cream shop held its annual Free Cone Day. And that was in the rain. Last year, with slightly better weather, people waited an average 45 minutes in order to save four bucks on a cone, according to business manager Jim Cooper.
Explanation? "People like free stuff," says Cooper.
We're all irrational when the subject is money, say the psychologists and economists who study these things. We'll fritter away 45 minutes to save $4 on an ice cream cone but think nothing of spending $4 on lattes five days a week. Anybody wondering why government is so often so wrong about money should just look in the mirror, say the experts.
Government may look different, but it's still run by people, says Drummond Kahn, Portland's Director of Audit Services, who's scratched his head more than a few times at some of the inefficiencies he's uncovered over the years, and the resulting public reaction.
Or, as recently ousted city commissioner Steve Novick puts it, "The irrational things government does are generally reflective of overall human irrationality rather than an irrationality that's specific to government."
Novick is something of an expert here, since Portland voters' views on government taxation and spending are probably the reason he's no longer city commissioner. More on that later.
Seven years ago Kahn led an audit of the city's new financial and human resources/payroll system which found a $14 million, 14-month implementation plan had exceeded $47 million, taken over 30 months and was still not fully operable. In fact, he titled the audit he presented to City Hall "Expensive, late, and incomplete." Then, he waited for the outcry.
Kahn is still waiting. But about the same time he noticed that there was a great outpouring of public outrage—when the city announced parking meters would be operational seven days a week instead of six. No longer would Sundays be free. It became clear, Kahn says, that not only could government behave irrationally (he found that city project managers had received red alerts for12 straight months about the new financial software and had ignored them all), but maybe they got that from taxpayers.
"There was more public discussion around the extra hours of paid parking than where audits found millions of dollars in (waste)," Kahn says.
That's because most of us can't grasp money proportionally, says University of Oregon economist Michael Kuhn. The city wasting $33 million doesn't fit easily into the way we think about the world on a daily basis. So we don't think about it much. "To a lot of people, once you pay your taxes and see your payroll deductions it's not mentally linked to the services the government renders to you," Kuhn says.
But parking on Sunday?
"There's something very visceral about paying the meter," Kuhn says.
Also, people just hate to start paying for anything that has been free, according to Dan Ariely, Duke University psychologist and economist. Parking was free on Sundays, then it wasn't, which would seem worse than if it was a small amount and then became a large amount. "We treat something moving from zero to something very irrationally," Ariely says.
The converse is also true, according to a paper Ariely co-authored in 2006, that showed a free Ben & Jerry's ice cream cone is worth more to most people than just the money saved, because free is moving from something to zero. The title of the paper? "Zero as a special price: The true value of free products."
Few topics get Portlanders hotter under their collars than parking. A few weeks ago the Northwest Parking District Stakeholder Advisory Committee held a meeting in a packed room full of angry residents. The unusual turnout was due to a discussion about a proposed increase in the cost of on-street parking permits.
Two years ago the city implemented a parking plan that limited neighborhood visitors to four-hour stays and allowed residents of Northwest Portland to purchase annual parking permits so they could park on their neighborhood streets all day and night. The permits cost $60 per car, and the city promised the money generated would go toward implementation and enforcement of the plan.
Now the city is about to raise the permit price to either $300 a year, which was endorsed by the neighborhood association, or $180 a year, which was endorsed by the advisory committee. At the same time, the Central Eastside Industrial District is seeing the cost of its street parking permits rise to $300 a year.
"Group think" is what has led to the precipitous increase, says Tavo Cruz, a member of the Northwest Portland neighborhood association as well as a member of the advisory committee. Cruz describes a process in which the committee was established to work on one goal—establishing the permits to keep non-residents from parking on the street all day—and then expanded its vision to larger goals.
The $60 permits have had success in freeing up parking on some neighborhood streets and not much success on other streets where there are more permit holders than spaces. So the committee, Cruz says, started listening to parking consultants who told them that the permits could be used as supply and demand leverage to get some people to stop driving, or at least stop parking.
Maybe, the consultants said, at $300 a permit some people will just give up their cars and the remaining people who pay for permits will be able to find the parking for which they paid. Cruz doesn't think so. More likely, he says, Northwest Portland and inner east side residents and workers will grouse, then pay.
"Is anybody going to change their behavior based on going from $60 to $300 or $60 to $180? I doubt it," Cruz says.
Cruz says he voted for the increase to $180, so maybe the group think may have infected him as well. "My fear about this is we could eventually wind up with the worst of all situations, which is an expensive program and no improvement for parking," he says. "And that's where it becomes irrational."
That's also were it becomes typical of the way committees and organizations tend to operate, says Mark Meckler, a University of Portland economist and business consultant. "Classic institutional theory" is what Meckler calls the process described by Cruz. Committees and bureaucracies usually begin with a narrowly-focused goal, Meckler explains. Then, they turn into institutions.
"Over time the goal of the organization starts to shift from achieving its mission to self existence," Meckler says. "It becomes like an organism."
In this case, the increased parking permit fees in Northwest and inner east side will generate considerably more revenue than the $60 permits residents were told were needed to finance enforcement. So where is all that extra money going? Now the permits are being viewed by the committee as revenue generators, according to Cruz, and the money can be spent on a wider range of transit projects.
Incidentally, Meckler says there's a reason the parking advisory committee faced a packed house public meeting and Kahn's audit showing $33 million in waste provoked hardly a whisper. It's called Parkinson's Law, authored by C. Northcote Parkinson, who claimed that the time a committee spends on an agenda item will be in inverse proportion to the amount of money involved.
The city's $33 million financing and HR boondoggle was ignored because it was complicated. "Nobody wants to sound like an idiot on a complex subject or an amount of money out of our ability to comprehend," Meckler says. "It's easy to speak up on wasting an amount of money that you can understand."
It isn't irrational for humans to want to protect their own jobs, but it might be irrational to assume bureaucrats will do what's best for the city if that will make their jobs less secure, says Meckler. That's basic agency theory, according to Meckler, which states that the higher up individuals climbs in an organization the less likely they are to take risks that will jeopardize their jobs.
Government is always at the mercy of agency theory, according to Meckler, which means creative, bold solutions to problems will be avoided in favor of safe, incremental change.
Steve Novick says he may be the exception that proves Meckler's rule. In 2014 Novick, then city transportation commissioner, proposed a $46 million annual street tax as a way to pay for fixing and maintaining the city's streets and sidewalks. The backlash was enormous, and probably cost Novick his city council seat. Today, Novick admits he might have found a more politically astute way of proposing the tax, but he says the current state of Portland's cratered streets are evidence his plan, which was neither safe nor incremental, made sense.
"You might say I was crazy or had an overdeveloped sense of responsibility," Novick says. "My experience should be a cautionary tale for other politicians. I paid a huge price for doing something where my predecessors paid no price for doing nothing."
Tipping 20 percent of a bill at a restaurant isn't rational, says economist Meckler. That's because a server at a diner where your bill is $5 will get a $1 tip and a server at a fancier restaurant, where the breakfast bill is $20, will get a $4 tip even though the two servers might have worked the same amount to serve you. But most of us do it. A realtor selling a small house may work harder than one selling a large, expensive house, but get a much lower commission because they both get six percent of the selling price.
"It is not rational to tip by percentage," Meckler says. "Percentages are a cycle of inequality."
But that's how the Community Development Corporations (CDCs) who build taxpayer-subsidized housing traditionally have been paid, and it's a big reason why subsidized housing is in such short supply, according to Rob Justus, who has been fighting the Portland low-income housing establishment for years.
Justus builds low-income apartment buildings without taxpayer money for about $80,000 per apartment. His development contracts call for him to receive a set fee on his apartment buildings. Taxpayer subsidized buildings come in closer to $250,000 per apartment. Which means taxpayer money devoted to building low-income apartments is providing one-third as many apartments as it could.
Kurt Creager, director of the Portland Housing Bureau, say there are a number of reasons taxpayer-financed housing is more expensive per unit. But one of the big ones is the way CDCs get paid—usually about 10 percent or more of the final cost of each development.
That incentivizes CDCs to spend more per apartment, not less, according to Meckler, who says government should be paying the CDCs a set dollar amount per apartment, so the developers will build as many apartments in a project as they can. And there's nothing stopping government from making certain the development contract has very detailed specs and calls for plenty of inspections so developers don't try to cut quality as a way of making more money.
So why have Portland and Oregon consistently paid CDCs a percentage fee?
Rules governing federal tax credits led to business models that favored percentage fees and the industry just grew from there, according to Creager. "It's a business where innovation hasn't always been rewarded," he says.
The whole idea of nonprofits building low-income housing with taxpayer money is part of the problem, says Jim Malatras, president of the Nelson A. Rockefeller Institute of Government. Nonprofits building taxpayer subsidized housing and receiving taxpayer money to provide social services aren't necessarily more efficient than government taking on those projects and services by itself. But they provide political cover for politicians, according to Malatras.
"They (nonprofits) do those things so politicians don't have to," Malatras says
Creager says his bureau will soon test the waters for turnkey housing developments—the city won't subsidize the developments, but instead will buy finished projects that have an agreed-upon number of apartments with detailed specs and flat fees for the developers—with total costs about $100,000 per apartment.
Justus says Creager is likely to meet some of the same resistance he's encountered from developers and contractors who have developed a mutual dependence on an inefficient model for doing business.
"Nonprofits say 'We're doing things more expensively because the funding made me do it.' And over time, funders say, 'We have to do it this way because the business models of nonprofits are set up to do it this way,'" Justus says.
Speaking of percentages, auditor Kahn says government often is much more irrational than people when it comes to dealing with hard times. Traditionally when spending has to be reduced, government's preferred method is across the board cuts. If you had to make cuts at home, Kahn says, you wouldn't commit to using ten percent less toothpaste and ten percent less water. You'd find specific items you could do without. But government rarely looks at entire programs that need to be removed, which would entail uncomfortable conversations with department heads.
"You make everybody feel the pain so nobody feels special pain," says Malatras.
Those agency heads are each protecting their fiefdoms rather than thinking about what's best for government as a whole, and that breeds inefficiency, or worse, says University of Oregon economist Michael Kuhn. Think of government like your household, Kuhn says. Each month you budget specific amounts for gas and clothing. A cold snap arrives and you need a $50 winter coat but there's only $20 left in your clothing budget. There's a store 100 miles away where the coat is selling for $20 and you've got plenty of money left in your gas budget. If you are irrational, you get in the car and spend $50 for gas to buy the coat for $20, spending $70 overall when you could have bought the coat for $50 at your nearby store.
That happens all the time in government, according to Kuhn. "They have very strict rules abut money being pre-allocated to certain categories," he says. "That's very irrational because money is just money."
And if there's money left in an agency's budget come the end of the year, it gets spent because leaving a surplus would indicate the agency doesn't need as large an appropriation in the future, according to auditor Kahn. "It's a natural inclination for departments and their constituents to want to protect their budget," Kahn says.
Which has led to some legendary federal "use it or lose it" agency spending. Federal government workers have reported their agency's buying three years worth of staples at year's end. The Washington Post a few years ago revealed the Department of Veterans Affairs bought $562,000 in end of year artwork and the Agriculture Department spent $144,000 on toner cartridges with leftover end of year money.
But "use it or lose it" government policy was developed for a rational reason, according to Portland Budget Director Andrew Scott. When agencies were allowed to keep what they didn't spend at the end of a fiscal year "bureaus could create pretty large slush funds," Scott says.
It's easier for bureaus to hold on to their money, Kahn says, if it's impossible for auditors to compare costs and benefits. In 2004 the city of Portland spent $911,000 for a Boston consultant who said he could save the city at least $25 million over six years in purchases for city agencies. But the city's Bureau of Purchases failed track the savings, which was noted in a city audit that couldn't determine if the whole idea was worth it.
Agencies often don't track costs, according to Kahn, usually using the justification that tracking isn't worth the extra cost. "What's the analogy? If I have to do all these reports I'd never have time to do my job?" Kahn says.
The costly saga of Centennial Mills
Nobody would call procrastination rational behavior, but we all do it. Government especially. With apologies to comic Henny Youngman, "Take Centennial Mills. Please."
The Portland Development Commission purchased the abandoned mill on the Willamette River in 2000. In 2004 PDC proposed demolishing most of the mill's buildings but public outrage called a halt to that plan. In 2006 plans for the site's development were completed. Since then various suitors have approached the city with money and their development ideas but none were given the go ahead. Meanwhile, the historic mill was crumbling. The city spent $750,000 to maintain it, and eventually had to demolish all but one of the mill's original buildings at a cost of $12 million.
A big part of the problem, says PDC commissioner Tavo Cruz, is that different interest groups have been so passionate about turning the mill into their preferred vision, and passionate in their objection to other plans. Some people are upset the city didn't spend more to maintain the buildings, Cruz says, and others think the city should have torn down the whole structure years ago. Now, many of those people are united in their belief that city money has been wasted.
That's democracy, Cruz says. "Everybody thinks their decision is objective and rational."
That's right, says University of Oregon economist Michael Kuhn, who studies why people make irrational choices.
"What government has a hard time doing is making everybody happy, so rather than making any one group very unhappy they choose to make everybody slightly unhappy," Kuhn says.
One of Kuhn's pet projects has been studying how low-income families budget. Often, he says, families find food stamps run out before the end of the month. But it turns out that single-parent families face this problem less often that two-parent households. In addition, when food stamps are replaced by debit cards which only one person in each household can use, the food supply more often lasts until the end of the month.
"The more people making any decision the harder it is to efficiently manage, whether it is a household or a city agency," Kuhn says.