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Managing a government like a business: the Sunnyvale System.

Sunnyvale, California, the "Heart of Silicon Valley," has a residential population of 125,000 and a daytime population of 200,000. While other cities are struggling to survive, Sunnyvale has become well recognized as a financially sound city committed to excellence. It may look like any other city with invisible boundaries that hold homes, industry and people, but the unusual characteristic of this city is that it uses the same basic principles that apply to a well-run corporation to run its government. This philosophy of managing the city as a business has been the key to Sunnyvale's success.

As with corporations, the city has its own board of directors--the city council--and its own chief executive officer--the city manager. The council sets policies and goals, including the general plan, which is the statement of the city's long-range goals. The city manager, like the president of a company, carries out the council's policies and manages the day-to-day affairs of the city. The city's sole purpose, which is dictated by the general plan, is to provide high-quality services to the residents, industries and businesses of Sunnyvale in the most cost-effective way possible.

The City of Sunnyvale has a dynamic management philosophy. City officials manage this $149 million municipal corporation on three essential business principles: long-range planning, performance budgeting and performance auditing. While most cities are required by state law to prepare a long-range comprehensive planning document, few, if any, use it to the extent that Sunnyvale does for all of its planning and budgetary actions.

In early September 1993, President Clinton and Vice President Gore asked Sunnyvale officials for pointers on how to run a government. What attracted the presidential team's attention was something that might be called the Sunnyvale System: municipal managers get a "contract" from the council to do a specific job. Not only are managers paid based on the market rate, but they can earn a bonus or suffer a pay cut depending on their ability to meet service-level standards. The council receives a 10-year projection of impacts of its fiscal decisions; feedback and ideas are sought from every conceivable source.

Clinton and Gore learned of the civic departure through the book Reinventing Government, by David Osborne and Ted Gaebler, and played up the "reinventing government" theme while campaigning in 1992. Clinton credited Sunnyvale directly when he signed the Government Performance and Results Act of 1993, which requires federal agencies to design sets of measurable goals, much like Sunnyvale government does.

Performance Measurement

Systems for goal setting and performance measurement have been employed in Sunnyvale for a considerable period of time. They were first instituted in a limited way in the mid-1970s, when the city joined in a cooperative venture with the U.S. General Accounting Office to develop and refine what was known then as "program budgeting." Sunnyvale was one of several demonstration sites, including several state and federal agencies. A program-type budget was instituted in Sunnyvale's department of public safety, which provides police, fire and emergency services. The hallmark of the budget system was the development of certain high-level goals to direct actions in a particular fiscal year.

During the late 1970s, the city council decided that a far more sophisticated performance-based budget system should be instituted as a part of a comprehensive planning and management system. The system, which began on July 1, 1979, directs most of the critical policy-setting processes, as well as establishes the basic management framework utilized by every city department.

Planning and Management

Managing public money means far more than collecting taxes, putting money in the bank, and writing checks for goods and services. Sunnyvale officials firmly believe that managing citizens' money well requires long-term planning, focused goals and clear accountability to achieve the best results with limited resources. The success of this philosophy is evident: the city has increased productivity by more than 30 percent during the past six years; maintained extremely low taxes and fees; and delivered excellent public services with 30 to 40 percent fewer employees, compared to similar services offered by the neighboring cities in the San Francisco Bay area.

The Planning and Management System (PAMS) links fundamental long-term planning goals contained in the city's general plan with a 10-year resource allocation plan, or budget. The city council defines service levels and policies, and the 10-year plan identifies the resources needed to achieve them. Sunnyvale's program managers and staff are responsible for delivering specified services within those resources, and through PAMS, they are evaluated each year on how well they have managed the public's money to meet planned objectives. Sunnyvale's program managers are expected to be experts in their fields, but they also are expected to be strong budget managers. Members of the finance staff work as consultants to help program managers perfect their budgeting.

PAMS consists of an eight-step process. The steps are discussed in the sections that follow.

Twenty-year Strategic Plans. California cities are required by state law to prepare a general plan outlining the direction of their community. The Sunnyvale general plan helps the council set short- and long-term policy, establish annual and 10-year budgets, determine required services, and evaluate policies and programs.

The city has developed 20-year strategic plans in 28 areas, identified as the critical areas of city services and policy setting. These strategic areas range from law enforcement to air quality, from libraries to human services. The purpose of the 20-year strategic plans is to recognize that public-policy goals usually cannot be accomplished in the span of a one- or two-year budget appropriation but require concerted effort over a longer tiem frame.

The key products of these strategic plans are goals, policies and action statements directing the city's future programs and service delivery. Each of the strategic plans is developed with considerable public involvement, through advisory committees and commissions, and often with significant direct public participation. An attempt is made to review and update the strategic plans every five years. The strategic plans become the blueprint of high-level goals and the compass by which the community sets its direction for the 20-year planning horizon.

Ten-year Financial Plans. Each year, a 10-year financial plan is developed to project revenues, debt cost and capital needs, as well as operating program costs. It is critical that the 10-year financial plan is structured to support the goals and policies found in the 28 strategic planning areas. For example, outlays for capital improvement are not scheduled in the 10-year financial plan unless directly supported in a strategic plan.

The 10-year financial plan serves several purposes. Such a multi-year financial planning tool is useful in projecting where the city is heading financially. It is less for the accuracy that might exist in forecasting revenues and expenditures and more for understanding the trends and effects of the city's actions on its financial health.

In addition, the city council manages the budget to insure that ongoing programs are not dependent on external funding sources for their long-term operation or stability. For many years, the city's 10-year budgeting plan has presupposed that federal revenue-sharing funds will disappear in any given year; therefore, those funds have been kept separate from the operating budget and are never budgeted beyond the current year. Sunnyvale does not make commitments it cannot fulfill or fund essential city services with unreliable revenue sources.

The long-range projections illustrate the compounding effect of current budget decisions. For example, if money is available in the current year to purchase land to develop a new park, and if the 10-year plan indicates that the new operating and maintenance costs to support the park will throw the budget out of balance in year seven or eight, then the project will never be started until the city council takes appropriate action in the current year, such as increase fees or cut back on services, to finance future operations as indicated in the 10-year plan.

Sometimes long-term budgetary decisions may be more costly in the beginning but have significant cost savings in future years. For example, a 1984 study of road conditions evaluated every street based on a set of measurements of road conditions (amount of elasticity in the asphalt, number of surface cracks, bumpiness, etc.). Streets were rated according to four "grade" levels: an "A" street was in good shape; a "D" street was in poor shape. In order to improve each street to level A over a period of time, an additional $500,000 was needed the first year. Projections showed that the initial investment would yield significant long-term savings. Today, the annual street maintenance budget is $500,000 less than the budget nine years ago, and the streets are in better condition.

After preparing 10-year projections of revenue and expenses, the finance department looks at a 20-year financial planning scenario. Although officials cannot predict 20 years into the future, they can look at trends and predict the effect of today's budget decisions over the long term. With this information, they can make small, relatively painless course changes that will avoid major budget problems down the road. They can see that a current-year $100,000 annual budget increase is worth nearly $1.5 million over the next 10 years (with an assumed inflation factor for the entire planning period). This can make a significant difference in the city's ability to allocate resources for priority projects and services many years in the future. Taking the long view, therefore, adds to the city's flexibility to make adjustments, as small budget decisions in many programs will add up in 10 to 20 years.

Two-year Peformance-based Budget. Appropriations for city programs occur on a two-year cycle. The critical aspect of these budgets is their form. Within each department and program of the city, specific, measurable performance goals are identified, and appropriations are made to those goals/service objectives. It is these goals and the specific outcomes related to them that the city council reviews and eventually takes action on for budgetary purposes. Thus, the more than 300 service goals become the heart of the management and evaluation system as practiced in the city. The concept places emphasis on planning and budgeting resources for the accomplishment of goals/service objectives, compared to traditional budgets, which base decisions on line-item costs that provide neither efficiency nor effectiveness data.

Sunnyvale's budget is service oriented, designed to spell out both the quantity and the quality of public services. It uses a full cost-accounting system, which computes the cost involved in every unit of service, including maintenance fees, employees' salaries and benefits, facility costs and any other costs associated with that service. Through its budget, the city knows how much it costs to sweep a mile of street, respond to a fire call or circulate a book. Some examples of budgeted service objects are "repair all reported vandalism in parks within three working days 90 percent of the time at a cost of $28,813, or $56.50 per act of vandalism reported;" "emergency police response should be within 7.0 minutes or less (from time received by dispatch) 90 percent of the time at a cost of $793,760, or $75.60 per emergency response;" and "review site and building plans for compliance with zoning ordinance within 30 working days of submission 90 percent of the time at a cost of $51,069, or $40.86 per plan reviewed."

Sunnyvale's performance budgeting system reveals not only how much the city plans to spend, but it also details the level of service the city expects to deliver through each objective. Using this comprehensive information, policy questions of the cost/benefit of contracting out a particular service can be answered easily. Exhibit 1 shows the relationship between the general plan and the performance budget measurement structure.


Sunnyvale's budget reveals the true costs of the decisions its city council makes today, and it projects the anticipated costs of those decisions 10 years into the future. The city council knows the value it is getting for its taxpayer dollar with a greater degree of certainty than under a line-item budget. If money is taken from one program and shifted to another program, the council knows what will happen to citizen services in those two areas; therefore, more effective decisions are made. If citizens do not care how often the lawns are mowed but how long the grass is, the council can ask, "If three-inch lawns are good enough in the parks, how much money will we save?" The policy question, "How many police patrols should we add?" becomes "How much faster do we want emergency police response to be?" Exhibit 2 provides examples of these quantifiable service levels, with output measures of productivity and outcome-oriented quality measurement.


Objective/Service Level Goal

632 - Library Service Maintain a collection of library materials for adults so that patrons complete title searches successfully 67 percent of the time, complete author or subject searches successfully 66 percent of the time, and complete browisng searches successfully 90 percent of the time. Also maintain the collection to achieve a turnover rate of 5.0 per item by 2000.

Productivity (Output) Measure

- Number of items selected materials for adults - Number of items received for repair or discard - Number of patrons surveyed in use of adult collection

Outcome Measure

- Success rate fior patron title searches in the adult collection - Success rate for parton author or subject searches in the adult collection - Success rate for patron browing searches in the adult collection - Turnover rate for adult collection - Number of materials in adult collection and number of adult items per capita - Number and percent of collection received annually for repair - Number and percent of collection discarded

Objective/Service Level Goal

411L - Police Services Programs Provide quality control of public safety services by assuring the department is responsive to the public needs by seeking out, accepting, interpreting and considering all expressions of concerns about services, practices and policies, and completing thorough investigations of complaints within four months at least 75 percent of the time.

Productivity (Output) Measure

-Number of investigations

Outcome Measure

- Number of citizen complaints about services receivced and percent processed - Number of investigations and percent sustained - Number of investigations and percent unfounded - Number of citizen complaints investigations and percent exonerated - Number of investigations and percent resulting in police procedure changes - Percent of investigations completed in two months or less - Percent of investigations completed in three months or less - Percent of investigations completed in four months or less

Objective/Service Level Goal

333C - Water Pollution Control Plant Operation Optimize the WPCP tertiary processing capabilities to produce a final efflent that meets the NPDES requirements of not less than 85 percent removal of suspended solids, not less than 85 percent removal of CBOD (Carbonaceous Biochemical Oxygen Demand), seasonal limits for the conversion of NH3-N to NO3-N, a turbidity of less than 10 NTUs to effectively disinfect and to maintain pH values between the limits of 6.0 to 9.0.

Productivity (Output) Measure

-Number of millions of gallkons discharged

Outcome Measure

- Percent of suspended solids removed - Percent of CBOD removed - Percent of time NH-N limits achieved (seasonal variation) - Percent of time turbidity requirements are met - Percent disinfection meets regulatory requirements - Percent of pH values between 6 and 9

Annual Management Contract. Each year, contracts, or achievement plans, are developed for each management employee of the city. In these achievement plans, primary emphasis is placed on the budget goals for which that particular manager is responsible. Not only do the achievement plans make clear the expectation that performance should meet the goals approved by the city council, but they also emphasize other work-plan elements regarding how managers can focus energy and resources toward the improvement of efficiency and quality of service delivery.

Frequent and Periodic Management Reports. In Sunnyvale, laying out the goals and reviewing them for accomplishment at the end of an accounting cycle is very important in order to reap the benefits of PAMS. Every four weeks, managers receive information reports that reveal how their program is faring against the prescribed goals. These reports serve as a tool to monitor the productivity and quality of services being provided. Also, they provide data to evaluate how resources are being used and what improvements, if any, are needed to achieve the desired outcome.

Annual Performance Reporting to the City Council. Sunnyvale's business principles of long-range planning and budgeting would not have much meaning unless they could be measured. The city council and management team, therefore, use a dynamic method of evaluation called performance auditing. Through this method, results are monitored to ensure that the city maintains high-quality standards. City officials use three evaluation tools to measure whether performance standards are met: service measurements, the citywide annual performance report, and the achievement plans and performance evaluations that make up the payfor-performance system described in the next section.

Service measurements are used to evaluate the quality and effectiveness of the services provided. Each task is measured by the type of unit, the number of units, the cost and hours it takes to accomplish the task per unit, and how the task is performed compared to previous years. A detailed annual performance report is submitted by the city manager's office to the mayor and city council. A summary document is developed for general public review. This is a report card from Sunnyvale's government to its citizens informing them as to how it performed in the previous year.

Annual Pay-for-performance Reviews. All management personnel in the city are on a pay-for-performance compensation system. Depending upon goal accomplishment, the pay-for-performance system can result in an annual reduction in pay range of up to 5 percent or a one-time bonus of as much as 10 percent. The basis of the evaluation ties directly back to the annual contracting process and the specific obtainment of the service goals established by city council.

The basic pay range is for those managers who accomplish their goals within the norms established by the city council. Each year, program managers prepare achievement plans outlining their assignments for the coming year. At the end of the fiscal year, managers are audited based on the successful completion of the achievement plan, as well as their success in meeting each of the established service objectives. Under Sunnyvale's pay-for-performance system, bonuses are reserved for those who exceeded expectations, and sanctions are for those who did not successfully meet the city's service standards, assuming no extenuating circumstances existed.

Performance Audit/Analysis. The eighth component of PAMS is analysis and audits. Periodic performance audits are conducted in each service area. These audits are not pre-announced and are developed on a random basis. It is neither possible nor desirable to dedicate the resources that would be required to audit each and every area. The audit system, however, assures integrity in the process.

The audit system is directed to two important purposes. First, it ensures that resources are expended for the specific policy purposes for which they were authorized. This is less of a problem with a performance-based system: the performance standards are so specific that the process tends to be self-auditing. The second purpose of the performance audit is to assist in ascertaining whether the greatest efficiency and effectiveness is resulting from management. Sunnyvale has found, however, that this system also is self-monitoring. When a manager's responsibilities (outputs) are expressed clearly, and when that individual's evaluation and pay are predicated on performance, exceptional improvement can be expected.

How Well Has Sunnyvale Managed?

Exhibit 3 depicts the relationship between production units and their costs between fiscal years 1984-85 and 1992-93. Measurement of cost versus production efficiency compares the average cost per equivalent unit produced with the average equivalent unit produced per work hour. The graph shows that for 1992-93, the city produced more units at a lower cost per unit. This equates to the city's ability to be more productive, innovative and prudent while continuing to serve its community effectively and efficiently.


The city's staff has made earnest efforts to improve PAMS and its usability from year to year. At the end of fiscal year 1992-93, Sunnyvale's annual performance report--the report card to its citizens--shows that, during the preceding six years, the city had improved productivity by 30 percent and had reduced the cost of service on a constant-dollar basis by 29 percent.


Effective money management and budgeting by the City of Sunnyvale has returned high yields to the community. Not only has the city tracked measurable productivity improvements, but it has among the lowest fees and taxes in the region. The city's water, garbage and sewer utilities are self-supporting through rates, not taxes. Sunnyvale's rates are competitive compared to other communities: water rates are the lowest in Santa Clara County, where Sunnyvale is the second-largest city.

There are no property assessments for basic services, such as street lights or sidewalks; there are no payroll taxes for businesses; and the City of Sunnyvale paid off the last of its general obligation bonds in 1988. This means there are no hidden charges in residents' property tax bills. This gives Sunnyvale the strength and room to maneuver through difficult financial times.

Improvements have occurred in every service area and are measured directly. Whether it is the cost per unit of street maintenance, per library book checked out or per fire inspection conducted, each could be improved once the focus was clear on the outcomes and outputs desired. When outcomes are explicitly stated, even on the seemingly unmeasurable goal of "reduction in accidents and property loss per million miles traveled," a focus of effort is created and tremendous gains are possible.

Despite the ongoing California budget crisis and recession, Sunnyvale has continued to provide its high level of services with no service reductions, no tax increases and no staff layoffs. In addition, there is no better way to determine the effectiveness or quality of services provided than to ask the customer. Ongoing user surveys are conducted in eacfh service area of the city. A comprehensive citywide survey conducted by an independent agent in 1986 expressed high levels (90 percent) of constituent satisfaction in every service area.

Sunnyvale's financial managements has been recognized with numerous awards during the past decade by public finance officials in California and throughout the nation. Financial management is a team effort, and it is integral to Sunnyvale's overall philosophy of serving the public well in everything it does. Sunnyvale's motto is, "Never stop trying to get better."

Sunnyvale's business approach to manage its government is a proven success story. PAMS is not a cure-all system. however. It is a highly accountable structure and requires that everyone--from city council to management to line employees--use the system. While it is a financial system, it is more of a management tool to assist in informed decision making. It should be designed to meet the unique characteristics of each community. It focuses on what is to be achieved with public dollars rather than on how it is to be achieved. It also focuses on cost and quality improvement rather than on reacting to crisis management. Most of all, PAMS places emphasis on long-range financial planning as a way of life.

citizens Win. Residents and businesses receive excellent services and high value in return for their tax dollars. Costs, such as taxes and fees, remain low. Services have not been affected by budget losses facing California cities from state government decisions, nor by economic changes as a result of the recession.

City Council Wins. For the elected officials in Sunnyvale, the system enables them to achieve long-term, tangible results. PAMS frees them from the burden of complaints and involvement in the day-to-day management of the city. As policy makers, councilmembers can concentrate on policy goals and service levels to respond to community priorities.

Employees Win. Sunnyvale's staff is able to focus on achieving results. Employees are empowered to seek innovative solutions to meet service-level goals. The compensation package is highly competitive, and management employees are rewarded for exceptional performance. The city has been able to maintain stable employment without resorting to layoffs or cutbacks.

sunnyvale continues to demonstrate that government can be run like a business. It has proven that, even with fewer public dollars and increasing citizen demand, a high level of service can be maintained.
COPYRIGHT 1994 Government Finance Officers Association
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Copyright 1994 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Sunnyvale, California
Author:Chan, Amy
Publication:Government Finance Review
Article Type:Cover Story
Date:Apr 1, 1994
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