For the first time since taking office, Mayor Bill de Blasio has announced plans to implement a Program to Eliminate the Gap (PEG), which requires agencies to generate savings through expense reductions or revenue enhancements. PEGs were a routine part of the budget process starting in the 1980s and critical tools for managing expenses and operations at all agencies.

The de Blasio administration previously eschewed PEGs in favor of Citywide Savings Plans (CSPs); in contrast to the PEG, agency participation in the CSP was voluntary. CSPs have generated budget savings largely through expense re-estimates and debt refinancing.  Efficiency initiatives, which reduce recurring costs through improvements to agency operations, averaged just $155 million in each year of the five-year savings plans for fiscal years 2016, 2017, 2018, and 2019—less than 0.25 percent of the City funds budget.¹ The Mayor’s stated PEG target of $750 million per year is equal to 1 percent of the City funds budget.

The Mayor is right to pursue more aggressively agency savings at this time; prudently, he has  cautioned that New York City is facing economic and fiscal risks. A recession could double or triple the existing out-year gaps to $10 to $12 billion per year. Preparing for a fiscal downturn is an important opportunity to contain spending strategically and improve efficiency.

Pursuing a PEG presents both a challenge and an opportunity. Staff at agencies and the Office of Management and Budget (OMB) have not been required to identify recurring savings since the last PEG was implemented during fiscal year 2013; hence, the process and approach associated with a successful PEG program have not been deployed in several years. The Administration also faces the challenge of prioritizing resource allocation in the face of constrained resources. However, the PEG also presents an opportunity to rethink City services and unleash the knowledge and creativity of City employees.

This blog proposes three guidelines: 1) identify significantly more than $750 million in savings, 2) encourage recurring savings through efficiency, and 3) follow agencies’ leads.

1. Identify significantly more than $750 million in savings

OMB should set agency targets that generate savings in excess of the $750 million annual goal for two reasons.  First, this will provide options that will facilitate mayoral priority setting. Second, this will better position the City to identify additional savings should they be needed.

The Mayor said that no agencies would be exempt from the PEG process. All agencies, even those providing critical services such as public protection and education, can benefit from examining their operations to identify opportunities to reduce costs and preserve or improve services.

2. Focus on increasing efficiency to produce recurring savings

Savings from the PEG should be derived exclusively from agencies and should focus on increasing efficiency in operations and service delivery.  Increasing efficiency lowers costs while minimizing negative impacts on services to the public. It also generates recurring savings, which should be a requirement for the PEG.

To reduce negative impact on the public, cost reductions should be informed by clear priorities and data that compare the savings achieved to the reduction in service levels, quality, or relevant outcomes.

Efficiency can be increased by:

• Redesigning programs or services, or shrinking or eliminating those that are less cost-effective;
• Improving operations through use of technology or process redesign;
• Identifying alternate service providers within or outside of the public sector;
• Sharing resources across agencies or reducing or eliminating duplicative processes; and
• Strengthening centralized management of cross-agency operations, such as those for vehicles, office space, and energy, a strategy that OMB’s Citywide Savings Unit has pursued successfully.

It is also prudent to reevaluate existing fees to ensure they are keeping pace with rising costs for relevant services, without reaching economically counterproductive levels.

The City should continue to seek savings from re-estimates and debt service in tandem with savings from efficiency initiatives. However, these savings should be above and beyond the $750 million recurring PEG target, particularly because they often generate savings in only the first or second year of the financial plan.

3. Follow Agencies’ Leads

Agencies have the opportunity to use the PEG process to optimize programs, services, and operations. Agency executives, managers, and front line staff have valuable insights on how to improve programs and operations and should take the lead on identifying savings. As announced by the Mayor, agencies must be accountable for reaching their targets; if they fail to propose savings that meet the targets, the Budget Director should make the cuts.

The process of identifying savings is never easy, but the City is right to prepare for an economic slowdown or contraction. Furthermore, the City benefits from a regular effort to examine operations, set priorities, and reduce costs. This discipline can yield benefits in good as well as leaner times.