Experts despair county's cost controls
By LISA GREENE
© St. Petersburg Times, published February 4, 2001
If Pinellas County were Pinellas Corp., shareholders would be asking the top guns some tough questions right about now.
How could a company be so misguided in its financial projections that it now must cut as much as $162-million in future spending -- cuts that will delay road widenings, building construction and endangered land buys?
"Smart executives have learned they need to really closely monitor their financial performance," said Marty Donsky, marketing manager for technology practices at PricewaterhouseCoopers in Tampa.
"In the private sector, negative surprises often result in decapitation. The CEO gets his head cut off by Wall Street."
Interviews with analysts and financial experts show that Pinellas County's approach to cost control and financial planning is radically different from the rules that govern the corporate world.
The county got itself into hot water by ignoring three major principles that guide good business:
Make careful forecasts.
Track costs closely.
Respond quickly to make hard choices.
Most of the county's building, road and parks projects are funded with its local sales tax, the Penny for Pinellas. The Penny is projected to bring the county more than $700-million in the next 10 years.
But last week county officials admitted there will not be enough money to accomplish all the projects scheduled for the next 10 years. Reasons include county commissioners taking on new million-dollar projects that were never scheduled and seriously underestimating the cost of the ones that were.
Unchecked ambition and bad math have left department heads searching for ways to save money. Managers in the county's road department identified $53-million worth of projects that could be killed. Other potential cuts are expected to be announced this week.
In the spring, commissioners will be left to decide which projects to keep and kill. In the meantime, the finger-pointing has begun: Some commissioners say county employees should have let them know the Penny budget was out of kilter, while those employees say commissioners should have known because they were provided adequate financial statements.
Donsky doesn't know what happened in Pinellas. But he offered a different picture of how budget forecasting should work. A large corporation may spend months preparing an estimate of what a major project should cost, he said.
Inflation would be carefully factored in. Each component of the project would be measured. Factors that could change the cost, such as the price of oil, would be monitored.
"It's one of the single most important things companies do -- projecting their future," said Carla N. Cooper, equity analyst with the Robert W. Baird & Co. brokerage firm.
Corporate boardrooms are littered with the ghosts of CEOs whose companies didn't meet such predictions. Lucent Technologies spent too much to expand too fast, missed earnings targets repeatedly last year and fired its CEO. Here in Tampa Bay, chief executive David Grimes and his chief financial officer left Sykes Enterprises last year after the company's earning projections fell short and sloppy accounting practices came to light.
But in Pinellas, planning drew little scrutiny. Fred Marquis, who retired last fall after 22 years as county administrator, said county officials used "plug numbers" to guess how much a project would cost once it got started. County planners put together a list in 1996 that included some projects that wouldn't be done until 2010.
"They're even worse than estimates because nobody had any idea at all what's going to be needed 14 years out," Marquis said. "Within the Penny itself, there are a lot of plug numbers. There's no way in the world to really have a handle on every single project, what the price is going to be."
Some defended the county. Local governments often project further into the future than private companies usually do, they said, making accurate forecasts harder. David F. Scott, a University of Central Florida finance professor who sits on two corporate boards, added that accurate estimates take staff time -- time that government workers may not have.
Larry Silver, spokesman for Raymond James Financial Inc. in St. Petersburg, said Pinellas faced a tough task. "We talk to a lot of our clients about college planning for their kids," he said. "The cost of your kid going to school in 18 years -- who the heck knows?"
One thing analysts do know is the importance of closely tracking costs so adjustments can be made along the way.
"You're tracking cash flows daily. With capital projects, it's the same thing," Scott said. "We're going to have continual reporting procedures. If we fly in our division general managers, they're going to have to document where the projects are."
And if a project becomes more expensive than expected, the company takes notice.
"You deal with it quarter by quarter, year by year, board meeting by board meeting and not have it come out and surprise everybody," Cooper said.
Had commissioners closely tracked burgeoning projects, they could have adjusted the overall Penny list sooner and used the information in deciding whether to spend taxpayer money for new, unscheduled projects. Now, they are left cutting a long list of projects voters were led to believe would be done.
"This would be a disastrous announcement for a company's share price," said Kenneth Eades, a business administration professor at the University of Virginia. "It would be bad for analysts with the CFO: 'Either you knew this and you didn't tell us, or you're incompetent."'
The state Department of Transportation once faced the same problem. When its road project list went to lawmakers each year, the list got longer and more expensive.
"There used to be turkeys," said Kurt Wenner, senior analyst with Florida TaxWatch. "Legislators would put on a road project in their district."
Now lawmakers are forced to choose. State law says legislators can still add projects to the road plan, but if they do, they must remove another project from the same district.
"You have to realize that there's only a finite amount of money, and you can't do everything," Wenner said.
When the software company SPSS decided it needed to spend more to develop a new product a year ago, Cooper said, executives were up front: Shareholders would see lower earnings now, but better long-term growth.
"They dealt with it in a forward-looking manner," she said. "It was a very conscious decision to change their expenses."
The bottom line: Good companies make tough choices. And they make them before a change becomes a crisis.
New Commissioner Ken Welch, a Florida Power Corp. accountant, said the county must become more accountable. He and Commissioner Barbara Sheen Todd have called for regular updates and tracking of the Penny funds.
Welch said commissioners must be ready to change their plans and to say no to new projects.
"You have to manage expectations," he said. "It's not an endless bucket of money."
- Staff writer Edie Gross and researcher Caryn Baird contributed to this report.
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