Serving Customers without a Metric for Success

California managed to pass a budget for fiscal year 2010 at the eleventh hour, but now the Center on Budget and Policy Priorities reports that the state faces a midyear projected shortfall of $1.1 billion.

Budget strife has recently led to cut backs in services and hours at state parks, after Governor Arnold Schwarzenegger cut over $14 million from the parks budget.

The parks department chose to cut hours rather than raising rates as it did last year in an effort to reduce budget shortfalls then.  In the Sacramento Bee, department spokesman Roy Stearns explains:

Parks leaders increased entrance and camping fees last year, and decided not to do it again, for fear of losing revenue if too many visitors stayed away.

State employees are attempting to choose the method to close their budget shortfalls that will bring the least pain to residents, but in truth, they do not know how to best serve their “customers.” Unlike firms who rely on profit and loss calculation to let them know if they are successfully serving consumers, government agencies can only make educated guesses about providing the optimal level of services to constituents at the right price.

Across the country, the Washington (DC) Metropolitan Area Transit Authority is facing a similar problem. The Metro and bus services are paid for by a combination of subsidies and rider fares, but setting the “optimal” ticket price and determining the agency’s budget are largely a matter of guesswork.

A WMATA report details the need for $11 billion in funding for fiscal years 2011-2020, ignoring that some of the budget could be covered by cost savings or changes in fare price.

If a private firm provided a transit or park system, it would have a profit incentive to determine the most efficient fare price and to pay for its services, but government agencies have no equivalent. Some services with public goods characteristics may simply not be provided by private firms, which is why many people advocate a government role in providing these services. However, as long as the public sector is offering such goods, we should acknowledge that there is not a good way of determining the appropriate level of provision, despite what lobbyists and politicians may tell us.