The finances of service sharing.

This article is adapted from An Elected Official's Guide: Intergovernmental Service Sharing, by John Ruggini. This GFOA publication is available from the e-store at www.gfoa.org.

Effective and efficient services do not always fit into the geographic and political boundaries that define local governments. A merged fire department between several cities or a joint health insurance plan between a county and a school district may be more effective than if each jurisdiction provided the service on their own. This alternate approach to service delivery, known as shared services, is not a new concept; however, continuing fiscal pressure on many local governments and demand for high-quality services make it a relevant concept. The following excerpt focuses on the finance side of service sharing.

SHARED SERVICE AND COST SAVINGS

Sharing services does not guarantee cost savings. Governments should conduct detailed analysis to determine the potential for cost savings and remember that it often takes three to five years before cost savings are realized. There are also many types of cost savings beyond simply providing the service for less money. Sharing services may free up staff to work on other initiatives, allow the jurisdiction to avoid future costs, or provide for a service enhancement at no additional cost. Likewise, cost savings should not be the only goal for pursuing shared service. While cost is a significant component of an ROI analysis, quality improvements are also an important consideration. If costs remain constant but the quality of the service increases, this may be an equally acceptable outcome.

COST ALLOCATION

If cost allocations are not carefully crafted, they can become a contentious issue that doesn't just stand in the way of concluding an agreement, but also creates problems during the life of the arrangement. Before addressing the cost allocation details, it is helpful to agree on the goals underlying the selected cost allocation methodology. For example, should cooperation be maximized at the expense of complete cost recovery, or should the costs to participate be proportionate to service utilization? Agreement on these principles at the outset will simplify negotiations by helping define the choices that are available. The actual agreement should address the following cost allocation issues.

Determining the Costs to Be Included. Jurisdictions tend to focus on direct costs; however, for more complex endeavors, they also need to consider indirect costs. For many smaller endeavors, these costs may be considered a "wash" and not be calculated. However, allocating overhead costs becomes critical if one agency is serving as the lead administrator or fiscal agent, or if such an allocation is required because federal funds are being used or an enterprise fund is providing the service to general fund departments.

Capital costs deserve special consideration because they are often not included in the initial arrangement and can lead to challenges down the road. For example, how will the replacement for the maintenance garage in a shared fleet operation be financed...