Cutting Costs: A Compendium of Competitive Know-How and Privatization Source Materials

About the Authors

William D. Eggers, Lead Author
Bill Eggers is a nationally recognized expert on privatization, and was until recently the director of privatization and government reform at the Reason Public Policy Institute, the country’s leading research center on privatization and state and local fiscal management issues. He is now a special assistant to the Texas state comptroller. Mr. Eggers also is the co-author of Revolution at the Roots: Making our Government Smaller, Better and Closer to Home (Free Press, 1995). The book was named as the winner of the Atlas Economic Research Foundation’s 1996 Sir Anthony Fisher International Memorial Award for the book “making the greatest contribution to the understanding of the free economy during the past two years.” A 1996 winner of the prestigious Roe Award for leadership and innovation in public policy, Mr. Eggers has advised dozens of cities, states and foreign countries and trained hundreds of public officials on the nuts and bolts of downsizing and restructuring government.

Timothy J. Burke, Contributing Author
Timothy Burke was a graduate student in public policy at the University of California, Los Angeles (UCLA) and an intern with Reason Public Policy Institute hired to work on the original version of this project (1997). He has since become an analyst with Ernst & Young.

Adrian T. Moore, Contributing Author
Adrian Moore is the director of privatization and government reform at the Reason Public Policy Institute. He is the co-author of Curb Rights: A Foundation for Free Enterprise in Urban Transit (Brookings, 1997), and his articles have been published in such well known publications as Regulation, The American Enterprise, the Los Angeles Times and the Houston Chronicle.He has served as a spokesmen for RPPI on such media outlets as Fox News Network, KPCC, On-Line KROQ, Radio Free America and the Wall Street Journal Report. He is currently an advisor to commissions on privatization and government management in over a dozen states, cities and counties. He is completing his Ph.D. in economics at the University of California, Irvine. He was the primary author those sections within this book pertaining to water, wastewater, fire and emergency medical services.

Richard L. Tradewell, Contributing Author
Rich Tradewell left the Los Angeles County Chief Administrative Office in 1979 as the principal health services program analyst. He moved on to several senior management positions including hospital administrator for Comprehensive Care Corporation and director of development for Travelers Health Network. He is the author of “Privatizing Public Hospitals: Strategic Options in an Era of Industry-wide Consolidation,” published as a Reason Policy Study (No. 242) in August 1998. He is currently completing his Ph.D. in political science at Claremont University. Tradewell wrote the health-care sections of this report.

Douglas P. Munro, Contributing Author
Doug Munro is the president of the Calvert Institute and a frequent writer on Maryland state and local affairs. His articles have appeared in the Baltimore Sun, the Baltimore Business Journal and the Montgomery Journal. He is a frequent guest on radio public-affairs and talk shows, particularly at WJHU 88.1 fm and WBAL 1090 am. He has also been featured on NewsNight Maryland (MPT-TV), WBAL-TV evening news, WMAR-TV evening news, WBFF-TV evening news, Fox Cable Network News and Kweisi Mfume’s Bottom Line show (WBAL-TV). Munro holds a Ph.D. in political science from the Johns Hopkins University. He wrote the Maryland material within this report.

About the Publishers

This publication is based upon material previously released in the form of a jointly published book, Cutting Local Government Costs through Competition and Privatization (1997). That work, which focused primarily on California issues, was published under the auspices of the California Chamber of Commerce, the California Taxpayers’ Association, the Howard Jarvis Taxpayers’ Association and the Reason Public Policy Institute (RPPI, a division of the Reason Foundation). The book was edited by Bill Eggers, then the director of privatization and government reform for RPPI. This revised and updated version of the book focuses on Maryland affairs (though much of the content applies equally to other states). The rewrite was edited by Doug Munro (Calvert Institute).

Reason Foundation

Since 1978, the Los Angeles-based Reason Foundation has provided practical public-policy research, analysis and commentary based upon the principles of individual liberty and responsibility and limited government. The Reason Public Policy Institute (RPPI), a division of the Reason Foundation, fuses theory and practice to influence public policies. RPPI’s research draws upon economics, science and institutional analysis to examine public policies and advance new policy ideas in a variety of policy areas.

Howard Jarvis Taxpayers’ Foundation

The Howard Jarvis Taxpayers’ Foundation is devoted to promoting economic education and the study of tax policy. Recent studies sponsored by the foundation include an analysis of Los Angeles County government, Proposition 13 and state tax and expenditure trends, the state budget, privatization of government services and alternatives to protect taxpayers when lawsuits threatened Proposition 13.

California Taxpayers’ Association

Cal-Tax is a non-partisan, California non-profit corporation formed in 1926 and operated continuously since that time to serve its members and the citizens of California by protecting taxpayers from unnecessary and unwarranted taxes and financial burdens and promoting efficient, high-quality governmental services. Cal-Tax currently represents nearly 700 individuals and corporate members and approximately 30 local organizations.

California Chamber of Commerce

The California Chamber of Commerce is the largest and most broadly based employer representative in Sacramento with nearly 11,000 member companies statewide. Its staff meets with legislators, regulators and other key government staff members year-round to assure that they consider employer concerns when proposing new laws and regulations. Backing up this lobbying team are 1,200 representatives of member firms who serve on the California chamber’s standing committees, 160 member trade associations, 425 affiliated local chambers of commerce and a statewide network of 275,000 small business owners.

Calvert Institute for Policy Research

The Calvert Institute for Policy Research is Maryland’s only conservative and market-oriented public policy research institution. Despite its relative youth (four years since incorporation), the institute’s voice has been a loud one. In November 1998, a Calvert report on bloated municipal bureaucracy in Baltimore was credited by one Baltimore Sun reporter with embarrassing the Mayor Kurt L. Schmoke (D) into downsizing the city work force by 500. Likewise, Calvert’s advocacy of a reduction in Maryland’s public-debt levels was hailed by Sun columnist Barry Rascovar as “smart financing” and the “right move for Maryland.”

Executive Summary

As Maryland moves toward the 21st century, an expanding population demands ever better services and ever more schools – without more taxes. How to pull it off? The answer is for local governments to pay less for services, leaving funds available for purchasing additional services in other areas. The easiest means of doing this is to subject service providers to the rigors of the market by making them compete with each other.

Baltimore City

Baltimore City faces a related but differently nuanced problem. There, the problem is not how to produce more services for the same money. No, Baltimore urgently needs to pay less money – far less money – for approximately the same level of services. The solution is the same: Subject existing providers to vigorous competition. There really is no other option. No other American city save Washington, D.C. lost as much population as did Baltimore during the 1990s. With a net loss of over 1,000 people a month, Baltimore is rapidly losing what remains of its tax base. Plain and simple, the city is regarded by many people as a supremely unappealing place to live.

But unappealing is one thing. Unappealing and expensive is entirely another. The city’s tax burden is astonishingly high. Proportional to family income, Baltimore’s combination of state and local taxes is the fifth-highest of any large city in the U.S. Its effective property-tax rate is the 12th-highest. The Hong Kong example proves that people will put up with low services if taxes are correspondingly low. But no one can seriously expect Baltimore’s middle class indefinitely to put up with sky-high crime and execrable schools – and a vast tax bill to boot.

Contrary to popular belief, Baltimore is not strapped for cash. Baltimore’s 1996 revenue per capita from all sources was, at $3,171, the seventh-highest of the 28 largest cities in the nation, according to the Census Bureau. And the place receives more state and federal transfer funding proportional to budget size than any of the two dozen biggest cities in America (in fact, in fiscal 1994 it received the sixth-highest raw-dollar amount of transfer funding, regardless of budget size). With almost half its annual budget made up of state and federal funds, Baltimore is the most externally dependent large city in the country.

The problem is that Baltimore City is inefficient in its expenditure. Expressed in “Baltimore dollars” (that is, in figures equivalent to their purchasing power in Baltimore), comparable cities pay far less per capita for many services than Baltimoreans do. In 1995, Baltimore spent $248.74 per capita on police services, while Philadelphia and Indianapolis got by on $180.78 and $132.04, respectively. For fire services, Baltimore in 1995 spent $125.85 per person, far more than Philadelphia ($64.95), Indianapolis ($61.05) or Milwaukee ($100.01). That same year, Baltimore expended $128.81 per resident on streets and highways (a public works function), compared to $46.55 in Philadelphia, $97.96 in Indianapolis, $77.43 in Milwaukee and $111.95 in Cleveland.

None of this seems cause for concern within the Baltimore political establishment. Former state Senator Julian L. Lapides (D-Baltimore City) calls Baltimore’s reliance on external funding a “just payback” for the days of yore when a wealthy Baltimore subsidized rural Maryland. Past city council discussions about privatization have gone nowhere. None of the current Democratic candidates for mayor has addressed the issue. This is a pity, because what limited experience Baltimore has had with privatization has been positive. When the municipal golf courses where some years ago turned over to a non-profit to run, they went from losing $500,000 a year to making a profit of $400,000 between them.

Streamlining Techniques

A variety of institutional reforms and alternative service delivery techniques can be employed to maximize efficiency and increase service quality. Some methods will be more appropriate than others depending on the service. In searching for ways of cutting costs and increasing competition in service delivery, cities and counties should consider using a combination of techniques. Some are service delivery techniques, designed to alter the means of delivering municipal services. Examples include: management contracts, public/private competitions, franchises, internal markets, vouchers, commercialization, corporatization, and asset sales or long-term leases.

There are also reforms that must be made within public agencies, reforms which will facilitate fair privatization and good government in general. First, there is the purchaser/provider split, separating policy functions from service delivery, transforming them into distinct units. Second, agencies should adopt performance/output budgeting, by which policy makers budget in terms of outputs and outcomes, not inputs. Third, performance contracts should be established for public-sector employees, whereby performance agreements are negotiated between individuals and employers on work expected. Fourth, local governments should adopt accrual accounting, whereby assets are depreciated and obligations are recorded in the books when they incur, rather than when the money is spent. Finally, there is reengineering, which involves radically rethinking and redesigning work processes.

Privatization Opportunities

Infrastructure, public works and transportation are amongst the ripest areas for employing a range of creative privatization techniques. Various studies have documented budget savings of between eight percent and 30 percent for wastewater-services privatization, between 10 percent and 25 percent for water-services privatization, and between 28 percent and 42 percent for the privatization of solid-waste services. These are not the sorts of savings officials can afford to ignore.

One model is provided by the southern California City of Hawthorne, which in March 1996 completed the first ever long-term lease of an existing municipal water system. The California Water Service Company (Cal Water) made an up-front payment of $6.5 million to the city and must pay annual lease payments of $100,000 for 15 years. The lease made Cal Water responsible for all needed capital improvements.

Likewise, the California city of Manhattan Beach contracted out its solid-waste disposal in a very creative manner, saving serious money. In early 1993, the city council rebid its refuse collection services, which were already under private contract. After all proposals were in, the city actually revealed the proposals publicly, for all bidding firms to review. Firms were allowed to revise their proposals based on what other firms had offered, thus allowing for improvement in the city’s ultimate deal. In the end, the firm under the current contract won the bidding war – but for a savings of $1 million.

Public safety is an area generally considered best left up to the public sector. Yet, there are creative steps that may be taken to increase private-sector or non-union involvement even here – to the benefit of taxpayers. Especially in California, some jurisdictions are experimenting with interesting public/private partnerships for these services. San Diego, for example, realizes more than $1.5 million worth of man hours from using over 1,000 volunteers in its police department. The volunteers, a large number of them senior citizens, have enabled San Diego to add several new policing services and are an important component of the city’s community policing program.

Another innovative way that many California cities have reduced public safety costs is by contracting with other governmental entities (typically counties) to provide services. Westminster, California is saving more than $2 million annually from contracting with Orange County for fire services, while San Clemente is saving the same amount from contracting with the county for police services.

Political and Organizational Strategies

With Baltimore’s mayoral election a few short weeks away, political horse trading for endorsements and the like is at fever pitch. Given this, the next mayor will have to tackle entrenched interests whose appetites for perks have been whetted by the summer’s political processes.

As the authors have examined hundreds of programs at every level of government across the country and around the world, we have identified six key political and organizational strategies for successfully implementing competitive strategies. These are:

Each of these is examined in depth in the final chapter of this book. But the salient points to remember for now are, first and foremost, that a strong political leader is vital to success. Voters must bear this in mind as they go to the polls. A candidate who has promised everything to current service providers is, to say the least, unlikely to deliver much to taxpayers in the way of lower costs through competition. Second, nickel-and-dime pilot projects are doomed from the start. They will not generate enough savings to impress taxpayers and they will be the target of severe institutional ire. Third, politicians must “just do it.” Bureaucrats are adept at dooming reform proposals to decades of discussion, in the full knowledge that political leaders will eventually lose office or interest. Fourth, the administration must ensure knowledgeable oversight by creating a central office to supervise all agency privatization ventures. Fifth, to deter public agencies from derailing reform mandates, agencies which purchase services should be kept separate from agencies that provide services. Finally, union employee resistance to privatization is invariably fierce. This resistance is based on fear and misperceptions. Thus, employee-adjustment strategies are essential to winning employee support for reform.

The next mayor of Baltimore will inherit a spendthrift city impervious to reform. He must change that. Or the city’s long spiral downward from fame to futility will continue unabated.

- Bill Eggers and Doug Munro

I. Introduction

As the 21st century approaches, Maryland’s public-sector agencies – at both the state and local levels – face major challenges. First, a growing population in much of the state (with the notable exception of Baltimore City) is creating the need for more schools, roads, sewers and prisons. Second, quantum advances in customer service and technology in the private sector are causing Marylanders to demand more responsive, higher quality services at a lower price from the public sector.

Given these developments, traditional means of coping with fiscal pressures – such as increasing taxes or cutting services – are no longer an option in many jurisdictions. This means that Maryland public agencies will need to find ways to cut the costs of government – while simultaneously pulling off the seemingly impossible task of maintaining services levels. Meanwhile, in Baltimore City, the task is not so much to provide more services for the same funds (through privatization), but to provide similar levels of service for dramatically lower costs (in an effort to stem the city’s catastrophic population loss).

One of the most proven ways of improving service cost efficiencies is by introducing competition and privatization into public sector operations. “No reporting process, auditing procedure or budget procedure has ever gotten a public organization to put anywhere near the energy into improvement that competition has,” says Phoenix, Arizona city auditor Jim Flanagan. “Enormous energy goes into getting prices down for bids.”1 Budget savings resultant from privatization of government functions can be spectacular, as shown in exhibit 1, which gives the ranges of savings documented by some of the studies referred to in this manual.

Competition has become standard operating procedure in hundreds of governments in America and around the world. In Australia, the process of opening up public services to competitive bidding is termed “market testing.” In New Zealand, all government departments strive for “contestability” in service delivery.

Contrary to popular belief, competition need not necessarily lead to job losses among current, public-sector providers. In Indianapolis, where nearly all public services are regularly subjected to competition, public units have won about two dozen bids in head-to-head competitions with private firms. City line-level employees in most cases are better off than they were before competition, because the introduction of financial incentives – performance bonuses and gainsharing – has put more money in their pockets in exchange for increases in productivity.

There also is much that Maryland public officials may learn from innovative city and county governments in California. Lakewood and other California cities have been contracting competitively for a host of services for 30 years. Sunnyvale has received international attention for its performance-based budgeting model. And through its extensive use of civilians and volunteers, San Diego has kept its per capita policing costs close to the lowest in the country among big cities, making it the envy of other police departments.

This report is intended to serve as a comprehensive handbook to assist Maryland and other policy makers introduce competitive strategies into governing. Streamlining techniques, cost-savings potential and best-practice examples are detailed by service category. The handbook provides extensive how-to tips to help officials implement privatization and competition strategies.

To use this book, look in the table of contents to find the broad issue area you are interested in. Look up the relevant chapter and peruse it until you find the specific service of interest. Read the privatization examples provided and then call the contact experts listed at the end of the section for more information.

II. Trends in Maryland

Maryland is a wealthy state. As shown in table 1, its 1995 median household income was $42,132, a figure 19.8 percent higher than the national median of $35,172. Maryland’s poverty rate is well below the national average: 9.2 percent compared to a nationwide rate of 13.7 percent.2 If one wished to be trite, one might almost argue that Maryland can “afford” its high taxation rates, were it not for the unfortunate effect on the business climate. In July 1999, the Maryland Association of Nonprofit Organizations made just that argument, claiming that “Maryland state and local governments collect less tax revenue relative to the state’s economy than state and local governments elsewhere.”3 This of course ignores the damage done to the private-sector economy by excessive taxation.

For high the state’s taxes are. In 1997, the most recent year for which comparative statistics are available, Maryland’s per capita, combined state and local tax burden (all tax types) was, at $3,431, the seventh-highest of the 50 states.4 According to a recent study published by Clemson University, the state ranks 35th out of 50 in terms of economic freedom (that is, freedom from heavy tax and regulatory burdens), with 1 representing “free” and 50 “unfree.”5 This taxation is necessary in turn to provide for an expanding public sector. Annapolis’ rhetoric notwithstanding, the number of individuals drawing a state paycheck grew from 93,103 in fiscal 1990 to 97,007 at the end of fiscal 1997 (regular and contractual employees combined), an increase of 4.2 percent,6 as evidenced in figure 1. (The state government likes to point to the shrinking number of official state “employees” to prove its commitment to limited government. This statistical sleight of hand excludes the hundreds of contractual workers who augment the official employees. Contractuals make up an ever increasing percentage of the government’s work force: 31.8 percent in 1997 compared to just 22.4 percent in 1990. When contractuals are added to regular employees, as above, it becomes plain that the size of the work force has increased.)7

Likewise, spending has increased relentlessly over the past few years. The state budget in fiscal year (FY) 1990 was $11.2 billion. In FY 1995, the year current Governor Parris N. Glendending (D) took office, spending was set at $13.8 billion. By FY 1999, this had risen to $16.5 billion.8 Even adjusting for inflation by expressing the figures above as 1998 dollars (rendering them respectively as $13.6 billion, $14.5 billion and $16.3 billion), state spending has increased by 19.8 percent in real terms this decade.9

Baltimore Could Benefit

However, Maryland as a state is not our sole concern. Perhaps the principal beneficiary of cost-cutting privatization measures would be Baltimore City, the state’s decaying former political and social center of gravity. The city’s poverty rate is 24.0 percent (compared to Maryland’s 9.2 percent) and its median family income is just $25,918 (next to Maryland’s $42,132).10 City leaders have over the past decade or so exhibited an almost blissful lack of concern for the factors driving residents to the suburbs. The city suffers a net population loss of some 1,000 people a month, witnessing an 8.2 percent population decline from 1990 through 1996, a considerably greater rate of loss than that endured by similar cities such as Philadelphia, Indianapolis, Milwaukee and Cleveland.11 (See table 2.) Indeed, from 1990 through 1998, Baltimore suffered a greater proportional population loss than any American city save Washington, D.C.12

A 1997 survey of ex-city residents commissioned by the Calvert Institute found crime and education to be Baltimoreans’ principal reasons for fleeing, not surprisingly, but taxation-related issues ranked third in importance, cited by 9.1 percent of respondents as being their primary reason for departure (compared to 43.4 percent answering “crime” and 16.5 percent answering “education”).13

Despite Baltimore’s dire population loss, officials have remained timid about education reform and have essentially done nothing whatsoever to reduce Baltimoreans’ tax burden. In 1992, Baltimore City’s combined rate of major state and local taxes was, proportional to income, the fifth-highest of any city in the country (16.23 percent of income for a family of four in the $25,000-to-$50,000 income category).14 Meanwhile, in 1996, Baltimore’s effective property-tax rate was the 12th-highest of 51 cities examined by the District of Columbia’s Department of Finance and Revenue.15 And total revenue per capita from all sources was (at $3,171) the seventh-highest of the 28 largest cities in the nation, according to the Census Bureau.16

As illustrated in figure 2, city spending has steadfastly climbed recently, heedless of the hemorrhaging population. Expressed in constant 1998 dollars, from a level of about $2.0 billion in 1989, city expenditure decreased in real terms during the recession of the early 1990s but has increased fairly steadily since then. By FY 1997, spending (in 1998 dollars) was back up to $1.95 billion.17

The increase becomes ever more apparent when expressed in proportion to population. In 1989 (the year of its record spending), the city spent $2,711 on each resident. By 1997, though its inflation-adjusted overall budget was lower than in 1989, the amount the city spent per resident was considerably higher: $2,910, an inflation-adjusted increase of 7.8 percent. (See figure 3.) Meanwhile the number of municipal employees per 10,000 residents was in 1997 the highest it had been since 1981.18 (See table 3.) The work place of 21.0 percent of all public-sector employees in Maryland (federal, state and local), Baltimore has the highest concentration of non-private-sector workers of any of the state’s subdivisions. Only Montgomery and Prince George’s counties, in the Washington suburbs, come close with, respectively, 18.7 percent and 16.4 percent.19

It will not suffice for the city to claim, as it has in the past, that, despite its large municipal work force, services are nonetheless provided quite cheaply.20 Baltimore still does not make the grade. The Census Bureau divides municipal functions into such broad categories as: public education; housing and community development; health; police; fire services; highway and road services; public assistance; and public utility services. Using Census Bureau data, table 4 excludes those functions not common to all five cities compared, leaving housing, public health, police, fire and highways/roads. (We have even omitted the health category for Philadelphia and Indianapolis, because their budgets include spending on publicly run hospitals, a function not replicated in the other three cities.) Population differences are controlled for by expressing all expenditures in per capita terms. We control for regional variations in purchasing power by converting all figures to “Baltimore dollars,” i.e., by expressing them in sums equivalent to their purchasing power in Baltimore. This conversion is accomplished using an Internet site provided by the Yahoo! web search engine.

In each of the five functions, Baltimore’s 1994 per capita expenditure was higher than the average of the other four cities (see figure 4).

In the housing and community development function, Baltimore in 1994 spent $112.52 per resident, more than all the other cities except Indianapolis and 3.4 percent more than the mean.

In the health area, we have excluded a comparison with Philadelphia and Indianapolis because of their hospital expenditures, which could not be separated from their other public health spending. Baltimore health expenditure was, however, considerably higher than that of Milwaukee and Cleveland, though this may very well be explained by Baltimore’s extraordinarily high rates of AIDS and other sexually and syringe-transmitted diseases. At $99.20 per capita, Baltimore’s spending was 196.2 percent higher than the Milwaukee/Cleveland average.

Baltimore’s policing function exceeded the other cities’ average by 26.3 percent, spending $248.74 per resident as opposed to their $196.98.

Likewise with the fire function, the city spent $125.85 on each Baltimorean, compared with the other cities’ $91.73 (37.2 percent more).

Finally, in the highway function, a component of public works, the other cities’ expenditure of $83.47 per resident paled next to Baltimore’s lavishing of $128.81 – a figure 54.38 percent higher than the other cities’ average.21

At the same time, the city’s reliance on outside sources of income has increased. As figure 5 shows, by FY 1997 almost half the city’s budget was made up of federal and state grants.22 This ability to access outside funding has a particularly deleterious effect. Baltimore receives more intergovernmental transfer funding than the vast majority of jurisdictions in America. “Annapolis probably gives more to Baltimore proportionately than any other city receives in state funding,” says Cooper Union college historian Frederick F. Siegel.23 Nor does the federal government shortchange Baltimore. In 1996, the Washington/Baltimore consolidated metropolitan statistical area,24 received $10,682 in federal grants per capita, ranking it seventh of 273 metro areas in terms of receipt of federal funds.25 The city itself in FY 1994 received $938 million in intergovernmental transfer funds, the sixth-highest intergovernmental funding in raw dollars of any of the two dozen largest cities in the nation.26 This sort of state and federal generosity is unfortunate because it allows the city indefinitely to postpone necessary restructuring.

One common plea made by the city to justify its consistent rattling of the tin cup in the state and national capitals is that it is somehow “different” – and thus in need of special consideration – on account of its being a free-standing subdivision, not a part of any county. This is an absurd objection, for it assumes that other cities are awash in funds provided by the county each is located in. This is simply not the case. Moreover, in Maryland, the state government to a large extent steps into the role filled by county governments elsewhere. For example, Cleveland’s real property value assessment for tax purposes is carried out by the surrounding Cuyahoga County on behalf of the city. In Maryland, property evaluation is made by a state agency, so it is not as though the city is spending its own funds on this function. In recent years, Annapolis has assumed costly Baltimore municipal functions, such as the city jail and the city’s community college.

The crucial question is not, how much money does the county kick in? Rather, the query should be, how dependent is the city upon own-source revenue as opposed to intergovernmental transfers from all other sources? Though different revenue structures make exact comparisons difficult, there is no reason to suppose that Baltimore is hard done by in terms of intergovernmental transfers. Quite the reverse. An examination of the budgets of a number of similar ex-industrial cities reveals that they are far more self-reliant than Baltimore. Below, we have compared Baltimore’s budget to those of the same cities listed above.

With nearly half its funds derived from non-local sources, Baltimore is very externally dependent. In FY 1994 (the latest year for which comparable figures are available), 43.93 percent of its total budget was derived from general revenue intergovernmental transfers. By contrast, and as shown in figure 6, some 18.57 percent of Cleveland’s total budget was similarly derived. (Cleveland raises much of its revenue by means of a local income tax levied on all people working in the city, regardless of place of residence.) In some respects like Baltimore, Indianapolis has no surrounding county because it “consolidated with” (read, annexed) Marion County in 1970. Previously about half its size, Indianapolis now occupies just about all of the 402-square-mile Marion County with the exception of four small towns that refused to be swallowed by the city (though they remain part of the county). The Consolidated City of Indianapolis in 1994 received 28.44 percent of its total funds from general revenue intergovernmental transfers. Only Milwaukee that year came remotely close Baltimore’s dependence on transfer funds. Its budget was 37.88 percent contingent upon non-city funding. As for Philadelphia, 26.91 percent of its fiscal 1994 budget was derived from external sources. Indeed, Baltimore in 1994 received as a proportion of its budget more intergovernmental funding than any of the two dozen largest cities in the nation, more even than the District of Columbia, which was 33.98 percent externally dependent. The average among the 24 was 21.7 percent.27

Nevertheless, despite privatization’s promise dramatically to reduce municipal service costs – and thus residents’ tax burdens – the authorities in Baltimore have shunned the issue almost entirely. With astonishing insouciance, former state Senator Julian L. “Jack” Lapides (D-Baltimore City), looks at the city’s dependence on Annapolis as “just payback,” on the grounds that years ago, a wealthy, influential “rich uncle” Baltimore subsidized state expenditure in the rural counties. “If we live long enough,” he says, “as the problems grow in Baltimore County – the schools, poverty and blight – eventually, the city will be back in a position of dominance.”28 It is not clear how this will be of assistance in the here and now.

Meanwhile, past dalliances with the concept of privatization have been tepid to the point of absurdity. In 1992, then-Councilman Anthony J. Ambridge (D-2nd) introduced a (failed) ordinance mandating that the privatization of any function would have to demonstrate potential savings of at least 20 percent before being allowed to proceed. The bill also decreed that any contractors overcoming this hurdle would have to include “provisions, if feasible, for the hiring of displaced [city] employees.” This sort of obstruction has made privatization a virtual non-issue in city policy debates.

To be sure, the city has off-loaded a number of assets over the past few years. However, most of this process has involved turning functions over to the state government rather than to the private sector. The examples noted above – the prison and the community college – are but two. Additionally, and contrary to past practices, the local airport (Baltimore/Washington International or BWI) is now under state control, as are the city’s two new professional sports stadiums, Oriole Park at Camden Yards (for the Orioles baseball team) and the PSINet Stadium (for the Ravens football team). BWI’s previous incarnation, Friendship Airport, was city run, as was once the Orioles’ old home, Memorial Stadium. Those sections of the interstate highway system within the city limits – part of I-95 and I-395 – that were once maintained by the city have, likewise, been turned over to the state.29

As for pure privatization, examples are few. The former City Hospital has become Johns Hopkins Bayview. But the municipal golf courses, the municipal markets, the zoo and the civic center have all been turned over to quasi-public agencies, rather than to purely private companies. Even so, success there has been. When still directly administered by the city, the five local public golf courses – Carroll Park, Forest Park, Lake Clifton, Mount Pleasant and Pine Ridge – between them lost a half-million dollars a year. Now, under the Baltimore Municipal Golf Corporation, they generate $400,000 in revenue a year for the city coffers.30

Early in 1999, there was a limited amount of renewed, polite discussion about privatization, as reported in several newspapers at the time.31 But this was not the result of any intrinsic enthusiasm for competition on the part of city leaders. Rather, it was the result of a state bill introduced some 10 months earlier, during the 1998 session of the General Assembly. This bill proposed withholding $5 million in state aid if the city did not adopt “competitive reengineering,”32 a term described in the next chapter. The sponsor eventually withdrew the bill, but the city saw the action as a shot across the bows – and temporarily privatization was the talk of the town.

However, would-be reformers see no particular reason for enthusiasm when viewing the current line-up of candidates for the November 1999 mayoral election. One of the front-runners as of August 1999 was Lawrence A. Bell III (D), the incumbent city council president. In response to concerns voiced by municipal unions about privatization in spring 1999, Bell assured union attendees at a council meeting, “We’re listening to you. We hear you. We’re going to do what we can to help you.”33

By 2003, Baltimore City’s cumulative debt is projected to have reached $153 million.34 Despite this, during deliberations for the city’s FY 2000 budget the principal talk was about how to get away with imposing new taxes. Proposals ranged from imposing a tax on boat slips, to taxing non-profits, to taxing cellular telephones, to reinstating the despised “bottle tax” on soft-drinks.35 Notably absent was any discussion of means to maintain constant service levels at reduced costs – by introducing competition. Likewise, a July 12, 1999 forum of Democratic mayoral candidates witnessed no discussion of privatization.36 The topic du jour of January 1999 had by summer apparently become a non-issue.
est. Read the privatization examples provided and then call the contact experts listed at the end of the section for more information.

III. Streamlining Techniques

This chapter describes the basic models for streamlining the cost of government service provision, be it by finding alternative providers or by finding means for the existing (public) provider to do so less expensively. The terms described in this chapter will occur repeatedly throughout the rest of the report. The pages that immediately follow serve as a sort of glossary.

Alternative Service-Delivery Techniques

A number of alternative service-delivery techniques exist, a variety of which may be employed to maximize efficiency and increase service quality. Some methods will be more appropriate than others depending on the service. In searching for ways of cutting costs and increasing delivery, Maryland officials should consider using a combination of these methods.37

Contracting Out

This is also called “outsourcing” sometimes. Under outsourcing, the state or local government competitively contracts with a private organization, for-profit or non-profit, to provide a service or part of a service.

Management Contracts

The operation of a facility is contracted out to a private company. Facilities where management is frequently contracted out include airports, wastewater plants, arenas and convention centers.

Public/Private Competition

This is also known as “managed competition” or “market testing.” When public services are opened up to competition, in-house public organizations are allowed to participate in the bidding process against private-sector bids.

Franchise

A private firm is given the exclusive right to provide a service within a certain geographical area.

Internal Markets

Departments are allowed to purchase support services such as printing, maintenance, computer repair and training from either in-house providers or outside suppliers. In-house providers of support services are required to operate as independent business units competing against outside contractors for departments’ business. Under such a system, market forces are brought to bear within an organization. Internal customers can reject the offerings of internal service providers if they do not like their quality or if they cost too much.

Vouchers

Under a voucher system, the public sector continues to pay for the service, but it does not provide the service directly. Rather, individuals are given redeemable certificates to purchase the service on the open market. The vouchers may subsidize the consumer’s costs, but the point is that service is provided by the private sector, subjecting would-be vendors to the intrinsic cost-cutting regime of the market. Thus, in addition to providing greater freedom of choice, vouchers bring consumer pressure to bear, creating incentives for consumers to shop around for services and for service providers to supply high-quality, low-cost services.

Commercialization

This is also referred to as “service shedding.” With commercialization, the government stops providing a service altogether and lets the private sector assume the function.

Self-Help

This involves the transfer of service-provision responsibilities to the non-profit sector. Community groups and neighborhood organizations take over a service or government asset, such as a local park. Governments increasingly are discovering that by turning some non-core services – such as zoos, museums, fairs, remote parks and some recreational programs – over to non-profit organizations, they are able to ensure that these institutions do not drain the budget.38

Volunteers

Volunteers are used to provide all or part of a government service. Volunteer activities are conducted through a government volunteer program or through a non-profit organization.

Corporatization

Under a corporatization strategy, government organizations are reorganized along business lines. Typically they are required to pay taxes, raise capital on the market (with no government backing, explicit or implicit), and operate according to commercial principles. Government corporations focus on maximizing profits and achieving a favorable return on investment. They are freed from government procurement, personnel and budget regulations.

Asset Sale or Long-Term Lease

Government sells or enters into long-term leases for assets such as airports, real estate or gas utilities to private firms, thus turning physical capital into financial capital. In a “sale/leaseback” arrangement, government sells the asset to a private-sector entity and then leases it back.

Another asset-sale technique is the “employee buyout.” Existing public managers and employees take the public unit private, typically purchasing the company through an employee stock ownership plan (ESOP).

Private Development and Operation

Under this model, the private sector builds, finances and operates public infrastructure such as roads and airports, recovering costs through user charges.

Several techniques commonly are used for privately building and operating infrastructure. For example, with “build, operate and transfer” (BOT) arrangements, the private sector designs, finances, builds and operates the facility over the life of the contract. At the end of this period, ownership reverts to the government.

A variation of this is the “build, transfer and operate” (BTO) model, under which title transfers to the government at the time construction is completed.

Finally, with “build, own and operate” (BOO) arrangements, the private sector retains permanent ownership and operates the facility on contract.

Institutional Streamlining Tools

While the most appropriate service delivery technique will vary depending on the service in question, there are a number of institutional reforms that can be applied across government agencies and services. From London, England, to Sunnyvale, California, to Auckland, New Zealand, governments across the globe are revolutionizing the systems and structures of the public sector by introducing innovative management and organizational reforms. These cutting-edge reforms can help institutionalize continuous improvement in the public sector as Maryland cities and counties approach the 21st century.

Purchaser/Provider Split

A popular public-policy trend is separating (a) policy and regulatory functions from (b) service delivery and compliance functions, transforming them into separate and distinct organizations. Termed the “purchaser/provider split,” or “uncoupling,” the goal is to free policy advisors to advance policy options that are in the public’s best interest but may be contrary to the self-interests of the department. Splitting policy functions from service delivery creates incentives for governments to become more discriminating consumers by looking beyond government monopoly providers to a wide range of public and private providers.

Performance Budgeting and Management

With performance management, policy makers budget in terms of outcomes and outputs rather than in terms of inputs (as is commonly the case now). Managers submit strategic objectives and are held accountable for achieving these outcomes. Prices for goods and services are negotiated on the basis of the goods and services supplied – irrespective of production or overhead costs.

Performance Contracts

Performance agreements are negotiated between individuals and employers on work expected and compensation. The performance agreements typically contain a list of items the employer and individual believe are the most important goals for the year for the agency. Often, some part of the individual’s salary is at risk depending on performance, and a bonus of up to 20 percent can be earned for superior performance. Starting with the agency director, performance contracts often are cascaded through the organization.

Accrual Accounting

Accrual accounting is the standard accounting system used in the private sector in which assets are depreciated and obligations are recorded in the books when they incur, rather than when the money is spent. Accrual accounting has two major advantages over traditional government cash-based accounting. First, from an ownership perspective, it provides incentives for managers to manage their assets more proactively and maintain government capital. Second, from a purchase perspective, accrual accounting and full-cost accounting are necessary to determine the true costs of public services.

Reengineering

Reengineering refers to radically rethinking and redesigning work processes. When organizations reengineer, workloads are reduced by greatly cutting down on paper flow, procedures and internal requirements. Although it usually involves government entities’ making better use of technology, reengineering is not the same as automation.

IV. Privatizing Infrastructure and Public Works

Recent developments are likely to make infrastructure privatization a far more viable and attractive option for local governments in the late 1990s and beyond.

First, Internal Revenue Service (IRS) rules for allowing tax-exempt financing of long-term public/private infrastructure partnerships have been liberalized. In January 1997, the IRS issued new regulations concerning private-activity bonds. Previously, if a city contracted with a private firm for longer than five years to operate, say, a sewer system, any debt on the sewer system would have lost its tax-exempt status. This no longer holds true. Tax-exempt debt can now be used to finance facilities sold to, or operated on long-term contract by, a private operator.

The new regulations permit management contracts for up to 15 years for airports, roads and bridges, buildings and the like, and up to 20 years for such public-utility operations as electricity, gas, water and wastewater, without losing the tax-exempt status of any outstanding debt. There is one condition: At least 80 percent of the compensation paid to the private firm must be in the form of a flat fee; only 20 percent can be based on a share of the profits from the facility.

As for asset sales, the new rules permit existing tax-exempt bonds to retain their exempt status under three possible circumstances: (a) if the bonds are redeemed or defeased within 90 days of the sale; (b) if the sale proceeds are all cash and the city or county uses them for governmental purpose within two years; and (c) if the private purchaser uses the facility for an exempt purpose, so long as the bonds meet other applicable requirements, such as the state volume cap and any required public approval.

Second, particularly in places such as Baltimore City, chronic budget shortages are turning even ideological opponents of privatization toward at least a token reconsideration of the issue. For example, despite a history of reluctance to examine alternative methods of delivering municipal services (see chapter II), in January 1999 the Baltimore City Board of Estimates voted to hire to consulting firms to explore the matter. Nonetheless, it is far to early for reform proponents to rest easy as old habits die hard in “Charm City.” The vote to hire the consultants was made over the objection of City Council President Lawrence Bell, a leading candidate for mayor in the November 1999 election. And even lame-duck Mayor Kurt L. Schmoke (D) acknowledged that in part the retaining of the consultants was externally driven. As previously described, Delegate Samuel I. Rosenberg (D-Baltimore County) had in 1998 introduced a bill threatening to withhold $5 million in state funds if the city did not show progress in adopting “competitive reengineering.”39 The bill was ultimately withdrawn, but it woke up city leaders.40 Additionally, the liberal-leaning Baltimore Sun has of late run a number of articles discussing privatization,41 as has the Baltimore City Paper (generally known for its leftish, counterculture inclinations).42

This being the case, this chapter examines a number of the strategies in regard to the privatization of infrastructure and public works functions that Baltimore and other Maryland jurisdictions may wish to consider as they move into the next millennium.

Wastewater Treatment

The privatization techniques applicable to wastewater treatment are:

Cost Savings Potential

Cost savings from outsourcing wastewater treatment services typically range from 8 to 30 percent.43 A 1985 study comparing in-house to contractor-built and -operated water treatment facilities found that contractor costs averaged 20 to 50 percent less than in-house costs due to shorter construction lags and lower construction costs.44 Table 5 shows some of the dollar savings realized by five jurisdictions in recent years, ranging from $700,000 a year in West Haven, Connecticut to $13 million over five years in Indianapolis, Indiana.

Trends

As of January 1997, there were 509 privately operated, publicly owned wastewater treatment facilities in the United States.45 Experts predict that the market will grow nationally between 15 and 20 percent a year. The number of privately operated or owned facilities, and the size and national scope of the companies that own and operate them, has reached the point where economies of scale can be achieved by sharing fixed costs across several facilities that either are owned or operated by one firm. These economies are stronger the closer the facilities are to one another, and mostly in large urban areas.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Auburn, Alabama – Build, Own and Operate (BOO). After 1984, the city of Auburn faced the urgent need for capital improvement of a wastewater treatment system. Having tried and failed to secure federal grant funding for construction, in 1985 Auburn competitively bid a contract to build and own two new treatment facilities serving 34,000 people and to operate them for 25 years.

The contract was won by a subsidiary of Metcalf & Eddy. The city provided $26 million of the construction costs with tax-exempt bonds, and Metcalf & Eddy provided $10 million in equity funds. The use of equity funds helped keep rates lower than they would have been under alternative financing proposals. Critics noted that rates rose to cover the costs of the expansion, but rates had been rising steeply in Auburn previously and were predicted to triple if the city performed the capacity expansion itself.

The city retained annual review of rates, and the contract spelled out the terms under which increases in cost could be reflected in rates. The city also has the right to repurchase the plants at current market value at any time. In 1992, Auburn reviewed the option to repurchase the plants and decided against it.

Houston, Texas – Public/Private Competition. The 80-million-gallon-per-day Southeast Water Purification Plant near Houston serves 700,000 people in 13 cities, utility districts or water authorities, each with various percentages of production capacity ownership. The City of Houston is the plant’s managing partner and owns 23 percent of the operation.

In early 1996, the city offered a five-year operations and maintenance contract for the plant in a “managed competition” (i.e., one allowing the public unit to bid). The qualified bidders hailed from as far away as France and the United Kingdom, but also included competitors from the United States, along with a “company” owned by Houston area rate payers.

Officials had conservatively expected around 10 percent savings from using a competitive contracting process, and were delighted that the winning bid came in with savings of 43 percent from current costs. The 13 entities that own the plant will save $12.7 million over the five years of the contract. For example, rate payers in Pasadena, which has an 18.75 percent ownership in the plant, will save $476,250 annually. Smaller towns like South Houston and Webster will save close to $100,000 per year over the same period.

The winning bidder was JMM-OSI, owned by L’Yonnaise des Eaux of France: their bid, $16.3 million. Houston’s own bid was fourth. For Houston, this was the first time the public sector had competed with private operators for the privilege of providing services in a sealed-bid process.

Franklin, Ohio – Sale of Facility. In July 1995, Franklin, Ohio sold its wastewater plant to Wheelabrator EOS for $6.8 million. Assisted by Barakat & Chamberlain, Franklin made use of presidential executive order 12803, which reduces previous requirements for repaying federal grants in the event of privatization. The 23 percent lower sewer rates made possible by private ownership have helped lead to an industrial boom in Franklin, with 16 plant expansions or relocations to the area, necessitating an expansion in its water supply.46

Indianapolis, Indiana – Contract Operation and Management. In November 1993, the Indianapolis Advanced Wastewater Treatment facilities became the largest privately managed municipal wastewater operation in the United States. The White River Environmental Partnership (WREP) won the bid by offering savings that topped $65 million over five years and halved the payroll, as shown in table 6.

Today, WREP is well ahead of schedule in achieving these savings. The contractor has achieved these savings by centralizing planning, computerizing maintenance, consolidating inventory and improving response time to vendors – which resulted in additional cost discounts for prompt payments.47

Careful use of electricity helped cut the annual utility bill by $1 million, while ending unnecessary buildup of inventories saved millions more dollars. Renegotiating the labor contract converted half the automatic cost-of-living increase into performance incentives for individuals and teams. And WREP trimmed planned capital expenditures, saving an additional $1.8 million.

Although 200 city workers made the transition to private ownership, 126 city workers did not. The city moved half of these workers into vacant city positions and WREP paid for the training and placement for the rest. In the end, jobs were found for all former plant employees.48

Employee morale has been high, due in part to tuition reimbursement programs and better on-site safety training, which reduced employee accidents by 80 percent, as shown in table 7. Wages and benefits are up by 4.1 percent and employee grievances have plummeted. WREP also has succeeded in increasing minority and female business participation, substantially exceeding the city’s 25 percent goal by the end of 1995. None of this has been at the expense of service levels, it should be noted, for water quality has improved. Within its first year of operation, WREP exceeded its discharge permit limitations only once, substantially less than the 14 times in the city’s last two years of public operation. And overflows declined by 50 percent.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, specify performance measures. Include liability for environmental compliance and audit policies. Specify and monitor needed capital improvements. Include termination, renewal or buy-back terms as ultimate insurance of control.

Second, maintain control of the industrial pre-treatment program. If the private operator is responsible for industrial pre-treatment programs and compliance, then the facility will be subject to rigid and costly hazardous-waste requirements under the Resource Conservation and Recovery Act of 1976 (RCRA).

Third, evaluate tradeoffs between up-front payments and annual payments. An up-front payment can be useful, especially to finance capital improvements, but it usually means higher rates over the life of the contract. Spreading any concession or lease fees over the life of the contract helps keep rates down.

Fourth, do not specify the mix of up-front and annual payments. Over-specific terms in the request for bids stifle innovative proposals. Fifth, use the present value to evaluate bid prices. Allow bids to include an inflation factor and evaluate bids of varying lengths and different mixes of up-front and annual payments by a present-value criteria to allow an apples-to-apples comparison. Sixth, have the private operator collect the user fees. In most cases, private operators achieve much higher collection rates than does the public sector. This helps keep down rates.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Peter W. Debrolski
Senior Assistant Director
Public Utilities Division
Department of Public Works & Engineering
City of Houston
611 Walker, 21st Floor
Houston, TX 77002
(713) 837-0450

Tim George
Deputy Director
Department of Public Works
Consolidated City of Indianapolis
City/County Building
200 E. Washington Street, Suite 2160
Indianapolis, IN 46204
(317) 327-2327

Adrian T. Moore
Director of Privatization & Government Reform
Reason Public Policy Institute
Reason Foundation
3415 S. Sepulveda Boulevard, Suite 400
Los Angeles, CA 90034
(310) 391-2245

George A. Raftelis
President
Raftelis Financial Consulting
511 East Boulevard
Charlotte, NC 28213
(704) 373-1199

Leslie Sherman
Thelen, Reid & Priest
Two Embarcadero Center
San Francisco, CA 94111
(415) 392-6320

Further Reading

G. Richard Dreese and Janice Beecher, Regulatory Implications of Water and Wastewater Utility Privatization (Columbus, Ohio: National Regulatory Research Institute, July 1995).

Roger Hartman, “Contracting Water and Wastewater Utility Operations,” Reason Foundation How-To Guide, No. 8, June 1993.

Water

The privatization techniques applicable to water services are:

Cost Savings Potential

Cost savings from outsourcing water-delivery services typically range from 10 to 25 percent.49 As demonstrated in table 8, Roanoke, Alabama and Jersey City, New Jersey have realized even higher savings – 30 percent and 35 percent, respectively. A 1996 Reason Foundation study found that investor-owned water companies in California provided water at the same price to consumers as municipal water companies,50 even though the former must pay local, state and federal taxes; generally cannot make use of tax-exempt debt; and are expected to earn a profit for their shareholders.51

A 1993 review of the literature found that recent studies have confirmed the cost advantages of privately-owned water systems over publicly-owned systems.52 Table 9 sheds some light on the differences in operating expenses, especially the much higher staffing of California government-owned versus investor-owned municipal water providers.

Trends

Currently, investor-owned water companies serve approximately 15 percent of the U.S. population (and as much as 22 percent in California). The remaining population receives its water from government-owned water companies. In January 1997, there were 433 privately operated and/or investor-owned water facilities in the country, between them delivering 1.4 billion gallons a day.53 The highest number in any single jurisdiction was in Texas, which had 133 such plants, closely followed by Puerto Rico, with 128. (See table 10.) There are two leading factors responsible for the increased interest in public/private partnerships for municipal water services: (a) unfunded congressional mandates related to requirements of the Safe Drinking Water Act (SDWA) and the Clean Water Act (CWA); and (b) the lack of public resources to address the nation’s aging infrastructure.54

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Jersey City, New Jersey – Contract Operation and Management. In May 1996, Jersey City turned over the operation of its water system to United Water. All six bidders in the highly competitive bidding process offered to run the water system at a lower cost than the city’s current operation. The winner, the United Water Company, is now responsible for everything “from soup to nuts,” that is, everything from the aqueducts and pipes to bill collection.

The city expects to realize over $68 million in savings over the five-year contract, a 35 percent reduction in costs. These savings will come from the concession fee ($2.5 million), operational savings ($17.5 million), and substantial increases in bill collection revenues ($48.6 million).

When the system was run by the city, only 66 percent of the water produced was actually being paid for by users.55 The new contract provides financial incentives for the contractor to increase this percentage, as illustrated in figure 7. If the percentage rises to 70-75 percent, United Water gets to keep five percent of the increased collections. If it rises further to 75-80 percent, United Water keeps 10 percent of the increase in collections. And if the collection rate exceeds 80 percent, United Water gets 25 percent of the increase in collections. In other words, United Water has a built-in incentive constantly to improve efficiency. The city estimates increased water revenues of $17 million and increased sewage collection of $32 million from the profit-sharing arrangement.

The city’s system before privatization was so antiquated that it was impossible to look up people’s water bills on the telephone in real time. The reason was that all records were kept on three-by-five cards. United Water has since computerized the system.

Water rates were unaffected by the privatization and all 138 employees were guaranteed their jobs for at least a year. After that, the number of employees could be reduced, but to no fewer than 80 (the number of employees United Water estimated it would need in its bid).

Hawthorne, California – Long-Term Lease. In March 1996, the first ever long-term lease of an existing municipal water system was completed by the southern California city of Hawthorne to the California Water Service Company (Cal Water). Cal Water made an up-front payment of $6.5 million and must pay annual lease payments of $100,000 for 15 years. The lease has made Cal Water responsible for all needed capital improvements, and the city residents will benefit from the economies of scale made possible by sharing some fixed costs with Cal Water’s adjacent Hermosa-Redondo Beach operations. The agreement included a provision that existing Hawthorne employees would be transferred to Cal Water at the same pay and benefit levels. Customer rates in Hawthorne were to be set at the same level as those in the Hermosa-Redondo district.56

North Brunswick, New Jersey – Long-Term Operations and Maintenance Contract. In the first non-recourse financing of a water system in the United States, North Brunswick signed a 20-year franchise of its water and wastewater systems to U.S. Water, LLC on February 27, 1996. The contract gave the township $30 million up front, of which $24 million went to retire the system’s debt. U.S. Water agreed to pay a concession fee of $1 million for the first year, $600,000 a year for the following nine years, $1.5 million for the next five years after that and $2 million for the final five years. The township will save $45,000 annually and the privatization also will provide capital for much needed maintenance.57

Water rates initially increased by 5.75 percent, with annual increases thereafter to diminish from that level by 0.25 percent until reaching three percent in the seventh year. Officials calculate that much larger rate hikes would have been necessary to maintain environmental compliance if the facility had remained publicly operated.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, always use a competitive process. The most favorable terms can be achieved through competitive bidding. Second, establish a baseline description of current operations better to compare the privatization proposals. Know in detail the current and projected revenue and cost streams for the system, the condition and value of the capital, the environmental compliance status, the federal grant repayment status, the amount of of system debt and how much is tax exempt. Third, have a credible third party assist in evaluating the bids. This is especially crucial if the public agency has submitted a bid. A third-party evaluation helps avoid conflicts of interest.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Richard F. Anderson
Senior Advisor
Urban Water Council
U.S. Conference of Mayors
1620 Eye Street, NW
Washington, DC 20006
(202) 861-6795

Jim Good
Vice President, Marketing/Corporate Communication
California Water Service Company
1720 N. 1st Street
San Jose, CA 95112-4598
(408) 367-8200

Patrick J. Maloney
Law Offices
2425 Webb Avenue
Suite 100
Alameda, CA 94501
(510) 521-4575

Further Reading

David Haarmeyer, “Privatizing Infrastructure: Options for Municipal Water-Supply Systems,” Reason Foundation Policy Study, No. 151, October 1992.

Kathy Neil, Patrick J. Maloney, Jonas A. Marson, and Tamer E. Francis, “Restructuring America’s Water Industry: Comparing Investor-Owned and Government-Owned Water Systems,” Reason Foundation Policy Study, No. 200, January 1996.

Solid Waste/Recycling

The privatization techniques applicable to solid-waste processing are:

Cost Savings Potential

Recent studies have confirmed that competitive delivery of solid-waste services can generate cost savings. A 1984 study of 20 California cities demonstrated savings of 28 percent to 42 percent from privatization.58 A 1994 Reason Foundation study showed City of Los Angeles costs to be 30 percent higher than costs in neighboring cities with competitive contracting of waste services.59

Trends

More than 50 percent of U.S. cities of varying sizes contract all or part of their refuse-collection services. The respected Wall Street Journal estimates that the fraction of local governments contracting for waste collection grew from 30 percent in 1987 to 38 percent in 1990 to 50 percent by 1995. Likewise, a 1995 study of 120 local governments in 34 states found that, between 1987 and 1995, the percentage of cities contracting out for solid-waste collection increased by 20 percent.60 While no comprehensive surveys have recently been undertaken, as the figures above show, until the mid-1990s the private-sector role in providing waste management services certainly appeared to be increasing.

The significant role of the private sector in recycling is best documented in the area of materials recovery facilities (MRFs) or recycling plants. Of 338 operating MRFs in 1996, two-thirds were privately owned, 29 percent were publicly owned and three percent had joint public/private ownership. This ownership breakdown shows a marked shift from four years earlier, when just over 50 percent of facilities had been in private hands, with more than 40 percent government owned. With respect to operations, 80 percent of all facilities are now privately run.

Conducted by the Seattle-based R.W. Beck company, a 1996 poll of 1,600 municipalities (representing over 80 percent of the U.S. population) found that more than ten percent of solid-waste management systems were at the time candidates for privatization within the following 24 months. The survey indicated that 11 percent were focusing on solid-waste collection services as prime candidates for privatization. The survey also found that 35 percent of the cities surveyed were planning on privatizing their MRFs, that 27 percent planned to privatize their landfill operations, and that 22 percent intended to privatize their transfer station operations.61

Best Practices

New regulations and changing local values have prompted significant changes in waste-management services over the past decade. The focus has moved from collection and disposal of trash to the delivery of integrated services that include recycling, composting and other waste-diversion tools. For some governments, meeting these new requirements is beyond their in-house engineering and technical capabilities. This is particularly true of smaller government jurisdictions. Privatization of both facilities and operations offers a means of tapping into state-of-the-art technologies.

Indianapolis, Indiana – Public/Private Competition. In late 1993, the city put out to bid its curbside refuse-collection services. The scope of the services included the curbside manual collection of household waste and yard waste, with collection of recyclables on both a subscription and non-subscription basis.62

The city already was divided into 11 districts, a result of previous contracting of commercial refuse-collection services. One district was reserved for the city Department of Public Works (DPW), in order to retain some of the service in-house. To allay union members’ fears of layoffs, the DPW was permitted to bid on the remaining 10 districts, and preferential hiring by a winning private contractor was a feature of the bid requirements. Firms were to submit bids for contract terms of three and five years. No performance bond was required on the bids, as Indiana state statutes do not require a bond for contracts valued at under $300,000.

To allow for maximum competition, no firm, including the DPW, could be awarded more than three of the 11 districts. In all, five firms (including the DPW) were assigned to serve the 11 districts, at an average total monthly price for the three distinct services of $8.54 per household per month (trash, yard waste and recycling).

Contract features for contract monitoring included a schedule of liquidated damages for a breach of contract, such as the failure to collect refuse on time or the accumulation of legitimate complaints in excess of a fixed number. If material breaches of the contract terms are not remedied within three days, the city is authorized to assume the responsibilities of the contractor. In addition, the city has the right to terminate the contract upon written notice at any time, should funding for the contract be insufficient as a result of reduced appropriations or any other reason.

Before and during the initial transition period, the city made every attempt to inform residents of the features of the new service by mass mailings detailing the new district hauler and the day of the week scheduled for pickup. In addition, the city set up a three-month temporary hotline for residents to call with any questions. Initially, the hotline received 2,000 calls per day, gradually tapering off.

Motivated by competition, the city DPW’s own Solid Waste Division beat its first-year bid target of $3 million in savings by a full $2.1 million. As part of the performance bonus provisions, each of the 117 trash haulers and 26 administrative staff members received $1,750 per employee as their share of the additional savings.63

Manhattan Beach, California – Competitive Contracting. Manhattan Beach’s contracting program for its 12,000 residential units serves to highlight the potential for unique facets within the bidding process and the potential for creativity in contract structure.

In early 1993, the city council rebid its refuse-collection services, which were already contracted privately. It was not an ordinary request for bids, however. In developing the request, the city opted to issue a request for proposals (RFP) instead. In doing so, the city asked contractors to describe their process for waste disposal, resulting in a proposal that absolved the city of most of the liability it might otherwise have incurred in the event of an accident under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA, more usually known as Superfund).64

As well as avoiding Superfund liability, the city was able to use the bid process to obtain an even better deal for itself. After all proposals were in, the city revealed the proposals publicly, for all bidding firms to review. In effect, he city said, “Here is your chance to make your proposals better; go ahead and see what you can do.” Firms were allowed to revise their proposals based on what other firms had offered, thus allowing for improvement in the city’s ultimate deal.

Ultimately, the firm that already held the contract won the bidding war. But the impact of competition was salutary: Savings compared to the previous contract are now $1 million annually. Though the firm offered only the second-lowest total price for single-family residential service, it eliminated the cap on indemnification from Superfund liability, offering access to its assets. It also offered collection of “greenwaste” with the regular refuse,65 with sorting at the firm’s transfer station, thus reducing both the cost per household and the number of trucks on the streets. The firm additionally promised the lowest rate increase structure.

Traverse City, Michigan – Commercialization. Traverse City put commercialization, perhaps the purest form of privatizing government services, to work to meet its solid-waste needs. The program dates to 1987, when Traverse City found its in-house collection fees for commercial trash to be uncompetitive with the programs offered by local private contractors.

So city policy makers made a straightforward decision: The city should get out of commercial trash collection. “The city has always treated trash collection like a business,” observes Steve Slater, district manager for area waste contractor West Michigan Disposal (WMD), which went on to win the contract for the city commercial-refuse hauling. “They decided to essentially sell their business.”66

Residential waste disposal programs, however, tend to be a more sensitive matter. So Traverse City maintained its own residential waste pickup system for several years more. By 1990, however, private competition had reduced the city’s share of the waste-pickup business to 50 percent. Equipment needed replacement soon, and two trucks alone would set the city back $125,000 apiece. This, combined with the high capital costs of citywide collection, left the Traverse City waste collection program with a deficit of more than $21,000.

In May 1990, a city commission voted to put Traverse City out of the waste business altogether. West Michigan Disposal bid $224,000 for two city-owned “waste packer” machines and rights to the city’s list of 2,200 residential trash customers. While WMD gained an edge in having first solicitation to the list, it gained no exclusive franchise. City residents are free to contract with any waste hauler they choose.

Today, Traverse City has an open market for trash pickup. Although WMD remains one of the major waste contractors in the city, six firms compete for the residents’ rubbish.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, ensure a two-tier process. As cities have become more sophisticated partners in privatization, many have moved away from a single-tier bidding process that simply selects the lowest bidder. Instead, many use a two-tier process. Cities first assess the technical qualifications of potential bidders. This process, called the request for qualifications (RFQ), determines a firm’s ability to meet basic performance, financial, regulatory and other criteria. The second tier of bidding – the request for proposals (RFP) or request for bids (RFB) – involves evaluation of competing proposals in terms of comparative cost-effectiveness.67

Second, insist on performance standards. Successful competitive contracting for waste services also requires provisions to ensure that specified performance levels are maintained. Procurement documents need to spell out reporting requirements, performance standards and guarantees against non-performance.

Third, carefully consider the length of the contract. The term of municipal refuse/recycling contracts is the subject of considerable debate. On the one hand, it is argued that contracts should be short in order to increase the opportunity for competition. Others, however, assert that short-term contracts reduce the level of competition and increase the cost of service to the consumer. Longer contracts (seven to ten years) likely will attract the most bidders and the most favorable rates for residents. Although the quality of service should remain constant throughout the term of the contract, the operating efficiencies of the contractor usually improve dramatically over time.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Kimberly A. Derchak
Director of Enterprise Development
Office of the Mayor
Consolidated City of Indianapolis
City/County Building
200 E. Washington Street, Suite 2501
Indianapolis, IN 46204-3332
(317) 327-5779

Lynn Scarlett
Vice President for Research
Reason Foundation
3415 S. Sepulveda Boulevard, Suite 400
Los Angeles, CA 90034
(310) 391-2245

Further Reading

Lynne Scarlett and J.M. Sloan, “Solid Waste Management: A Guide for Competitive Contracting for Collection,” Reason Foundation How-To Guide, No. 16, September 1996.

Road Maintenance

The privatization techniques applicable to road maintenance are:

Cost Savings Potential

Cost savings from outsourcing road maintenance services typically range from 25 to 50 percent.68 A 1984 study showed that contracting out for highway maintenance cost half as much as delivering these services in-house.69

Trends

A 1995 study of 120 local governments in 34 states found that between 1987 and 1995, the incidence of cities contracting out for road maintenance had increased by 19 percent, bringing the total percentage of cities outsourcing for road maintenance services to 37 percent.70

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Laguna Niguel, California – Competitive Contracting. The City of Laguna Niguel began contracting for street maintenance with Charles Abbott Associates on July 1, 1993. The city saved more than $250,000 through competitive contracting in its first year, a 25 percent reduction from its previous costs when it contracted with Orange County for services. Using these savings, Laguna Niguel significantly expanded its street maintenance services, while keeping the budget well below its previous level before competitive contracting. “The real reason we are contracting is that now I have control over maintaining our streets, whereas before, the county was the one that decided what got done and when. So the significant difference just in administering the street maintenance program is not only in cost savings, but the fact that I can direct it and make the decisions,” said Public Works Director Ken Montgomery.71

Laguna Niguel now has a regular patrol of its rights of way, and the citizens are enjoying cleaner streets. The response time in resolving customer complaints was reduced from 56 days to 6.5 days over a six-month period. In addition, the average number of complaints has dropped 44 percent. Meanwhile, the response time for emergencies also had to be considered when the city privatized. Officials wrote into the agreement with the contractor that “all of the subcontractors that our maintenance contractor hired had to be available to respond to call-outs [i.e., emergencies], and this has worked out extremely well,” said Montgomery.

Officials in Laguna Niguel found the transition to privatization particularly easy because they did not have to be concerned with layoffs or relocating workers. All of the public employees that had provided their street maintenance previously worked for Orange County, not for the city directly.

Indianapolis, Indiana – Public/Private Competition. Indianapolis has opened up pothole filling, asphalt laying, crack sealing, berm repair and other road-maintenance functions to competition.

The first service opened to competition was pothole filling. Forced to compete, city workers streamlined operations, dropping from eight workers on a crew to four, and going from two trucks to just one. But still their costs were not competitive with private firms. In reviewing their costs, city employees discovered that the overhead costs of indirect management were enormous.

There were 92 truck drivers and 32 management supervisors. The union realized that it could not compete if these managers’ salaries were included in their costs of doing business. The front-line union employees asked Mayor Stephen Goldsmith (R) to unload them of the burden of the supervisors.72 In response, Goldsmith laid off most of the supervisors. The city unit won the contract. With the assistance of outside experts, they now do intensive full-cost accounting on all the services they perform, from chuck-hole filling to crack-sealing to line painting. They can tell you exactly how much money it costs for every mile of cracks in the road they seal or every street sign they make.

They also have gone through something called the GE Dot Matrix. This means that city crews have evaluated their strengths and weaknesses compared to other competitors in the marketplace. In the private sector, this sort of benchmarking process is fairly common. It is unheard of in government. City crews in Indianapolis now use this information when they bid on contracts. If they have determined a service is not one of their strengths, they will not bid on it.

British Columbia, Canada – Employee Buyout. In October 1987, all of British Columbia’s highway and bridge maintenance was put out to bid (for 2,645 bridges and more than 29,000 miles of public roads). The provincial Ministry of Transportation and Highways divided the province into 28 districts.73

The majority of workers affected by the privatization, about 3,800 employees, had previously performed all provincial bridge and road maintenance. These workers originally were allocated among the province’s eight development regions. From the beginning, the government sought to protect the interests of these current employees, encouraging proposals that involved continued employment of existing workers. The government also encouraged existing employees to form their own private firms to take over the services they were providing. The government gave qualifying employee groups the first opportunity to bid on providing services as prime contractors for their contract area. Moreover, bids from these employee-owned firms were given a five percent preference over non-employee bids. Ultimately, of the 28 multi-year contracts, 10 were awarded to new firms composed of the former provincial employees.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Ken Montgomery
Director
Department of Public Works
City of Laguna Niguel
27791 La Paz Road
Laguna Niguel, CA 92677
(949) 362-4339

Dennis Neidligh
Director
Department of Public Works
Consolidated City of Indianapolis
City/County Building
200 E. Washington Street, Suite 2360
Indianapolis, IN 46204
(317) 327-3725

George Wentz
President & CEO
Charles Abbott Associates
371 Van Ness Way, Suite 200
Torrance, CA 90501
(310) 212-5778

Further Reading

Barbara Stevens, Delivering Municipal Services Efficiently: A Comparison of Municipal and Private Service Delivery (Washington, D.C.: U.S. Department of Housing and Urban Development, 1984).

Airports

For existing airports, the simplest form of privatization is contracting out management of the airport on a relatively short-term basis. Larger economic benefits generally can be obtained via a long-term lease or sale of the airport, increasingly common overseas. To create new airport facilities (or entirely new airports), the private sector can be granted either a long-term or perpetual franchise to finance, design, own and operate these facilities.

Cost Savings Potential

Cost savings from outsourcing management and operations of airports typically range from 15 to 40 percent.74 The sale or long-term lease of airports could generate significant revenues for local governments. In a Reason Foundation study that estimated the market value of the 50 largest airports in North America, Los Angeles International was estimated to be worth more than $1 billion; San Francisco, $888 million; San Diego, $308 million; and Ontario, $138 million.75

Trends

Increasingly, airports are being viewed as enterprises, rather than as public services (that are expected, at best, to break even). Around the world, governments in both developed and developing countries are turning to the private sector for airport management and development. In contrast to the rest of the world, U.S. airport privatization has been limited mostly to contract management. A 1994 study of combined U.S. cities and counties found that between 1982 and 1992, the use of private contractors for airport operation increased by 16 percent.76

In 1995, Indianapolis contracted out management of its airport. The winning bidder, the American subsidiary of the British Airports Authority (BAA USA, Inc.), committed to achieving cost reductions and revenue gains that should reduce landing fees by 25 percent over the 10-year contract, while providing better service.77

Several small air-carrier and general-aviation airports in the U.S. are now leased to private firms (table 11). Other airports have been leased by municipal governments to independent public authorities. A prime example is the lease by the cities of New York and Newark of Kennedy, LaGuardia and Newark airports to the Port Authority of New York and New Jersey.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Los Angeles County, California – Long-Term Contract Lease Management. Between 1958 and 1970, Los Angeles County acquired five general-aviation airports that their developers were unable or unwilling to maintain. Due to concerns about high operating costs and low net revenues, the county decided in 1990 to contract out these airports as a group. What evolved was a hybrid between contract management and a long-term lease. The 20-year agreement (with two five-year extension options) does not grant the firm a leasehold interest, but it operates financially like a long-term lease rather than a management contract. In other words, users and tenants pay fees to the contractor, out of which the contractor must pay all operating expenses and turn over a guaranteed minimum annual amount to the county.

Before the award of the contract to COMARCO, there was strong opposition from pilots, airport employees and some airport tenants. Nonetheless, by the contract’s second anniversary, privatization had “gained acceptance by most pilots and proved worth celebrating for some,” according to a local newspaper account.78 Then Board of Supervisors Chairman Ed Edelman, who had voted against the contract in January 1991, wrote a letter of endorsement in January 1993, praising the success of the arrangement.

During the first two years, COMARCO paid the county $2.7 million per year, compared to the county’s net income of $2.2 million when it operated the airports itself. The increase was made possible by improved marketing of airport facilities, reduced operating costs and a computerized revenue control system.

To this day, all fee increases must be approved by the county. COMARCO splits the airports’ net income with the county according to a pre-arranged formula. The county puts all these revenues in its Aviation Division budget and uses them for capital improvements at the airports.

Westchester County, New York – Contract Management. The White Plains/Westchester County Airport is an 800-acre facility surrounded by affluent suburbs and office parks, just north of New York City. Turned over to Westchester County by the federal government after World War II, the airport was operated by the airport’s fuel supplier for 30 years.

In 1977, faced with large operating losses (up to $250,000 a year), the county government decided to bid out airport management on a five-year contract basis. PanAm World Services won the initial contract, and it and its successor company, Johnson Controls World Services, have won renewals every five years since then.79

Under contract management, the airport has become solidly profitable, with net income of up to $3 million per year. The company has achieved these gains by reducing operating expenses (e.g., by cross-training personnel so that fewer people are required), increasing revenues (e.g., by renegotiating ground leases to market levels and instituting paid parking in 1981), and fostering real estate development. For example, there now are five fixed-base operators (FBOs) compared with three in 1977, as well as additional hangars and related facilities. Despite community-imposed growth limits, major airlines have been attracted to Westchester; before 1977, flights were mostly made up of small commuter airlines.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, maintain public control. One particular benefit of contracting out is that measurable performance requirements can be specified, with appropriate penalties for failure to meet them. If an existing airport is sold, or if a new airport is built from scratch as a private venture, how can the public interest be protected? With a sale, government can condition the sale on several factors. A deed restriction can be included, guaranteeing that the property continue to be used for airport purposes for, say, 99 years.80

For either a new airport or an airport sale, governments can grant a perpetual franchise, administered by a municipal entity such as an airport commission. Under such an arrangement, the private firm would hold title to the airport in perpetuity, subject to compliance with the terms of the franchise. The commission would be able to revoke the franchise if the firm violated its explicit terms.81

Second, safeguard lease or sale proceeds. To ensure that the proceeds from converting a city’s physical assets (the airport) into financial assets (the sale or lease payments) are not wasted, governments can specify the use to which proceeds from such asset transactions may be put. For example, proceeds from asset sales could be treated like an endowment, dedicated to a specific purpose (e.g., public safety or debt reduction). The principal would be invested and only the earnings would be available each year, for spending on the designated purposes. For leased assets, the ongoing stream of lease payments could be dedicated, by charter, to certain designated purposes (such as other infrastructure investment).

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Michael E. Bell
President
BAA USA, Inc.
45240 Business Court
Sterling, VA 20166
(703) 7708-7283

Richard C. Loomis
COMARCO Services, Inc.
4519 Admiralty Way, Suite 202
Marina del Rey, CA 90292
(310) 823-7335

Robert W. Poole, Jr.
President
Reason Foundation
3415 S. Sepulveda Boulevard, Suite 400
Los Angeles, CA 90034
(310) 391-2245

Steve A. Steckler
President
Infrastructure Management Group, Inc.
4733 Bethesda Avenue, Suite 600
Bethesda, MD 20814
(301) 907-2900

Ronald D. Utt
Grover M. Hermann Fellow
Heritage Foundation
214 Massachusetts Avenue, NE
Washington, DC 20002-4999
(202) 608-6013

Further Reading
William H. Payson and Steve A. Steckler, “Expanding Airport Capacity: Getting Privatization off the Ground,” Reason Foundation Policy Study, No. 141, July 1992.

Robert W. Poole, Jr., “Guidelines for Airport Privatization,” Reason Foundation How-To Guide, No. 13, October 1994.

Ronald D. Utt, “FAA Reauthorization: Time to Chart A Course for Privatizing Airports,” Heritage Foundation Backgrounder, No. 1289, June 6, 1999.

Public Transit

The privatization techniques applicable to public transit are:

Cost Savings Potential

Competitively contracted public-transit services have achieved average direct cost savings of more than 30 percent.82 Competitively contracted services have resulted in cost savings of more than 31 percent for Denver.83 In Snohomish County, Washington, a suburb of Seattle, contracted express service saves more than 30 percent. St. Louis saved more than 50 percent on competitively contracted routes.84 And in Los Angeles, two large contracts have resulted in average cost savings of 60 percent.85

In 1986, the Urban Mass Transit Administration (now the Federal Transit Administration) found that cost savings from contracting ranged up to 50 percent, with a mean savings of 29 percent. For fixed-route services and contracts involving 25 or more vehicles, privately contracted services realized a 42 percent cost advantage over public operators.86

Trends

A 1994 study of combined U.S. cities and counties found that the use of private contractors for transit operation and maintenance increased by 14 percent between the years 1982 and 1992.87

According to an annual survey of the top 100 transit bus fleets in the United States, private contractors operated almost 2,000 more transit buses in 1996 than they did the previous year. This increase came while the total fleet size remained steady. Metro magazine, which conducts the survey, called the increase “astonishing,” and believes the number of contracted buses will keep increasing.

In 1996, the Houston, Texas Metropolitan Transit Authority (MTA) competitively contracted an entire operating division of 140 buses. MTA expects to save 39 percent compared to non-competitive operations, with gross savings of $45 million over the five years of the contract.

For certain specialized services, such as Dial-a-Ride or demand-responsive service, almost 70 percent is provided privately through contracting.88 Approximately 30 percent of all school-bus service is contracted.89

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Foothill Transit Zone, California – Competitive Contracting. Dismayed by the high cost and mediocre service offered by the multi-county Southern California Rapid Transit District (RTD), 20 cities in the San Gabriel Valley suburbs of Los Angeles in 1987 joined with the county government to form a joint powers authority to take over bus transit responsibilities from the RTD. To secure the most cost-effective bus service, however, the Foothill Transit Zone (FTZ) was designed from the outset to purchase such service via competitive contracting with commercial bus firms.

Although its start-up was delayed for several years by legal challenges from municipal transit unions, Foothill ultimately won in court, avoiding the application of the labor-protection provisions of ยง 13(c) of the Urban Mass Transportation Act. Today it provides service on all the routes formerly operated by RTD in the San Gabriel Valley. Audits by Ernst & Young, and other major accounting firms, have documented long-term FTZ cost savings of 24 to 48 percent. Ernst & Young’s figures are shown in table 12, which compares actual FTZ costs to estimated costs had the RTD continued to provide the service.90 The cost savings have been used both to expand service and to keep fare increases below those of the RTD’s successor agency, the Los Angeles County MTA. Ridership is 14 percent higher than had been projected for the public operator. According to Ernst & Young, customer correspondence was seven-to-one in favor of the transit zone soon after service was underway.91

Colorado Springs, Colorado – Public/Private Partnership. In Colorado Springs, city officials struggled with how to pay for Americans with Disabilities Act (ADA) upgrades to hundreds of bus stops. They estimated that complying with ADA requirements would cost an average of $1,000 to $1,500 per bus stop, and total several million dollars. Faced with scarce funds and tax-and-spending limitation laws, officials had to search for an innovative way to fund the bus stop upgrades.

The city struck upon the idea of forming a public/private partnership to expand the use of advertising at bus stops. The program is upgrading and adding bus shelters to several hundred bus stops, and adding three-sided illuminated advertising kiosks. Jerry K. Mooney, general manager of Springs Transit Management Inc., explains the city’s plan: “We figured it would work best if someone else built the shelters, made them ADA-accessible and owned them. Without increasing taxes, we’ve created an opportunity for the private sector to fund ADA accessibility [in] exchange for [space to sell] advertising.”

Liberty Communications Corporation, which had previously handled the city’s bus and bench advertising, won a 10-year contract to build 150 to 250 bus shelters and to install 700 new benches at stops that will not be upgraded with shelters. In addition to the upgrades, the city expects to receive at least $10,000 a year more in advertising revenues than it has in the past.

Boston, Massachusetts – Competitive Contracting. In Boston, the Massachusetts Bay Transportation Authority (MBTA) has begun the process of privatizing all of the city’s bus transit. MBTA has worked for more than a year on a plan to convert itself into a “virtual agency,” consisting of just a small policy and planning staff, which will monitor contracts with private providers of bus services. The agency currently runs 980 buses and 42 trolleys on 159 routes. Privatizing these services was expected to save $13.5 million in 1997 and approximately $27 million a year thereafter, an 18 percent cost reduction.92

Local public transit unions have vigorously opposed the MBTA’s plan, and the U.S. Department of Labor warned the agency that its plan might violate federal rules on the use of federal transit funds. MBTA staff argue that contractors will hire between 75 percent and 90 percent of the agency’s bus operators, and that the agency will take other measures to minimize impact on workers.

In spite of union opposition, the MBTA sees privatization as a winning policy. It also is exploring the benefits of contracting out other services, such as the subways, construction and engineering, and maintenance. In early 1997, the MBTA contracted out property management to Boston-based Transit Associates.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, ensure public control over service design and service monitoring. Contract to the lowest responsive and responsible bidder.

Second, ensure a genuinely competitive market. Be sure to send RFPs to all potential bidders. The RFPs should clearly specify service requirements. Contracts should be awarded for small increments of service to various bidders. Contracts and extensions should be for no longer than five years. Contract expiration dates should be staggered among the multiple service providers. Any one contractor should be restricted to a limited market share. All contracts should be for a fixed price. Finally, allow full and fair bidding by the existing public agency.

Third, keep the process open. Advertise the RFP widely. Make the pre-proposal conference open to all comers. RFPs and copies of contracts should be freely distributed to all interested parties requesting them.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

David J. Certo
Special Assistant for Regulatory Review
Office of the Mayor
Consolidated City of Indianapolis
City/County Building
200 E. Washington Street, Suite 2501
Indianapolis, IN 46204-3332
(317) 327-7854

Wendell Cox
Wendell Cox Consultancy
1010 Thornbury Place
O’Fallon, IL 62269
(618) 632-8507

Linda Somilleda
Marketing & Communications Department
Foothill Transit
100 North Barranca Avenue, Suite 100
West Covena, CA 91791-1600
(626) 967-3147

Further Reading

Jean Love and Wendell Cox, “Competitive Contracting of Transit Services,” Reason Foundation How-To Guide, No. 5, March 1993.

Parking Enforcement

The privatization techniques applicable to parking enforcement are:

Cost Savings Potential

Opportunities for privatization include citation issuance and processing, vehicle removal, towing, and the overall management of the parking control officers. The potential for savings is great. For example, Los Angeles handles parking enforcement services in-house. As demonstrated in table 13, its hourly costs are far higher than in nearby Anaheim or West Hollywood or, for that matter, in Montgomery County, Maryland, all three of which contract out for such services.93

Contracting out parking enforcement also often leads to substantial increases in revenue. One key to the apparent success of private parking enforcement providers appears to be the private sector’s willingness to invest in technology. Municipal agencies often are reluctant to invest in capital equipment that would allow them to improve their productivity and efficiency.

Trends

Parking enforcement is a growing area in the field of privatization. Currently a number of cities in the United States contract out their parking enforcement services. Examples include: Anaheim, which has contracted out for about 10 years; West Hollywood, which secured release of the service from the Los Angeles County sheriff’s department some three years ago; and Montgomery County, Maryland, which has contracted the service for over seven years. Also, in 1997, Baltimore County, Maryland contracted out the service.94 A 1994 study found the use of private contractors for meter maintenance and collection to have increased by six percent between 1982 and 1992.95

Best Practices

Listed below is a jurisdiction that has notably blazed the trial.

West Hollywood, California – Competitive Contracting. The enforcement area of West Hollywood achieved a reduction of over 27 percent in operating costs when it contracted with the private firm of JL Services (recently acquired by Serco). West Hollywood’s prior contract with the Los Angeles sheriff was for $1.1 million; its contract with JL Services is for $800,000 annually, a savings of 27.1 percent. Parking enforcement revenues increased by more than $2.5 million after privatization, totaling $6.8 million in fiscal 1996.96

The private contractor brought several advantages to the city, including additions of 110 parking officers, increased revenues and an overall reduction in operating costs (in terms of hiring personnel and overhead). According to city officials, private parking enforcement has brought consistency and savings to parking enforcement services in their areas.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, city officials should bear in mind the tradeoffs between increasing parking-ticket revenues and the negative effects that increased enforcement may have on street-front businesses. Overly aggressive parking enforcement is likely to induce more shoppers to abandon street stores for shopping malls. Moreover, each additional dollar collected by the city through tougher parking enforcement is a dollar that could have been spent in the private economy.

Overzealous ticket writing, however, need not be an inevitable result of privatization. In fact, if structured properly, privatizing parking enforcement could be a win/win situation for city government and street-front stores. Strategies can be developed to make parking enforcement more business-friendly under a private contractor. First, parking-enforcement officers may be instructed occasionally to go into stores and announce they are about to ticket the cars in front of the store. This would give customers the opportunity to move their cars or add money to the meter, and would engender tremendous goodwill from shoppers. Second, the enforcement operators can be told to place warnings on windshields rather than writing tickets for parking meter violations for a certain number of hours each week. Third, color-coded decals can be affixed to meters, denoting maximum meter time limits in order to minimize motorists’ confusion and frustration over parking tickets. The positive effect that these and other strategies would have on motorists’ perceptions of the city as being attuned to their shopping needs would more than make up for any slightly lower parking revenues.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area.

Vit Vittatoe
Parking Manager
Department of Transportation & Public Works
City of West Hollywood
8300 Santa Monica Boulevard
West Hollywood, CA 90069
(323) 848-6374

Michael Walker
President
Serco Management Services, Inc.
20 E. Clementon Road, Suite 102 South
Gibbsboro, NJ 08026
(609) 346-8800

Tree Trimming/Landscaping

The privatization techniques applicable to tree trimming and landscaping are:

Cost Savings Potential

Cost savings from outsourcing tree trimming and landscaping services typically range from 16 percent to 35 percent.97 In the past decade, private tree trimming has become far more competitive, forcing contractors to reduce prices. It now is possible to contract routine tree trimming services at a price well below in-house rates.

Trends

A 1995 study of 120 local governments in 34 states found that between 1987 and 1995, the percentage of cities contracting out for tree trimming services increased by about 15 percent, with a total of 32 percent of cities contracting out for this service.98

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Newport Beach, California – Competitive Contracting. The urban forests in Newport Beach are visible attractions for residents, an assett to the community. In fact, the city has a Citizen’s Street Tree Committee, which advises the city council on tree-related issues – such as when the city’s in-house resources lagged behind the efforts necessary to maintain its urban forest.

As a result of the committee’s findings, in August 1993, Newport Beach hired Integrated Urban Forestry, Inc. (IUF), a private consultant, to conduct a comprehensive study of its tree maintenance program. IUF found that Newport’s trim cost per tree in the 1993-94 fiscal year was $81.99 After studying the market rates for tree-trimming costs, IUF recommended that Newport Beach competitively contract its tree maintenance services out to the private sector. Among other things, the IUF report found that a private contractor would save approximately $211,000 per year on city tree-trimming expenses, while providing more efficient and productive services.

IUF found that city crews were compensated at a higher rate than private crews – in salaries, benefits and also in pay for non-productive time. IUF also found that city crews were on the whole less productive than private crews because city crews worked fewer hours and spent less time at the job site. Additionally, average daily productivity for city crews was 6.9 hours, while the average daily productivity for private crews was 9.0 hours. Since Newport Beach lacked an organized trim plan, crews were not being used to their maximum potential.

In November 1993, a private contractor took over tree-trimming services in Newport Beach. At IUF’s recommendation, the city retained a small crew to handle emergencies and special requests. The private firm West Coast Arborists agreed to hire the displaced city workers at their existing rates for one year. Newport Beach saved $241,000 in the 1995-96 fiscal year on its tree trimming services, and estimates an accumulated savings of $609,000 by June 1997.

Orange, California – Competitive Contracting. In 1993, the City of Orange contracted with West Coast Arborists for tree-trimming services. One tree supervisor was retained as a liaison between the city agency and the contractor, and public works employees now respond to emergencies. The city reduced its tree-trimming budget the following year. Despite this, West Coast was able to maintain its profit margin and did not raise its unit cost. Pat Pine, field supervisor for the Orange Public Works Department, rated the West Coast crews well above city crews in terms of service, productivity and management.100

Indianapolis, Indiana – Competitive Contracting. Indianapolis competitively contracts for mowing in more than 45 neighborhood parks. Since contracting began, mowing complaints have fallen by 95 percent. Parks Department employees now concentrate on the large regional parks.

Indianapolis initially contracted to have grass cut every six weeks. But seasonal weather variations make such a criterion meaningless – grass grows much faster during the spring. Furthermore, checking up on contractors is tedious – one must track them down to make sure they are really mowing when they claim they are.101 Then the city grew more sophisticated. After all, it did not really want the grass cut every six weeks. It wanted the grass kept short. Now, the city contracts with a company to keep the grass less than four inches high and pays by the acre. Monitoring is easier, too. At random times, someone simply goes out with a ruler.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, the city should retain a crew and a liaison person.

Second, the municipal authority should develop a productivity plan to see if the city service group can compete with the private sector.

Third, if the decision to contract is made, it is important to give the contractor a specific plan, so that only those trees that require service are trimmed.

Fourth, the municipal authority must be sure to contract for outcomes, not inputs.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Kimberly A. Derchak
Director of Enterprise Development
Office of the Mayor
Consolidated City of Indianapolis
City/County Building
200 E. Washington Street, Suite 2501
Indianapolis, IN 46204-3332
(317) 327-5779

David E. Niederhaus
Director
Department of General Services
City of Newport Beach
3300 Newport Boulevard
Newport Beach, CA 92659-8915
(949) 644-3055

Further Reading

City of Fullerton, “Report on Contract Tree Trimming,” unpublished document prepared by the City of Fullerton’s Maintenance Service Department, June 1994.

V. Privatizing General and Administrative Services

This section examines the possibilities for cost savings through the privatization of public-sector general and administrative services, such as information systems, facilities management, janitorial services and so on.

Information Systems

The privatization techniques applicable to information systems are:

Cost Savings Potential

Cost savings from outsourcing information technology systems typically range from 10 to 20 percent.102 For example, the Illinois Department of Central Management Services began contracting with IBM103 in 1987 to handle computer maintenance for all state agencies. By reducing paperwork and administration costs and persuading IBM to give a 10 percent annual discount off maintenance fees, the state has saved over $12 million since 1987.104

Other benefits of privatization information management include: access to the latest technology without major capital expenses; more time dedicated to core business functions; more highly trained expertise (expertise tends to be limited in-house because career paths in government generally are very limited for technology specialists); more flexibility; and increased user satisfaction (from other departments of government).

Trends

Between 1987 and 1995, the percentage of cities contracting out for data processing services increased by about 15 percent, bringing the total percentage of cities outsourcing this service to 32 percent.105 A 1992 survey by Apogee Research revealed a 20 percent increase in privatization in this area in just three years.106

Although outsourcing organizations’ entire computer operations has not progressed as far in the public sector as in the private sector, there has been a considerable increase in information-services privatization activity within state and local governments.

Services such as payroll and financial management, ticket and court-records processing, traffic controls and municipal records management are now often contracted out. Companies such as Electronic Data Services, Inc. (EDS), Martin Marietta and Maryland’s CMSI have begun the transition from corporate accounts into managing municipal systems. Banks and other institutions quickly are becoming important service providers by reducing the need for municipal processing of such records as payroll and municipal checks.

Local governments, such as the California counties of Orange and Los Angeles and the cities of Long Beach and Orange, have contracted with private firms for maintaining and upgrading internal systems. Advantages to this type of service include reduced cost of equipment purchase and maintenance (because the systems are leased from the private company) and the enhancement of software and hardware.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial. Most examples of contracting out information services generally fall into one of three categories: (a) bill collection and processing, (b) reengineering and applications development (c) and general data processing needs.

Michigan Court System – Competitive Contracting/Outsourcing. The Michigan court system has taken advantage of more sophisticated technology in the private sector to cut costs and improve service. A private firm called Quad Tran has created an integrated case-management system of more than 700 terminals throughout the state. The system handles more than 300,000 case abstracts, 85,000 driver’s license suspensions and 55 percent of all Michigan district court cases.

Quad Tran’s results have been impressive. By contracting with Quad Tran, the courts saved 25 percent in clerical costs and revenues increased by up to 100 percent. Service quality also has improved. The accuracy of Quad Tran transactions is 99.4 percent, much higher than state levels. Moreover, processing a driver’s license suspension takes only 60 seconds compared to four to six weeks for the state system.

Indianapolis, Indiana – Competitive Contracting/Outsourcing. In one of its more complex transactions, Indianapolis contracted out its city and county information systems in December 1995. After more than a year of study and deliberation, a review committee made up of local officials, agencies and Information Services Agency (ISA) staff voted to outsource information services to a private management firm, Systems and Computer Technology Corporation (SCT), for a seven-year period with options for three, one-year extensions. The city expects to save as much as $26 million over the seven-year contract period.107

SCT provides services that include network management, desktop/server/LAN108 manage-ment, disaster recovery and security, help desk management, education and training, management of the ISA data center and technological consulting for the city and county frameworks. A new position – city/county chief information officer – was instituted to manage the contract and perform the duties of the former ISA director. A core ISA staff is maintained to perform strategic planning services.

Of the four companies in the final bidding process, SCT offered the best bid, committing to operate an on-site, seven-day-a-week, 24-hour-a-day help desk, hire all existing information services employees, and provide salaries equal or better than their current pay. City employees were offered the opportunity to compete in the bidding, but opted to become a part of the review process instead.

Expert Resources

This section presents an expert and/or practitioner who is available to discuss reforming service delivery in this area.

Kimberly A. Derchak
Director of Enterprise Development
Office of the Mayor
Consolidated City of Indianapolis
City/County Building
200 E. Washington Street, Suite 2501
Indianapolis, IN 46204-3332
(317) 327-5779

Facility Management

The privatization techniques applicable to facility and convention center management are:

Cost Savings Potential

In 1995, after coming under private management, the Kansas State Expo Center broke the $1 million dollar mark for annual income, finishing with its best financial performance since opening in 1987. Since privatization, increased efficiencies of the operation have cut an average of $600,000 a year off the original $1.4 million annual subsidy.109

In the first year of private management at the West Palm Beach Auditorium, operating deficits were reduced by $531,878. In the three years before 1995, the facility had an average deficit of $746,600. In 1995, the deficit was cut to $214,722.

In Coral Springs, Florida, the City Center of Performing Arts’ first full year of operation under specialized contract management with Professional Facility Management saw attendance up 28 percent, revenue up 19 percent and the city’s operating subsidy reduced by 33 percent.

The City of Riverside, California privatized its convention center in 1991 and realized savings of $400,000 in the first year alone.

Trends

Publicly contracted private management of stadiums, arenas, convention centers and other such facilities began over 20 years ago when the Louisiana Superdome was privatized in 1975. Privatization is proving increasingly popular for new, multi-purpose sports and entertainment facilities, particularly in secondary markets.110

Best Practices

Listed below are some jurisdictions that have notably blazed the trial. Typically, the average term for private management of a municipal facility is three years, with the first year devoted to cost savings strategies and a decrease in bureaucratic layers. The next two years are devoted to the implementation of revenue generating programs by the private management firm. The management fees range from $50,000 to $200,000 per year plus incentives, which may be based on user ratings or on how closely management meets the original budget projections.111

Memphis, Tennessee – Contract Management. In 1992, the City of Memphis/County of Shelby contracted with a private manager, Spectacor Management Group (SMG), in order to reduce the Cook Convention Center’s annual operating deficit of $1.78 million per year.112 The first budget submitted by SMG, for fiscal year 1994, showed a reduction of $220,000 from the originally approved budget for the time period. The operations budget was further reduced for the next year from an operating deficit of $1.78 million to $1.25 million – a $500,000 savings.

SMG officials attribute a large portion of the savings to restructuring the food and beverage system. Under the city’s management, the concession system was open to all caterers, and the center provided a portion of the concessions as well. SMG competitively bid out concession services to an exclusive provider, saving $250,000 per year.

The transition of the Memphis Cook Convention Center to private management also resulted in very little, if any, disruption to former employees. SMG offered positions to 27 of the convention center’s 32 full-time employees. Those not retained found employment in other county departments.

Denver, Colorado – Contract Management and Operation. The City of Denver saved $500,000 from contracting out management of the Colorado Convention Center. These savings were produced by a host of management improvements, including new energy management programs, better staffing and increases in marketing and sales activities with the Denver Convention and Visitors Bureau.113 The private contractor also created new revenue with the additions of food and beverage, electrical, telecommunications and business services purchased by those who frequent the facility for exhibitions, conventions, trade shows and special events.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Keith D. Curry
Managing Director
Public Financial Management
660 Newport Center Drive, Suite 750
Newport Beach, CA 92660
(949) 721-9422

John H. Nicholson
Facility Consulting Associates
1203 Forest Park Drive
Auburn, MA 01501
(508) 832-8685

Wes Westley
President
Spectacor Management Group
701 Market Street
Philadelphia, PA 19106
(215) 592-4100

Further Reading

“Cities Find New Applications for Privatization,” Nation’s Cities Weekly, January 20, 1997.

Building Maintenance and Janitorial Services

The privatization techniques applicable to building maintenance and janitorial services are: Competitive Contracting Public/Private Competition Internal Markets

Cost Savings Potential

Cost savings from competitively contracting building maintenance and janitorial services typically range from 32 to 40 percent.114

Trends

Between the years 1987 and 1995, the percentage of cities contracting out for building maintenance services increased by 10 percent, bringing the total percentage of cities contracting out this service to 42 percent. During this same period, the percentage of cities contracting out janitorial services increased by 17 percent, bringing the total percentage of cities contracting out for this service to 70 percent.115

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Los Angeles County, California – Competitive Contracting. Los Angeles County began contracting maintenance and custodial services in 1980. Initially the county made some mistakes in the contracting process, failing to take into account quality of service when awarding contracts, and making no provisions to encourage contractors to hire displaced county employees. The county learned from its early mistakes and in the second round of contracts improved its contracting process.116 Contractor costs are 51 percent lower than previous county operating costs, as displayed in table 14.

Contracts typically are now five years in length. Both quality and low bid are considered in awarding the contract. The county currently has 15-20 custodial contracts, each selected on the basis of overall merit. Custodial employees now have several options regarding employment: (a) they can choose to be retrained in other fields and then transferred to other areas within county government where they have the potential for increasing their salaries; (b) they can choose early retirement; or (c) they can go to work for the private-sector provider.

Chicago, Illinois – Competitive Contracting. The City of Chicago experienced both substantial cost savings and quality improvements from competitive contracting. The custodial-services cost per square foot was reduced from $2.28, $2.57 and $2.79 respectively in the city’s three largest buildings to $1.81 overall. This amounted to more than $5 million in cost savings to the city. (All numbers account for increases in employees’ salaries and the costs cleaning supplies.)117

Contractors must make biweekly reports to the city regarding their expenditures on salaries and supplies, as well as on the tasks completed. City staff have observed that private providers use quality checkpoints more effectively than city custodial staff. The result has been cleaner facilities and more efficient cleaning and monitoring techniques. The improvement in cleanliness has been so sharply marked that the city has received thank-you letters from residents and other staff.

State of New York – Public/Private Competition. In the mid-1990s, the New York State Division of Budget decided to put out to competition its janitorial service, then provided by the Office of General Services (OGS). For its part, OGS was determined to keep the contract. The goal was to save $1.2 million over five years. Just one year into the project, however, the five-year savings estimate had confidently been increased from $35 million to $54 million.118

As a consultant for New York’s OGS, KPMG Peat Marwick determined the cost per square foot for OGS to provide full janitorial services for 37 state-owned office buildings. The cost per square foot took into account all costs incurred directly in cleaning the building as well as all other related costs. The 37 buildings included in the analysis were grouped into 15 clusters for the purposes of issuing invitations for bids (IFBs) to janitorial service firms. With tenants’ input, a performance standard established a level of expected cleanliness, including tenants’ special requirements, if any. (For example, certain rooms could only be cleaned during office hours for security reasons.) KPMG distributed the IFBs, conducting bidders’ conferences and building tours and providing an independent review of bidders’ proposals.

As part of the managed competition, OGS union employees were given assistance from the state to formulate a bid. Ideas generated throughout this process enabled OGS to reduce its janitorial costs by 50 percent. For example, OGS employees redesigned work processes and rules, reduced staffing requirements, reduced break allowance time, reduced management layers, introduced part-time employees and created a new broadband title. OGS bids were subject to the same requirements as those of private contractors. Contracts were awarded based on qualifications and, subsequently, the lowest bid. As of early 1996, four bids (representing five buildings) had been won by private-sector firms, and two bids (also representing five buildings) had been won by the OGS.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

As the New York example demonstrates, the contracting-out process also can benefit city management capabilities. The research, performance measurements, benchmarking and cost accounting associated with preparing for privatization provide the incentive for in-house reforms and increased efficiency.

In an effort to not displace city employees, Chicago required in its custodial contract that the contractor hire displaced city workers for a trial period of 60 days. If at the end of this time their performance proved unsatisfactory, or other problems arose, the contractor was no longer obligated to retain these employees. This process allowed the city to provide a guarantee for its employees while yet allowing the contractor to filter out any problem people.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Neil Davidoff
Deputy Commissioner for Administration
Office of General Services
State of New York
Mayor Erastus Corning II Tower, 39th Floor
Empire State Plaza
Albany, NY 12242
(518) 474-7483

Chris Goodman
Chief Administrative Office
County of Los Angeles
Kenneth Hahn Hall of Administration
500 W. Temple Street, Room 713
Los Angeles, CA 90012
(213) 974-1464

Further Reading

City of Chicago, “Summary of Custodial Privatization Initiative, 1990-1992,” unpublished document circulated within municipal government, 1993.

Fleet Maintenance

The privatization techniques applicable to fleet maintenance are:

Cost Savings Potential

Experiences from Phoenix, Des Moines, Los Angeles County and other jurisdictions demonstrate that fleet-maintenance privatization, when properly implemented, can result in substantial first-year cost savings and even greater savings in subsequent years. Typically, the areas of savings to the government include the following: parts, labor, overhead, preventive maintenance, inventory-carrying costs, purchasing labor costs, accounts payable labor costs, management and administrative costs.

A 1988 study comparing in-house and contract services for motor vehicle maintenance found that contractor costs were one percent to 38 percent below municipal costs for equivalent or higher levels of service. In conversions to contracting, wage levels generally remain similar, but the number of operating and overhead employees is reduced because of greater productivity.119

Trends

Between 1982 and 1992, the use of private contractors for fleet management and vehicle maintenance increased 27 percent.120 A 1990 survey by the Mercer Group found fleet maintenance to be one of the key areas in which governments used privatization.121 Governments increasingly are turning to the private sector to maintain their vehicle fleets for many reasons, including: technology changes superseding government mechanics’ job skills; inventory shrinkage; uncontrolled expenditures through excessive subcontracting; and lack of rigorous preventive maintenance, causing increased replacement costs.

A private fleet maintenance contractor can provide a broad range of services. At a minimum, such turnkey operations offer vehicle maintenance and fueling services. They sometimes assume responsibility for vehicle purchasing and disposal. Fleet ownership, however, typically remains in government hands.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

San Mateo, California – Competitive Contracting. San Mateo adopted a competitiveness strategy several years ago. Said San Mateo City Manager Arne Croce, “We want to test ourselves against the market. If we find out we can’t be competitive, we will use contracts and privatization.” While the city’s in-house street sweeping unit passed the competitiveness test, its fleet maintenance operation failed. So the city solicited proposals from a number of potential providers and eventually selected Managed Logistics Systems (MLS) in 1993.122 According to Croce, “It’s been very successful. The customer satisfaction reports we get back are showing high levels of satisfaction. MLS is meeting our expectations on a performance standpoint and from a cost standpoint.”

Privatization led to a 20 percent reduction in fleet maintenance costs, bringing the annual budget down to $900,000 in 1994. Although that may seem like a relatively small share of San Mateo’s total budget of $80 million, Croce says every little bit helps. “A 20 percent reduction in fleet maintenance is four police officers in terms of the value of services to the city.”

Coral Springs, Florida – Public/Private Competition. In 1993, employees of Coral Springs, Florida entered into a head-to-head competition with the private sector for fleet maintenance – and won the bid. Taxpayers won as well, as the employees attained their competitive edge by cutting 25 percent from their previous operating expenses.123 Coral Springs took steps to ensure fair competition (arguably excessively so) between the city employees and private-sector proposers, including training city employees to be competitive in the marketplace. After evaluating the bids in July 1993, city employees were awarded the contract.

“Because they are our employees, we have to treat them with respect, and they wanted to bid,” said Mike Levenson, one of the assistant city managers and chairman of the Fleet Maintenance Selection Committee. “We just didn’t say, ‘You have to bid.’ We offered all the support the city employees needed to come up with their business plan and to structure their bid, which is something most city employees don’t know how to do.” A team of municipal staff who were not on the selection committee gave technical advice to the city employees. They instructed the employees in “developing unit costs and unit revenues so they could better understand the economics of the service they ha[d] historically provided,” said Levenson. These lessons in competitive bidding helped the employees cut operating costs significantly and reduce their own staff by three. (These three were placed in other vacant positions within the city government in compliance with Coral Springs’ policy of no layoffs.) In total, the staff was able to lower costs by $222,000.

Indianapolis, Indiana – Public/Private Competition. Indianapolis’ fleet maintenance department had done 10 years of total quality management. It was widely acclaimed to be the most efficient central garage in Indiana. Yet, on assuming office in January 1992, Mayor Goldsmith decided to bid it out anyway. Three of the biggest players in the country bid on the contract. That is when the department got really serious. It eliminated $2.5 million dollars from overhead, increased productivity per mechanic by 22 percent, reduced costs to other city agencies – and won the bid.124 (See table 15.) Annual costs have been reduced by $1.5 million. The number of managers has been drastically reduced: There are now four workers for each manager; previously, the ratio was about one to one. The number of vehicles serviced has increased and the number of complaints has decreased.

The fleet maintenance employees discovered that the municipal government’s scheduling of days off – whereby each worker was entitled to the same, and frequent, holidays – affected their competitiveness. So they asked for more flexibility in this area. To increase their productivity and to minimize vehicle down time, they asked to be able to keep some workers on the job during scheduled holidays. The union employees also agreed to give up some automatic cost-of-living increases and to take a portion of their compensation in performance bonuses. They agreed to offset against this financial penalties if the department missed certain pegs on the contract. “They live and die by the performance measures,” said Deputy Mayor Charles “Skip” Stitt. “Real dollars come out of each employee’s pocket if they fail to perform to contract specifications.”

In the first year, the department surpassed its cost-containment goals, entitling the employees to over $75,000 in incentive payments (but only after deducting penalties for failing fully to comply with certain other performance goals). Due to the financial incentives to save money, fleet maintenance employees have even begun to propose outsourcing. In auto-body work, for example, the in-house unit was not competitive with private shops. So it began outsourcing that work and moving the displaced employees into more competitive areas.125

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, there are certain common elements to successful fleet maintenance privatization:

Third, ensure quality management and information systems. An accurate, reliable and appropriate system is key to managing and monitoring a service contract of this complexity and scale. Control over program performance information is needed to facilitate effective contract monitoring and enforcement.

Fourth, be vigilant about internal contract monitoring. Avoid employing those individuals who formerly managed the in-house operation as contract managers. Even if these individuals are fully committed to monitoring the contractor fairly and objectively, the appearance of bias and conflict of interest can cause disagreements and/or rifts to develop between the clients and the contractor.

Fifth, ensure accurate data gathering. In the largest ever local government fleet maintenance contract, in 1988, Los Angeles County contracted with Holmes and Narver Services, Inc. (HNSI) to maintain its entire fleet – 6,500 county vehicles, 1,800 heavy vehicles and the entire sheriff’s department fleet. Due to contract disputes, the contract was eventually terminated. The root of the problem was that the county underestimated the amount of work that needed to be performed by the contractor by more than 50 percent. County records of the number of backlogged vehicles and of the actual condition of the fleet were inaccurate, resulting in HNSI’s being unable to keep the backlog to expected levels.127 The problem could have been avoided if the county had gathered more accurate historical workload data.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Arne Croce
City Manager
City of San Mateo
330 W. 20th Avenue
San Mateo, CA 94403
(650) 522-7000

Marc A. Knight
Fleet Services Administrator
Department of Administration
Consolidated City of Indianapolis
1651 W. 30th Street
Indianapolis, IN 46208
(317) 327-2758

Further Reading

Janet Beales, “Fleet Maintenance Outsourcing Growing Trend Across the Country,” Reason Foundation Privatization Watch, December 1994.

VI. Privatizing Police, Emergency Medical and Fire Services

This section examines the possibilities for cost savings in the area of public safety by undertaking such measures and contracting out services and encouraging volunteer efforts.

Policing Services

The privatization techniques applicable to police services are:

Cost Savings Potential

Outsourcing police services such as funerals, directing traffic, responding to burglar alarms, citing parking violations, prisoner transport, watching over buildings found to be unlocked, dispatching police vehicles and others that do not require sworn officers can reduce costs by up to 30 percent.128 Experiences in California demonstrate that intergovernmental contracting can, in some instances, significantly lower per capita policing costs. As shown in table 16, the policing costs per capita in the three cities listed that contract out policing services are considerably lower than the costs in nearby cities that do not.129

Trends

Public police department budgets nationwide have been growing at about three percent a year, but demand for police service is growing much faster. In response, police departments are turning to several alternative service delivery techniques to cut costs and increase service levels.

One trend is the increased use of intergovernmental contracting. In Los Angeles County, the sheriff’s department has entered into 42 service contracts with local jurisdictions to supply policing services.

Another popular direction is the use of volunteers. Police departments increasingly are turning to volunteers to help expand their community-policing programs. In 1994, 10 percent of police departments used volunteers, and all indications are that the number has been growing steadily since then. Volunteers fit readily into community-policing programs so, as more and more departments turn to community-policing, they also turn to volunteers. Table 17 shows that already the large-scale usage of volunteers has come to some of the larger cities in the country.

Finally, outsourcing is increasingly being used by budget-conscious jurisdictions. Some police departments are starting to look at outsourcing administrative, support and security services that can be provided privately, freeing up public police to concentrate on the central policing function of combating violent crime.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial in discovering innovative ways to save taxpayer funds in the public-safety arena.

San Clemente, California – Intergovernmental Contracting. In 1991, the City of San Clemente began experiencing significant fiscal problems which threatened the future financial viability of the city. Emergency spending restrictions were imposed, capital projects were deferred, positions were eliminated and hiring freezes were imposed.130 In April 1993, San Clemente requested and received a proposal from the Orange County, California sheriff’s department to replace its 65-year-old police department. In July 1993, San Clemente disbanded its police department and achieved a $2 million reduction in costs and a significant increase in services. Both the reduced costs and the increased levels of service were included in the city’s financial strategic plan.

San Diego, California – Volunteers. The City of San Diego, like many cities, has introduced community policing into its police department. But what makes San Diego’s approach to neighborhood policing unique is the unparalleled extent to which the police department has made volunteers an integral component of its community-policing program.131

As of summer 1999, the San Diego Police Department (SDPD) possessed a volunteer work force of over 1,000 citizens. The San Diego experience has demonstrated convincingly the benefits of involving volunteers in the business of law enforcement. The benefits include: more than $1.5 million worth of policing man hours from volunteers; the addition of several new policing services; better police/community relations; and the freeing up of time, allowing regular police officers to focus more time on serious crimes. All told, as detailed in table 18, for a total cost of $230,900 a year, San Diego receives $1.56 million worth of policing.

In addition to general policing volunteers, San Diego’s program has two specialized units: the Crisis Intervention Team and Retired Senior Volunteers on Patrol. Since 1992, the Police Department has sponsored seven Retired Senior Volunteer Patrol (RSVP) programs. RSVP members wear uniforms with a badge, carry police radios and drive donated vehicles. The vehicles display the city’s seal and are marked “San Diego Police.” RSVP volunteers have a variety of duties not involving enforcement matters – they do not carry weapons – which enhance the department’s services to the community. Typical duties include: vacation house checks (when residents are gone for five or more days and wish a security check of their property); YANA (“You Are Not Alone”) visits, whereby RSVP members visit persons living alone on a periodic basis to check on their welfare and security and to provide contact with the community; service needs, such as broken street lights and potholes; fingerprinting; crime-prevention presentations; and marking of abandoned vehicles. Recently, RSVP officers have begun to do witness checks and provide other assistance to area investigators. In the first three years of the RSVP program in the Rancho Bernardo neighborhood, crime dropped 25 percent.132

As for the Crisis Intervention Team (CIT), this is composed of selected citizen volunteers who are specially trained to provide immediate emotional and practical support to victims, witnesses and other survivors of traumatic situations. It has proven to be a valuable resource. CIT statistics show a continuing increase in calls for service since 1989. CIT members are available on a 24-hour basis, seven days a week. Members sign up for a minimum of 20 hours of on-call duty per month.

There are only a few other cities that come close to the size of San Diego’s volunteer policing program. Similar programs have been started throughout San Diego County by the sheriff’s department and other local law-enforcement agencies. Other cities that are known to have sizable and/or innovative programs are: Lakeworth, Florida; Oceanside, California; Charleston, South Carolina; Orlando, Florida; Denver, Colorado; Phoenix, Arizona; Atlanta, Georgia; Salt Lake City, Utah; and Seattle, Washington.

Improvement District, Various Cities – Self Help. The use of private security has been spurred by the expanding numbers of business improvement districts (BIDs). BIDs are special organizations of businesses in an area that pay a special tax to pay for extra security, cleaning and other services to enhance the attractiveness of the area to customers. It is estimated that in 1996 there were nearly 1,000 BIDs in the United States, and more being proposed. Three such entities exist in Baltimore City, one in the downtown business district, one in the residential Charles Village area and one in residential/commercial Mount Vernon.

The success of the additional security provided by BIDs in lowering local crime has been demonstrated many times over. Two of the most famous examples are the Los Angeles garment district BID, where brightly dressed security guards on bicycles have reduced crime in the area by 20 percent, and the Grand Central BID in New York City, where extensive private security patrols have contributed to a 60 percent drop in crime.

The growth of more sophisticated and effective private security services has also contributed to their expanded use. Some security companies have begun to specialize in providing highly trained and better paid guards, equipped with high-tech gear and using aggressive techniques, to deter crime. A good example is Critical Intervention Services (CIS), which provides security in over 50 low-income apartment complexes in Florida. CIS uses armed guards in SWAT-style uniforms with visible bullet-proof vests. Their intent is to intimidate would-be trouble makers, but they also work closely with the local residents and landlords to establish a rapport. The result has been a 50 percent decrease in crime in the complexes CIS patrols.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

John W. Donlevy, Jr.
Assistant City Manager
City of Grand Terrace
22795 Barton Road
Grand Terrace, CA 92313-5295
(909) 824-6621

Sgt. Bill Snyder
Volunteer Service Coordinator
San Diego Police Department
1401 Broadway
Mail Station 796
San Diego, CA 92101
(619) 531-2223

Further Reading

John W. Donlevy, “Intergovernmental Contracting for Public Services,” Reason Foundation How-To Guide, No. 12, January 1994, p. 4.

Kathy Kessler and Julie Wartell, “Community Law Enforcement: The Success of San Diego’s Volunteer Policing Program,” Reason Foundation Policy Study, No. 204, May 1996.

Emergency Medical Services

The privatization techniques applicable to emergency medical services (EMS) are:

Cost Savings Potential

A recent Reason Foundation study found that contracting would dramatically lower the cost of emergency ambulance services in Los Angeles, from $57.6 million at present to an estimated $29.9 million. Because of the higher collection rate, revenues from user fees would increase from the $12 million to an estimated $15 million. The net taxpayer cost (expenses minus revenues) would drop from today’s $45.6 million to just $14.9 million. This would mean a savings of two-thirds of the current cost (or $30 million per year).133

Trends

A 1995 survey by EMS: Journal of Emergency Medical Services tabulates the organizational arrangements for EMS in the 200 largest U.S. cities (nearly all with populations over 100,000).134 That year, 68 of the cities (34 percent) had their fire departments provide the entire paramedic function of dispatching, treating and transporting. Fifty-one cities (25 percent) used the private sector for the entire paramedic function, while another 31 (16 percent) used the private sector in combination with another government agency, nearly always the fire department.

The 1990s have seen heated controversies over who should be providing paramedic services. In 1993, Huntington Beach, California ousted its private paramedic provider in favor of its fire department, and in the closing months of 1994 Sacramento did likewise. Fire departments often see paramedic service as a logical extension of their public-safety mission, especially as the trend in fire incidence continues its long downward path (down 23 percent between 1982 and 1992, according to the National Fire Protection Association), leaving less traditional activity to justify the community’s investment in firefighters, stations and equipment.135

Best Practices

Over the past 20 years, a great deal has been learned about the provision of emergency medical services. The single most important lesson is that the key to superior emergency medical services is not, per se, whether government or the private sector is the paramedic provider but, rather, whether the system is designed and structured for efficient and effective performance.

The best examples of EMS contracting are public/private partnerships in which the city fire department provides first-responder services and a single private ambulance contractor is responsible for all transports using a fleet composed entirely of advanced life support (ALS) vehicles. This cost-effective arrangement combines the organizational stability, reliability and community support of the fire department with the innovation and efficiencies of the private sector.136 Such systems can most notably be found in Las Vegas, Pinellas County (Florida), Kansas City, Syracuse and Fort Worth. These systems provide consistently high levels of service without excessively high user fees and with very low (or no) taxpayer subsidy.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, recognize the importance of system design. Among American cities, one can find a wide range of system designs, with a wide range of unit costs, productivity levels, response-time performance and per capita subsidies. Ironically, higher levels of subsidy do not generally correlate with higher productivity. In fact, what are now regarded as high-performance EMS systems generally have among the lowest levels of taxpayer subsidy. And they generally end up using a mix of public-sector and private-sector resources, each performing the task at which it is most cost-effective.

Second, watch key design features. Common features appear in high-performance systems, in contrast to the features of the lower-performance systems. These key features lead to higher productivity and lower unit costs, while achieving stringent fractile response-time standards. In most high-performance systems, public officials have opted to translate the lower costs into low or zero levels of taxpayer subsidy, with most of the costs being derived from user fees (reimbursed by third parties). The key design features of successful low-cost systems are the following:

Flexible production strategy. The entire fleet consists of ALS units staffed by paramedics who respond to all medical calls without resorting to error-prone call screening; these same units also transport all patients who require transport. All high-performance systems now use the flexible production strategy.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

John Furman
Chief Executive Officer
Rural/Metro Corporation
P.O. Drawer F
Scottsdale, AZ 85252
(602) 994-3886

Robert W. Poole, Jr.
President
Reason Foundation
3415 S. Sepulveda Boulevard, Suite 400
Los Angeles, CA 90034
(310) 391-2245

Chip Prather
Director of Fire Services
Orange County Fire Authority
P.O. Box 86
Orange, CA 92866-0086
(714) 744-0400

Further Reading

Robert W. Poole, Jr., “Privatizing Emergency Medical Services: How Cities Can Cut Costs and Save Lives,” Reason Foundation How-To Guide, No. 14, May 1996, p. 4.

Fire Services

The privatization techniques applicable to fire services are:

Cost Savings Potential

A study by John C. Hilke, a staff economist with the Federal Trade Commission, based on data in 48 cities, found that “the use of voluntary fire-fighting units reduces local-government expenditures for fire-fighting activities” and that these savings in the fire-fighting budget are not simply reallocated to other programs, but are reflected in lower spending and lower taxes in these cities.137 Cost savings from competitively contracting fire services range from 10 percent to 50 percent, with most communities falling in the middle of this range.138

Trends

About 90 percent of all fire departments in the United States are composed either entirely or mostly of volunteers. These departments protect 42 percent of the population.139

As for intergovernmental contracting, dozens of southern California cities, for example, contract with county governments for fire services. In February 1997, the City of Hawthorne joined dozens of other California cities when it turned over operations of its fire and paramedic services to Los Angeles County. Savings are expected to amount to $1 million annually.

Meanwhile, with competitive contracting, most of the growth in competitive contracting for fire services is occurring predominately in airports and new cities.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Westminster, California – Intergovernmental Contracting. In 1995, Westminster became the first city in California to bid out its fire service. The city concluded a hard-fought contest to replace its in-house fire department by selecting as its new fire service provider the Orange County Fire Authority, which beat second-place finisher Rural/Metro. Four cities and a startup firm, ACR Technologies, also submitted proposals.140 Westminster’s former city firefighters bitterly protested the city’s decision to contract out the service. They attempted to recall the four (out of five) council members who favored the idea, but the recall effort failed. The council members argued that economics in fire protection were essential in order for Westminster to afford increased police protection – and the voters agreed. Both the winning Orange County bid and the second-place Rural/Metro bid proposed saving Westminster taxpayers some $11 million over the five-year contract term, with the county bid offering about $500,000 more in savings.

Scottsdale, Arizona – Private Contracting. Since 1948, fire protection in this Phoenix suburb has been provided by a private, for-profit company, Rural/Metro. Before the city incorporated in 1952, Rural/Metro offered subscription service to individual homes and businesses (as it still does in rural and unincorporated suburbs elsewhere in Arizona). Upon incorporation, the city and Rural/Metro negotiated a service contract which has been renewed periodically ever since.141

Besides offering high quality, the company has figured out how to produce this labor-intensive service at lower cost. The key is to use a mix of full-time firefighters and on-call paid reservists (most of whom are city employees who receive regular monthly training and have permission to leave their city jobs when their pagers alert them to a structure-fire call). Using its innovative combination of full-time and part-time firefighters, Rural/Metro averages 23 firefighters on every Scottsdale fire call. A half-dozen outside studies over the years have verified the cost-effectiveness of Rural/Metro’s approach.

Eighty-eight firefighters are employed full-time in Scottsdale; 70 others are employed part-time. All are trained at levels consistent with the standards set by both the Arizona State Fire Marshall’s Office and the National Fire Protection Association. The company agrees to provide a “minimum of 240 hours of training each year of service to all full-time firefighters…and a minimum of 72 hours of training per year [or eight hours per month] for all reserves and Fire Support fire fighters.” Moreover, all full-time firefighters must hold the “Firefighter II level of certification, State Emergency Medical Technician certification and EMT-D certification when working in the primary service area.”142

The agreement between the Scottsdale and Rural/Metro is the most demanding fire privatization agreement that exists. It includes, for example, provisions specifying response time requirements, response-time definition, response-time liabilities, response-time penalties and – because sometimes special circumstances arise – exception report logs.

The thorough and precise nature of the agreement is intended to ensure that Scottsdale taxpayers get their money’s worth from Rural/Metro. The contract is valued at more than $5 million and a strict system of accountability is built into the agreement. There are nearly a dozen different monthly reports that “must be completed and submitted to the city’s contract administrator within 15 days after the end of each month.” Among the various reports required of Rural/Metro are: the total number of incidents responded to in the city; a fire cause analysis report of structure fires; a report of monthly fire prevention activities; and a report of estimated water usage for training, fire suppression activities and fire prevention.

In addition to providing fire and emergency medical services, Rural/Metro also enforces the city fire code and ensures that new construction is in compliance with city fire ordinances. Before the owner of a new building can be granted a “certificate of occupancy” by the city, the building must first be inspected thoroughly by Rural/Metro. All new fire-protection systems, including hydrants, sprinkler systems, alarm systems, halon systems, etc., are examined and tested by the firm. The University City Science Center, which conducted an in-depth, five-month study of the firm concluded that Rural/Metro’s “model prevention and inspection program provides citizens with a higher degree of safety than that which is available in most communities…. It has one of the lowest structure-fire rates and fire dollar loss rates in the valley. At the same time the costs for services are low compared to other communities.”143

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines: First, allow the use of a mixed force of full-time and reservist firefighters (so that fewer full-time salaries need to be paid). Second, require cross-training and multiple-service provision, so that the same emergency-services personnel, equipment and stations can provide more than one type of service, thereby spreading out the costs among all the offered services. Third, require a proactive fire prevention strategy that is aimed at minimizing fire loss through the use of technology (sprinklers, for example) and information (public education and safety promotion, for example).

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

John Furman
Chief Executive Officer
Rural/Metro Corporation
P.O. Drawer F
Scottsdale, AZ 85252
(602) 994-3886

Gary S. Jensen
Chief
American Emergency Services Corporation
P.O. Box 215
Wheaton, IL 60189
(847) 364-7163

Adrian T. Moore
Director of Privatization & Government Reform
Reason Public Policy Institute
Reason Foundation
3415 S. Sepulveda Boulevard, Suite 400
Los Angeles, CA 90034
(310) 391-2245

Robert W. Poole, Jr.
President
Reason Foundation
3415 S. Sepulveda Boulevard, Suite 400
Los Angeles, CA 90034
(310) 391-2245

Chip Prather
Director of Fire Services
Orange County Fire Authority
P.O. Box 86
Orange, CA 92866-0086
(714) 744-0400

Further Reading

John R. Guardino, David Haarmeyer and Robert W. Poole, Jr., “Fire Protection Privatization: A Cost-Effective Approach to Public Safety,” Reason Foundation Policy Study, No. 152, January 1994.

VII. Privatizing Health and Human Services

This section examines the possibilities for cost savings in the area of health and human services by undertaking such measures as contracting out services.

Local Health Care

The privatization techniques applicable to local health-care systems are:

Cost Savings Potential

Leasing or selling public hospitals typically results in substantial one-time revenues, as well as increased ongoing property- and sales-tax revenues. Austin, Texas, signed a 30-year lease with a private provider to operate its public hospital. The private firm is paying the city $2.3 million annually as part of the lease agreement. Cost savings from contracting out the operation and management of hospitals typically range from 20 to 55 percent.144

Outsourcing hospital services can achieve cost savings in the range of 15 percent to 40 percent. Nassau County Medical Center in New York saved $1 million in salaries and benefits from outsourcing its clinical services. The Nassau contract also resulted in $1 million in new revenues.

Trends

A 1994 study found that between 1982 and 1992, the use of private contracting for the operation and management of hospitals increased by 31 percent.145 Over the past two decades, hundreds of public hospitals have been sold to for-profit or non-profit providers.

A veritable revolution is occurring in the way in which health care is being provided to the indigent and uninsured. The advent of managed care and the popularity of outpatient care is leading to a fundamental restructuring of the whole health-care system. One offshoot of this is a declining need for hospital beds, especially in public hospitals.

In addition to dwindling public resources, the main force driving this change is vigorous competition from private and non-profit hospitals for treating the poor. In most communities, even those on public assistance now have a choice of providers. In 10 years, it is unlikely that many local governments will find it strategically desirable directly to operate their own public hospitals and clinics because more cost-effective choices will have become available.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Orange County, California – Competitive Contracting. By paying each of several community hospitals (both for-profit and non-profit) an annual fixed indigent-care allocation, Orange County now buys just the hospital bed days it needs from a total of 28 local contracting hospitals. This program is called Medical Services for Indigents (MSI), and it has saved Orange County both time and money on its health care services.

The Healthcare Association of Southern California appoints a committee each year to negotiate with the county. All hospitals desiring to qualify for county payments sign a single “master medical services agreement.” The physicians sign a similar master agreement. The single contract simplifies administration and the county also reduces paperwork by contracting with a fiscal intermediary to process claims.

The MSI program cuts costs because the county can protect itself through a fixed allocation of dollars to the master agreement. All the hospitals and physicians split the capped allocation at the end of the year (although the county makes provisional cash payments quarterly) in proportion to the units of service they actually delivered to indigents over the previous 12 months. Additionally, every hospital with a 24-hour emergency room must treat anyone who shows up in critical condition, or the hospital will lose its license.

The MSI program includes: 28 contracting hospitals; 28,758 inpatient days; 16,853 emergency room visits; 2,100 participating physicians; 187,587 visits; and 26,000 unduplicated clients. Orange County runs the entire program with a staff of seven employees.

Orange County’s payment for each day of inpatient service for indigents in 1993-1994 was $816. This payment covers an average of all five acuity levels, including all nursing, administration, hotel and ancillary services. The only item excluded is physician charges. This rate compares favorably with the $1,300 per day paid to county operated hospitals in Los Angeles.

Amarillo, Texas – Asset Sale. When the Amarillo Hospital District sold its community hospital to Universal Health Services, the sale yielded substantial benefits. It created a $200 million trust fund. It paid off $13 million in bonded indebtedness and eliminated Amarillo residents’ ad valorem tax burden of $8.5 million. It paid ongoing hospital-related costs to indigents at both the hospital and primary-care clinic. Finally, the newly privatized hospital paid property and other local taxes of $3 million annually, producing a net gain to the community of over $11 million.

Board members interviewed by the Amarillo News-Globe said the sale of the public hospital gave them the best of all worlds: lower taxes and better services. “Without Universal’s help, the Northwest Texas Healthcare System faced a difficult time due to increased competition. The results would have been an increase in taxes, cut in services to indigents, or both.”

Conroe, Texas – Asset Sale. Burdened by an ever-growing indigent population, Conroe, a community of 200,000 north of Houston, Texas, was faced with two choices. It could (a) keep fighting for market share for its public hospital against a local private hospital, a course which would have required a significant increase in taxes, or it could (b) sell the public hospital to the highest outside bidder willing to treat indigents. The county decided on “b,” exiting the business of operating a hospital and focusing instead on meeting the needs of the disadvantaged.

The winning bidder for the purchase of the hospital was Healthtrust, Inc., the owner of the largest private hospital in the area (Healthtrust later was acquired by Columbia/HCA, the nation’s largest hospital company.) The final sale price was $104 million, $20 million more than the estimated fair market value. The community realized a net “profit” of $30 million after $58.6 million in bond debt was paid off. The profit was used to establish a non-profit community foundation to meet the ongoing health needs of the community.

Healthtrust closed its own private hospital (instead of the public hospital), in order to solve the overbedding problem in the area and transferred its staff to the ex-public hospital, which was renamed Conroe Regional Medical Center. Columbia/HCA has since added $35 million in improvements to the hospital.

Through the privatization, the community is realizing increased revenue through new property- and other tax payments by the hospital, which totaled $2 million in 1995. As a result, the tax rate has declined 42 percent.

Indigents have fared best of all. The number of indigents served has gone up substantially: Enrollees increased 11.7 percent from 1995 to 1996. Indigent outpatient services increased 36 percent. Columbia is paying $10 million for indigent care, despite receiving only $6 million in payments from the district.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, put together a sound public relations strategy. Notify the public at least 60 days before a conversion to the private sector and hold public hearings.

Second, determine existing debt service before deciding to privatize. High debt can kill a sale.

Third, send out a “request for concept papers” rather than a standard request for proposals if unsure about the best method of privatization. This encourages contractors to present a variety of potential options.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area.

Russell Meyers
Chief Executive Officer
Conroe Regional Medical Center
504 Medical Center Boulevard
Conroe, TX 77304
(409) 539-1111

Richard J. Steele
Vice President
Birch & Davis Associates
8905 Fairview Road
Silver Spring, MD 20910
(301) 589-6760

Welfare and Welfare-to-Work

The privatization techniques applicable to welfare-related services are:

Cost Savings Potential

Being a relatively new area in privatization, definitive cost-savings estimates from competitive contracting are not available. Private providers have estimated they can run welfare administration and welfare-to-work programs for 25 percent to 40 percent less than the government.

Trends

States and counties now spend nearly $30 billion a year just to administer welfare programs. Public officials are hoping private companies can help them cut these costs. According to a survey by the American Public Welfare Association, more than 30 states are considering or have already contracted with private companies to deliver welfare programs, ranging from screening welfare applicants to running welfare-to-work programs.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

State of Wisconsin – Competitive Contracting. As part of the state’s ambitious W-2 welfare reform program, Wisconsin counties are contracting for eligibility determinations, case management, employment and other welfare-related services. Building on the managed-care concept, Wisconsin’s welfare contracts are awarded on a capitated rate basis, meaning the contractors receive a fixed amount per client, regardless of how much service costs are for that individual (although, due to the newness of the concept, the state is sharing in some of the financial risk).146

One region of Milwaukee County has competitively contracted for screening, training and placing welfare recipients in jobs. Milwaukee has been carved into six regions and public, private and non-profit firms have bid to administer the different regions. Each contractor is paid a flat amount to screen, train and place clients in jobs. This offers a powerful incentive to find work for the clients because otherwise the contractor could lose money.

Maximus, a private company specializing in welfare, child-support enforcement and job training, was the only for-profit firm to win a region. “Serious economic consequences exist if we are not successful,” says Larry Townsend, vice president of Maximus’ welfare division. “It’s sort of like capitated welfare.” Maximus employees are a mixture of social workers, people with business experience and individuals with experience in remedial education. “Having a work force with a combination of people with different backgrounds is the best model,” says Townsend, who has managed welfare programs in both the public and private sectors. “That way you get more creativity and a more dynamic mixture.”

Kenosha County in Wisconsin has funded a multi-provider job center for welfare recipients since 1990. Services related to job training, placement and retention are available at the center. And although the center emphasizes a cooperative approach to delivering services, the 18 providers at the center compete against each other for contracts.

Wisconsin officials expect the competition engendered through performance contracting will lead to a larger and more diverse market of service providers, which in turn will give counties greater leverage in future W-2 rebids.

San Francisco, California – Competitive Contracting. In San Francisco, welfare recipients without small children are now required to attend an employment and training program administered by Curtis & Associates (though staffers are still employed by the city Human Services Department). The company is placing about 40 to 60 people who complete the program in jobs per month and has a dropout rate of only 17 percent, which is 20 percent better than when the city ran the program.

Newport, New Hampshire – Competitive Contracting. Newport (population 6,100) closed down its welfare department in June 1996 and contracted with a local non-profit group to provide one-stop shopping for welfare services. The contract with Community Alliance of Human Services saves the city 50 percent. Applicants for aid now fill out only one set of papers and, when they are back on their feet, they repay the town.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

J. Jean Rogers
Division Administrator
Division of Economic Support
Department of Workforce Development
State of Wisconsin
201 E. Washington Avenue, Room 171
P.O. Box 7935
Madison, WI 53707-7935
(608) 266-3035

Larry Townsend
Vice President, Welfare Division
Maximus, Inc.
3890 11th Street, Suite 102
Riverside, CA 92501
(909) 684-5233

Richard J. Schwartz
President
Opportunity America, LLC
1560 Broadway, Suite 1109
New York, NY 10036
(212) 730-1818

Further Reading

State of Wisconsin, Department of Health and Social Services (DHSS), 1999 Plan: Wisconsin Works (Madison, Wis.: DHSS), 1996.

Child Welfare Services

The privatization techniques applicable to child welfare services are:

Cost Savings Potential

Reducing costs is typically a secondary concern for governments that turn to the private sector for child welfare services. More important is achieving improvements in the quality of services, such as shortening the length of time a child spends in foster care and speeding up the adoption process. Nevertheless, improvements in performance also eventually should lead to lower costs.

Trends

The number of governments contracting out child welfare services, particularly with non-profits, is increasing rapidly. Traditionally, child welfare contracts have been fee-for-service contracts and have not been subject to competition. This is changing. States and counties are now putting out RFPs that seek bids for performance-based capitated contracts, meaning they must agree to deliver the services in bundles for a fixed price per case. This shifts the financial risks to the private sector.

Best Practice

Listed below are some jurisdictions that have notably blazed the trial.

State of Kansas – Competitive Contracting. In 1996-97, Kansas became the first state in the nation fully to privatize its adoption, foster-care and family-preservation services. Kansas’ Department of Social and Rehabilitation Services (SRS), previously the state’s largest provider of adoption and foster-care services, now is strictly a purchaser of services and contract monitor with respect to child welfare services.

In all three areas – family preservation, foster care and adoption – the private contractors are paid a one-time lump sum per child. As with managed health-care plans, the rate is capitated. Previously, providers were paid on a fee-for-service basis. This provided little incentive to move a child quickly out of foster care, because the contractor would then lose the monthly state payments for that child. The result was “foster-care drift,” whereby kids floated through the system because there were no structural incentives to move them out of it.

In contrast, each contractor’s fiscal soundness is now linked directly to preventing such drift. For example, Lutheran Social Services, the lead adoption agency in a 13-agency private consortium, receives $13,500 for each child. Out of the $13,500 lump-sum payment, the agency must pay for foster care and counseling services for as long as the child remains in foster care. If the agency fails to place the child within one year, it will lose money. If the new adoptive home fails, the consortium must place the child again – but with no additional state money.

All the contracts are outcome-based. For adoption, the contractor must meet five key outcome measures in order to have the contract renewed. One is shortening the length of time between foster care and adoption. Previously, the state placed only one-fourth of the children in homes within six months of being freed for adoption. State officials want the private consortium to increase this rate to 70 percent within 180 days and 90 percent within a year.

While aware of the challenge, the non-profits are confident that over time they will vastly improve on the state’s performance. “In the future, the kids who need to be adopted will be younger, will have spent less time in out-of-home care and will have fewer problems as a result,” Joan Wagnon, the director of Kansas Families for Kids, told the Kansas City Star.

Early results are encouraging. In the first seven months of the family preservation privatization, 91 percent of families served remained intact, meaning that the children did not require an out-of-home placement. This was substantially higher than the 80 percent outcome goal.

Virginia Rodman, a consultant with Lutheran Social Services, is convinced privatization represents the future of foster care and adoption in America. “The national trend is certainly in the direction of privatization,” she says. “It may be different models than in Kansas, but some kind of privatization is definitely coming to child welfare.”

Sarasota County, Florida – Competitive Contracting. Sarasota County also turned over its problem-plagued foster care and adoption programs to a group of private, non-profit agencies in 1995. In addition to foster care and adoption, the coalition, led by the Sarasota YMCA, provides services for abused, troubled and drug- and alcohol-addicted children.

Having the human-services department purchase and monitor the services, but no longer deliver them, is expected to increase accountability. Previously, “it [was] like the fox guarding the hen house. There’s not a whole lot of accountability like that,” said state Senator John McKay (R-Bradenton).

The privatization push comes partly in response to a 1996 state law that encouraged the state human services department to contract out services to community-based agencies. The Sarasota pilot project is one of five in the state launched in 1997.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, phase in the privatization over several months. After encountering some logistical problems in turning over 730 adoption cases to the private contractor overnight, Kansas transitioned to a privatized foster care system in three phases over three months.

Second, develop rigorous performance standards for the contracts and give the private contractors freedom to meet the outcome standards creatively.

Third, closely collaborate with the existing non-profit and child-advocacy community. In Kansas, existing providers and child-advocacy organizations generally were very supportive of the new system. The state agency garnered their support by working closely with both groups to address their concerns and to design the new outcome-based privatization model.

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area.

Conna Craig
President
Institute for Children
264 Beacon Street
Boston, MA 02116
(617) 247-1117

Marilyn Jacobson
Deputy Commissioner
Commission of Children and Family Services
Department of Social and Rehabilitation Services
State of Kansas

Docking State Office Building
915 SW Harrison, 5th Floor South
Topeka, KS 66612
(785) 296-4653

Charlotte McCullough
Director, Managed Care
Child Welfare League of America
440 First Street, NW, 3rd Floor
Washington, DC 20001
(202) 638-2952

VIII. Privatizing Parks, Libraries and Recreation Services

This section examines the possibilities for cost savings in the area of parks, libraries and recreation services by undertaking such measures as contracting out services.

Golf Courses

The privatization techniques applicable to municipal or other local government golf services are:

Cost Savings Potential

Most municipalities privatize golf operations to increase revenues and to provide needed capital improvements. Table 19 provides a comparison of the revenues received by California cities following privatization.147 Of the six examples cited, five achieved revenue increases between 24 percent and 400 percent within the first year. Baltimore’s golf-privatization venture has already been described in chapter II.

Trends

Between 1987 and 1995, the percentage of cities contracting out for golf-course services increased by almost 10 percent, bringing the total percentage of cities contracting for golf course operations to 25 percent.148

Most privately run golf courses are managed by small businesses and entrepreneurs. There are estimated to be more than 15,000 golf facilities now in the United States. Of these, only 834 (about 5.5 percent) are managed by multi-course private management firms, according to a study recently completed by Golf Course News.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Los Angeles County, California – Competitive Contracting. The County of Los Angeles currently contracts out 16 of its 19 courses. Of these 16 courses, nine are leased to small firms or groups of individuals (mostly local golf pros) and the other seven to larger management firms.149

The county started the contracting-out process as a way of trying to increase revenue, and has been satisfied with the effort: It made a profit of over $9 million in fiscal 1993. An example of the county’s success is the Mountain Meadow Course. Before the course was privatized in fiscal 1989, it was generating revenues of approximately $570,000. After the contract, city revenues increased to $708,000. As of fiscal 1996, Mountain Meadow generated revenues of $1.4 million, more than doubling the profit of the pre-contract year.

Detroit, Michigan – Lease. City officials in Detroit are very satisfied with the privatization of four of their six golf courses. (The city continues to manage two courses.) Total revenue generated for the four courses for 1992 was $200,000, in comparison to a deficit of $500,000 the previous year, when they were still run by the city.

According to Detroit’s former director of recreation and parks, Dan Krichbaum, “It’s been a win/win situation.” The new management “improved the condition of the courses and increased the number of rounds played,” making capital improvements the city could not afford. Krichbaum added that the competition has also improved operations at two courses the city continues to manage.

A key reason Detroit decided to lease out its courses was its inability to make needed capital improvements to the courses. The city reports that the condition of the courses has significantly improved since the private contractor took over. In addition, the public’s reaction to the privatization of the courses has been positive, noting the improved playing conditions and efficient management of the operations. The city also reported that no municipal workers lost employment due to the changes, having either been hired by the private contractor or transferred to other positions within the city.

New York City, New York – Competitive Contracting. Since contracting out 13 golf courses, New York City has gone from losing $2 million a year to realizing a profit of $1.74 million in fiscal 1993. While the majority of its courses have been contracted out to local entrepreneurs, five courses currently are being run by Santa Monica-based American Golf Corporation.

New York City officials are quick to emphasize the disarray and disrepair the courses were in when run by the city. Despite this, privatization did have some initial resistance from club members at these courses, who were afraid they were going to lose their privileges. These problems have worked themselves out. Most of the employees were transferred to other departments or hired by the private contractor. New York City officials attribute the success to a strong monitoring program.

How-To Tips

When defining the terms of the privatization, governments should follow these guidelines:

First, opt for experienced contractors.

Second, provide enough qualified staff and an effective monitoring system to review the performance of the private contractor effectively.

Third, begin the process incrementally by contracting golf courses a few at a time, to protect the capital investment (golf courses) from possible problems.

Fourth, keep an open dialogue with community groups and unions to avoid misunderstandings and potential problems (e.g., negative media coverage, protests).

Fifth, consider having the in-house unit as well as a private contractor bid. Phoenix, Coral Gables and Sacramento have implemented programs where city employees run the golf courses as if they were private entities.

Sixth, avoid layoffs of any current employees whenever possible. This can be achieved in a combination of ways, such as (a) transferring employees to different positions within city government, (b) using attrition and (c) contracting with private operators who are more likely to hire current employees.

Expert Resources

This section presents an expert and/or practitioner who is available to discuss reforming service delivery in this area.

Laurence A. Hirsh
President
Golf Property Analysts
2213 Forest Hills Drive, Suite 3
Harrisburg, PA 17112
(717) 652-9800

Parks and Recreation Services

The privatization techniques applicable to parks and recreation services are:

Cost Savings Potential

Cost savings from outsourcing recreation facilities operation and management typically range from 19 to 52 percent. Cost savings from outsourcing park landscaping and maintenance range from 10 to 28 percent.150 A 1984 study comparing in-house and contract turf maintenance in parks found that contract service had costs 28 percent lower and equivalent service quality.151

Trends

Between 1987 and 1995, the percentage of cities contracting out for park maintenance services increased by 10 percent, bringing the total percentage of cities contracting the service to 33 percent.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Rancho Palos Verdes, California – Commercialization. In 1993, a budget shortfall prompted the City of Rancho Palos Verdes to reconsider its priorities. Pressed for cash, Rancho Palos Verdes eliminated its recreation programs. Before getting out of the recreation business, the city surveyed the surrounding area and discovered that private for-profit and non-profit organizations already were providing – at reasonable prices – most of the recreation services the city was running.152 After hearing the city would be dropping the recreation programs, many of the recreation class instructors went to the city and said they would continue the programs if it (the city) rented them the facilities. The result: many of the city recreation classes still are being offered. The only difference is they are being run privately and without a subsidy from the city. In fact, the city is now making a small net profit from the facility rental.

New York City, New York – Self-Help/Transfer to Non-Profit. Turning over partial ownership or management of city parks to non-profit groups and neighborhood associations often is the best way to ensure they remain a public asset. New York City’s Neighborhood Open Space Coalition has assumed control from the city of hundreds of abandoned lots and parks in this way, turning many dangerous eyesores into gardens. Nearly one-fourth of the city’s nearly 1,500 public parks are now cared for by community associations under the Operation Green Thumb program.153

The non-profit Central Park Conservancy has raised more than $100 million for New York City’s Central Park since its founding in 1980, taking over the care of trees, lawns and plants, and providing more than half the park’s operating costs. (The $100 million includes $40 million in capital improvements, $50 million allocated to park operations and $10 million for an endowment.) By 1989, 72 percent of Central Park users said the park felt safer after the Conservancy got involved. Crime dropped 59 percent and robberies plummeted 73 percent. The drop in crime is attributed to the large increase in park activities put on by the Conservancy. Good uses have driven out a lot of the bad uses.154

The Conservancy has since funded two-thirds of the renewed landscaping project, “Wonder of New York.” When the project is completed, the Conservancy will have paid for just over half of the $135 million in capital improvements in Central Park since 1980.155

vAs manager of the park, the Conservancy has protected the park by maintaining and then increasing park staff. Since 1991, Central Park has lost 54 city-funded staff due to budget cuts. Today, the Conservancy’s payroll includes 172 of the park’s 244 workers, and the city now pays only $5.4 million of the park’s $15.9 million total operating budget. Additionally, the city has profited from the renewal of Central Park, taking in $4.25 million in concessions from the skating rinks, vendors and many other sidewalk businesses. Conservancy leaders recently have called for outsourcing the management of all of the city’s parks, for it would bring competition, accountability and marketplace discipline.

Indianapolis, Indiana – Self-Help. Located in an upper-middle-class Indianapolis neighborhood, Holiday Park was a modern urban nightmare. Drug dealers and male prostitutes had set up permanent shop, and local residents were afraid to go anywhere near the park. After dark, not even the police felt safe in Holiday Park. In 1990, a courageous group of neighbors finally said, enough. They banded together and asked Indianapolis for permission to take back their park. They proceeded to raise $300,000 in private donations for new equipment, a security guard and better upkeep. The former drug-infested park now is safe enough for family picnics.156

Such problems are hardly unique to Indianapolis. In north central Baltimore City, Wyman Park is bounded to the north by the Baltimore Museum of Art and the Johns Hopkins University, and to the south, east and west by the residential Charles Village area. The attractive park becomes a haven of illegality after dark, however. Homosexual prostitution and drug trading flourish there. A late 1970s police attempt to restore order by enforcing anti-loitering laws was heavily criticized as anti-gay by local activists, says Sheila Rees, former president of the Charles Village Civic Association. Since then, the police have shied away from taking serious action.157 The city in some respects has only itself to blame. Wyman Park is one of very few Baltimore Parks not to close at dusk, meaning that anti-loitering ordinances do not come into play until midnight, severely curbing the police force’s ability to do anything about the place. The city has consistently refused to bring the park’s closing time into line with other area parks, though will not articulate why. Given the city’s lack of interest in turning Wyman Park around, perhaps it would make sense for the city to outsource its management to either the local civic association or to the special tax district authority in which Charles Village is located.158

Expert Resources

This section presents some experts and practitioners who are available to discuss reforming service delivery in this area, along with some further reading on the issue.

Henry J. Stern
Commissioner
Department of Parks & Recreation
City of New York
The Arsenal, Central Park
New York, New York 10021
(212) 360-8111

Les Evans
City Manager
City of Rancho Palos Verdes
30940 Hawthorne Boulevard
Rancho Palos Verdes, CA 90275
(310) 377-0360

Further Reading

Richard Gilder, “Set the Parks Free,” Manhattan Institute City Journal, Winter 1997.

Frederick F. Siegel, “Reclaiming our Public Spaces,” Manhattan Institute City Journal, Spring 1992.

Libraries

The privatization techniques applicable to public libraries are:

Cost Savings Potential

Typically, the goal of using an alternative delivery technique is to keep open the doors of the library in the wake of fiscal pressures.

Trends

Across the country, tight budgets have caused dramatic cuts in funding for public libraries since the early 1990s. So many libraries have closed their doors in recent years that the American Library Association says it is no longer able to keep track of them all.

The trend began in 1990, when officials in Worcester, Massachusetts, a city of 170,000, closed all six library branches. California’s recession in the early 1990s forced the closure of dozens of libraries. In Los Angeles, the county library system was threatened with the closure of about 50 of its 87 branches. The materials budget for the Nevada State Library & Archives went from $153,000 in 1992 to zero in 1993. Other jurisdictions have also eliminated their book budgets and have seen magazine-subscription budgets slashed by more than 50 percent.

Best Practices

Listed below are some jurisdictions that have notably blazed the trial.

Seal Beach, California – Volunteers/Asset Sale. Once threatened with closure due to budget cuts, a small branch of the Seal Beach library system in Orange County was saved through privatization.

In July 1995, the private retirement community Leisure World’s Golden Rain Foundation bought the Seal Beach library, finalizing an unusual private acquisition of a public library. Leisure World made a successful $225,000 bid to save the Seal Beach library, and spent an additional $35,000 to purchase the books. The former public librarians have been reassigned elsewhere in the public system, and volunteers are helping run the now private facility. “This is certainly a first, as far as I know,” County Librarian John M. Adams told the Los Angeles Times. “We think it was a real win/win situation. Clearly, we have had to make as many reductions as we can.”159 The Seal Beach Library is crucial to the retirement community’s 8,700 residents. “We plan to keep it open five days a week,” said Golden Rain Foundation President Howard McCurdy. “Over half of our residents use this library. It’s probably more used than any other function we have here.”

Palm Springs, California – Volunteers/Transfer to Non-Profit Sector. In June 1992, the city closed the Welwood Murray Memorial Library and removed every book from its shelves. A day later, the library started a new life as a private volunteer library, run by a newly incorporated non-profit foundation.160

“They left us with nothing,” says library trustee Jeanette Hardenburg. “And the building hadn’t been properly maintained for years. Volunteers did everything you see here – refinished the ceiling, donated display cases.”161 Palm Springs’ volunteer library now has more than double the number of books it had as a public library. (It has 8,000 books in its collection, which is 5,000 more than it had as a publicly funded library.) More arrive every day. “Every book in our collection was given to us by the city – I mean by the people – of Palm Springs. I don’t want to give the city any credit,” Hardenburg says.

The city’s public librarian had earned almost $70,000 annually to tend the 3,000-book collection. Now, Hardenburg and the other trustees each serve as volunteer librarians one day a week. Community members volunteer to help with the Friday afternoon book sales and other fund-raising and outreach programs.

Dayton, Ohio – Outsourcing. The Wright State University Libraries in Dayton pioneered contracting out all of their cataloging. In November 1993, the Online Computer Library Center (OCLC) of Columbus, Ohio took over the cataloging and saved the libraries about $230,000 in their first year, or 63 percent, according to Chris Watson, head of the libraries’ administrative services. There was no job loss, and the libraries were able to eliminate all backlog.

Expert Resources

This section presents an expert and/or practitioner who is available to discuss reforming service delivery in this area.

Sharon Arnold-Rasp
Operations Supervisor
Leisure World

Golden Rain Foundation
P.O. Box 2338
Seal Beach, CA 90740
(562) 598-2431

Further Reading

Elizabeth Larson, “Library Renewals,” Reason magazine, March 1994.

IX. Contract Management

As governments subject an increasing proportion of their services to competition, they must concentrate on becoming smarter shoppers. This means: (a) creating contracting systems that are outcome based; (b) writing contracts that contain clear performance standards; (c) incorporating financial incentives and penalties into the contract; and (d) developing advanced measurement techniques. Such state-of-the-art contracting often is referred to as performance-based contracting. When properly structured, performance-based contracting holds great promise for reducing contracting costs while increasing service quality.

Performance-Based Contracting

Increasingly, governments are fundamentally rethinking the way they contract out services. Previously, contracts tended to emphasize inputs: procedures, processes, wages, amount or type of equipment, or time and labor used. “Performance-based contracting,” on the other hand, is an output- and outcome-based approach to contracting.162

Performance contracts clearly spell out the desired result expected of the contractor, but the manner in which the work is to be performed is left up to the contractor. Contractors are given as much freedom as possible in figuring out how best to meet government’s performance objectives.

Along with the increased autonomy comes greater accountability for delivering the predetermined sets of outputs and/or outcomes. For example, a number of cities and states – Indianapolis, New York, Connecticut – contract with a private company called America Works to place welfare recipients in jobs. America Works is paid about $5,000 for each person placed in a private-sector job. America Works receives no payment for the time it puts into training, counseling and job searches for clients unless they are placed in a job for at least six months.

By measuring a contractor’s performance against a clear standard, performance contracting shifts the emphasis from a focus on process to a focus on product. Government’s management role changes from prescribing and monitoring inputs to collecting and generating the results-based data needed to measure the impact of the work performed.

The RFP and Contract

When public officials decide to purchase a service, they still have two important tasks. First, they need to make sure they ask for what they want. Then they have to make sure they get what they asked for.163 This is not as easy as it may sound. When contracting fails, it is almost always because government has failed at one or both of these two critical tasks.

Job Task Analysis

The first step in making sure an agency asks for what it wants is to determine accurately what it actually needs. This involves answering questions such as, what services and outputs do we want provided? And what do we hope to accomplish by providing the service or program? Termed the “job analysis,” this stage provides the foundation for all subsequent stages of the contracting process. The six basic elements of a job analysis are described in table 20. The job analysis forces departments to take a close, fresh look at their operations. Work processes have to be broken down to their lowest levels.

Performance-Based Statements of Work

The new focus on outputs and outcomes requires paying more attention to formulating more precise statements of work (SOWs). “Nothing degrades a contracting experience more than a lousy work statement,” says Bert Conlin, president of the Professional Services Council. Poor work statements can lead to poor performance, protests and ultimately disputes. A performance-based SOW consists of a statement of required services in terms of an output or outcome – or both – and measurable standards to judge whether the outcome is being met. Agencies should forget such traditional measures as dollar input or time on task, jettisoning such concepts in favor of standard performance indicators: quality measures, customer satisfaction, productivity, costs/benefit ratios and continuous improvement. An idea of the sort of indicators that should be adopted for certain common municipal services may be easily be illustrated by the example of park maintenance: “length of grass” instead of “number of mowing crews dispatched.” This may strike the reader as so obvious as to be almost childish. The fact remains, however, the most public agencies measures services and contracts almost exclusively in terms of effort put in, rather than results brought out.

The process of drawing up the RFP is a great way to focus a manager’s mind on exactly what it is the agency wants accomplished by the delivery of a service, operation of an enterprise or running of a program. The trick is to ensure that the SOW is specific enough to ensure the agency gets what is wanted in terms of service delivery, but without saddling the contractor with detailed procedures that must be followed to achieve the specific outcome.

Autonomy for Results

One reason government does not operate as efficiently and effectively as the private sector is the public sector’s myriad hiring and firing procedures. If they are to achieve cost savings and productivity gains, contractors must be given the freedom to operate outside this restrictive framework. Consider a principal finding of Bureaucrats in Business, a landmark World Bank study of privatization and management contracts: “The more successful contracts enabled contract managers to pursue contract objectives independent of government policy, while the less successful contracts made returns to the contractors dependent on government decisions outside their control.”164 According to the study, governments interfere with personnel policies more than any other area of contractor decision making, almost always having a negative effect on performance. All but one of the unsuccessful or borderline management contracts studied by the World Bank limited the contractor’s freedom and authority over labor. In contrast, nearly all the successful contracts gave the contractor maximum autonomy to hire and fire personnel and to set wages.

In this respect, the classic example is the “prevailing wage” law, whereby contractors bidding on government projects are forced to pay the locally prevailing union-set rates for labor. Maryland law, for example, requires that prevailing wages must be paid to workers on any public construction project receiving 50 percent or more of its funds from the state and valued at $500,000 or more. This requirement is in addition to the federal Davis/Bacon Act, passed in 1931, which requires that any state capital project funded in part with federal funds is subject to prevailing-wage regulations under the provisions of the act.165 According to the Maryland General Assembly’s Department of Legislative Services, the state’s prevailing-wage regulations alone can drive up the cost of construction projects by as much as 15 percent (this is in addition to federal and county equivalent regulations).166

As an example of the sort of result that can be achieved by allowing agencies to “think outside the box,” one would do well to look to Indianapolis. When the city wanted to lower costs and increase service in its mass transit agency, originally the plan was simply to contract out existing bus services. But city officials soon discovered that, despite three decades of providing bus service, no one had ever really asked what public interest the transit agency was supposed to be satisfying. After asking this question, it became apparent that the real goal of the agency was managing mobility in the regional marketplace, particularly for low-income and physically dependent citizens. In response, the city put out a bid for a firm to act as a “mobility manager,” whose responsibilities would include redesigning and rebidding various government-subsidized forms of transportation. The winning firm helped the city cut costs by one-third, saving $3 million while expanding service by 500,000 rides.

Performance Incentives in the Contract

The potentially powerful impact of incentive pay provides a compelling reason for performance contracting. Privatization gives public officials the freedom to design contractor payments creatively to correspond with certain performance pegs. Incentives to increase productivity, cut costs and raise service quality can be built into the contract. Incentive-based contracts shift much of the risk onto the contractor, who is rewarded for productivity improvement and penalized for poor performance or rising costs.

Performance Incentives

For services or projects in which time may be critical, financial incentives can be provided for early project completion. When the 1994 Northridge earthquake resulted in the collapse of two bridges on the Santa Monica Freeway, the world’s busiest, it was estimated that it would take from nine months to two years to open the damaged sections of the roadway if the bridge repairs were to go through the normal bidding process. The estimated cost to the local economy of this delay was estimated at $1 million to $3 million a day.

To speed up the process, Caltrans, the state transportation agency, offered substantial performance incentives and penalties to the contractor: a $200,000-per-day bonus for completing the project ahead of schedule and a $200,000-per-day penalty for each day the project was behind schedule.167 The financial incentives resulted in the overpasses’ being replaced in a little over two months – 74 days ahead of the June 24 deadline. To complete the project so early, the contractor used up to 400 workers a day and kept crews on the job 24 hours a day. The $13.8 million the contractor received in performance bonuses was more than offset by the estimated $74 million in savings to the local economy and $12 million in contract administration savings thanks to the shortened schedule.

Sharing the Savings

Private firms typically are able to generate much higher collection rates than the public sector for a host of revenue-collection activities, such as child-support payments, utility payments and parking-ticket collection. To provide incentives for the contractor to maximize revenues, governments can negotiate a contract that allows contractors to keep a certain percentage of the increased collections.

Another option is to negotiate a guaranteed level of savings from the contractor and then share any additional savings. This offers a powerful incentive for the contractor to search out ways continually to reduce costs over time. Such arrangements are used frequently when outsourcing many process-oriented support functions, such as information technology, billing and payroll.

This concept also can be creatively applied to non-support services. In 1995, the Indianapolis airport became the largest privately managed airport in the United States when BAA USA, Inc. won the bid to manage the airport. BAA guaranteed a minimum of $32 million in savings over a 10-year period, but hopes to achieve savings of $105 million. All savings over the $32 million baseline are shared by BAA and the Indianapolis Airport Authority, whose share ranges from 60 percent to 70 percent over the life of the contract.

Performance Penalties

Financial penalties imposed on the service provider can take the form of reduced charges for the period in which the poor performance occurred or a credit against future charges. In setting up the penalty structure, the contractor will be justifiably concerned that the penalties not be used simply as a means of reducing payments for every minor glitch in performance. The client, on the other hand, has a strong interest in protecting itself against any service problems and penalties built into the contract undoubtedly serve to keep the contracting company on its toes.

Capitated Contracts

Transitioning from cost-plus contracts to incentive-based payments has played a critical role in reducing the rapid growth of health-care costs. Increasingly, funders are asking providers to deliver health and social services – from welfare-to-work programs to adoption – under a “capitated” arrangement, meaning that the contractors agree to deliver the services in bundles for a fixed price per case. By providing a fixed payment in advance for a certain outcome, capitation shifts much of the burden of performance – and risk – to the provider.

Monitoring Contractor Performance

As more governments rely on private companies to deliver public services, monitoring and assessing these outside partnerships become svital to achieving an administration’s goals. While monitoring and measurement systems are becoming more refined, the public sector, in particular, still has a long way to go in becoming a better purchaser and overseer of service delivery. “Public-sector decision makers have yet to learn from the private sector the significance of managing outsourcing,” says New York University’s Jonas Prager. “Efficient monitoring, though costly, pays for itself by preventing overcharges and poor quality performance in the first place by recouping inappropriate outlays, and by disallowing payment for inadequate performance.”168

How many people are needed to monitor contracts? What should they be doing? What kinds of internal structures are needed as governments shift from service provider to service facilitator and purchaser? These are the types of questions that must be addressed in a systematic way as governments embrace competitive service delivery.

Establishing a Monitoring Plan

Agencies must think about how they are going to monitor the service/contract before they issue the RFP or sign the contract. The monitoring plan, sometimes called a “quality assurance plan” (or QAP), defines precisely what a government must do to guarantee that the contractor’s performance is in accordance with contract performance standards. Consequently, the better the performance standards, the easier it is to monitor the contract effectively. “The design of the deal can make an enormous difference in the future success of monitoring the contractor,” says Tom Olsen, formerly of the City of Indianapolis. “Strategic thinking on monitoring needs to begin at the time a deal is structured, not after.”169 Such interdependence means it makes sense to write the performance standards and the monitoring plan simultaneously.

The monitoring plan should be quantifiable and specific and include reporting requirements, regular meetings with minutes, complaint procedures and access to contractor’s records (if necessary). Agencies should decide in advance how many persons are needed to monitor the service and who these individuals will be. The plan should focus on monitoring and evaluating the major outputs of the contract so that monitors do not have to waste too much time and resources monitoring mundane and routine tasks that are not central to the contract.

Tailoring Monitoring Strategies

Different services require different types and levels of monitoring. Monitoring strategies that would be very effective for street resurfacing may be inappropriate for data processing. Some services require less overt monitoring than others. For highly visible services that directly affect citizens such as snow removal and garbage pickup, poor service will be exposed through citizen complaints. For complex or technical services, it may make sense to hire a third party to monitor the contractor.

Determining the appropriate technique and level of monitoring for a given service depends on several factors, one of the most important being the level of acceptable risk for non-performance. Where there exists a high level of risk for even minor problems – aircraft maintenance, for example – high-cost and high-control preventive monitoring techniques are necessary.

Once more, it is instructive to turn to Indianapolis. By the time the city had competed out nearly 70 different services over a five-year period, keeping track of the performance of all these relatively new projects had become a daunting task. In essence, the city had a portfolio-management problem. In order to get a better idea of actual contract performance and of the quality of the city’s monitoring and evaluation systems, “initiative management reviews” (IMRs) were launched.

One task of an IMR team is to determine the adequacy of current contract resources, personnel, procedures and monitoring systems for any given service. The review team also takes a hard look at performance measures, comparing actual performance to the measures. When appropriate, the team recommends changes in existing measures. A major element of the review process is determining the relative risk of each of the outsourcing projects. The higher the risk of non-performance, the higher priority the initiative will be for an IMR. Internal sourcing agreements – services for which in-house units have won the bidding competition – are considered to carry a greater risk of performance failure due to the heightened difficulty of establishing accountability for outcomes when an organization is essentially monitoring itself. Accordingly, these services are top priorities for the reviews. “It’s especially important to have a third party involved because of all the complex intramanagerial issues involved in the internal sourcing agreements,” says Tom Olsen. “We see the need for auditing and evaluating these services to be even greater than for those services being delivered by a private vendor.”170

Partnership of Trust

The contractor should be considered a strategic partner and given incentives to innovate, improve and deliver better customer service. The agency and contractor each should designate individuals to communicate on a regular basis. Many private companies schedule meetings once a month to review the status of the outsourcing relationship.

From a legal standpoint, it is helpful to have an agreement up front for solving disputes before they go to courts. Explains Vaughn Hovey, director of information processing services at Kodak, “Outsourcing is a collaborative relationship that has to be worked on. The lawyers are very helpful in structuring a contract. Our job is to make sure we don’t need them throughout the year. When the inevitable financial tensions arise, we have been able to have a ‘closed door’ meeting of several financial people from both sides and share our mutual objectives…. Both sides feel a lot better when it is over.”171

In addition, both parties can agree in the contract to use “alternative dispute resolution” (ADR) techniques – facilitation, mediation and mini-trials – instead of resorting to litigation. The U.S. Navy has used ADR techniques for almost 15 years and has been able to resolve disputes in nearly all cases in which it was used.

Management Information System

The best performance indicators in the world are useless unless they are accompanied by a system to track whether the standards are being met. In the private sector, Intel, Hewlett Packard and other computer companies have developed elaborate software systems to monitor, track and record the performance of their outsourcers. Another possibility is to link the evaluation system with a citizen complaint hotline. This is a good way of obtaining data in customer satisfaction.

Quality Is Ensured by Market Incentives

In the private sector, the market naturally provides useful – and sometimes painful – feedback that tells a firm how it is doing. If a company is not serving its customers adequately, they go elsewhere. But government monopolies – such as a state motor vehicle administration or municipal department of public works – experience about the same demand regardless of service quality. There is nowhere else customers can go. The most powerful way of ensuring high-quality service delivery from providers is by giving customers the power of exit. Many public services can be organized so individual customers have the power to chose their own provider and leave it if they are unhappy with the service quality. For internal support services – building repair, fleet maintenance, computer maintenance, printing and training – market forces can be brought to bear by allowing internal customers to reject the offerings of internal service providers if they do not like their quality or if they cost too much. These are called internal markets.

Bringing competition to bear on public services through privatization, competitive contracting, internal markets, vouchers and other techniques holds tremendous promise dramatically to reduce costs and increase service quality. Realizing these benefits, however, requires putting considerable thought into devising the right mix of performance standards, financial incentives and contract administration, and monitoring and measurement systems.

Perhaps most important of all, what is needed is a changed mindset where public managers are rewarded for effectively managing projects and networks of contractors rather than for the number of public employees under their command.

Resources

This section presents some expert studies useful for learning about reforming services.

State of Arizona, Governor’s Office of Management and Budget, Competitive Government Handbook (Phoenix, Ariz.: Office of the Governor, 1996).

John D. Donahue, The Privatization Decision: Public Ends, Private Means (New York, N.Y.: Basic Books, 1989).

William D. Eggers and John O’Leary, Revolution at the Roots: Making Our Government Smaller, Better and Closer to Home (New York, N.Y.: Free Press, 1995).

Susan A. MacManus, Doing Business With the Government: Federal, State, Local & Foreign Government Purchasing Practices for Every Business and Public Institution (New York, N.Y.: Paragon House, 1992).

John T. Marlin (ed.), Contracting Municipal Services: A Guide for Purchase from the Private Sector (New York, N.Y.: Ronald Press, 1984).

_____ (ed.), Contracting Out in Government (San Francisco, Calif.: Jossey-Bass, 1989).

John Rehfuss, “Designing an Effective Bidding and Monitoring System to Minimize Problems in Contracting,” Reason Foundation How-To Guide, No. 3, 1993.

E.S. Savas, Privatization: The Key to Better Government (Chatham, N.J.: Chatham Publishers, 1987).

_____, Competition and Choice in New York City Social Services (New York, N.Y.: Baruch College School of Public Affairs, May 1999).

Edward H. Wesemann, Contracting for City Services (Pittsburgh, Pa.: Innovation Press, 1981).

World Bank, Bureaucrats in Business: The Economics and Politics of Government Ownership (New York, N.Y.: Oxford University Press, 1995), p. 143.

X. Creating a Level Playing Field

Increasingly, when governments decide to test the market for the best price and quality for delivering a particular service, in-house units also are given the opportunity to bid for the contract. Based on the Indianapolis and Phoenix approaches, this model of public/private competition sometimes is referred to as “managed competition.”

When setting up a public/private competition program, public officials need to take great pains to create a level playing field between in-house public units and outside private providers.

Achieving such “competitive neutrality” requires at minimum that governments: (a) determine the real in-house costs of delivering the public service; (b) remove all special privileges and tax and regulatory exemptions now enjoyed by public providers that give them an unfair advantage over private firms; and (c) provide public units with greater flexibility in procurement, personnel and remuneration so they can effectively compete with the private sector.

Full-Cost Accounting

Few governments know how much it costs to fill a pothole, conduct a building inspection or clean out the sewers. In fact, most governments do not know how much it costs to deliver any number of public services. Yet, without such information, it is impossible to conduct fair competitions. Before agencies can make an informed decision about competitive contracting, they must first identify the total cost of in-house service. The task is not an easy one. Often, the cost of a single good or service is shared by several departments or activities, so administrators must decide how much of the cost to allocate to each part of the organization. Professor E.S. Savas of New York City’s Baruch College notes that public agencies routinely understate their true costs by as much as 30 percent.172

Many public agencies lack a consistent methodology for reporting costs. A survey of the contracting practices of 120 cities, counties and district governments nationwide found that half the respondents had no formal method for analyzing and comparing costs.173 Common mistakes in estimating total costs include:

Part of the difficulty is inherent in the nature of the task. As Jonathan Richmond of the Massachusetts Institute of Technology’s Center for Transportation Studies has observed: “Cost analysis is art, not science. In complex organizations, large numbers of assumptions must be made about how costs which are incurred are to be allocated to various parts of the organization. Many costs are shared by a number of services, and there is often no one obvious way of assigning them to their sources.”174

Cost often is an important consideration in the privatization decision, and officials should be aware of the true cost of both in-house and contracted services. Without an accurate assessment of total costs, public officials face difficulty determining the most cost-efficient provider of a given service. Computing the cost of service delivery is a complex accounting endeavor, and there is no “cookbook” method that will eliminate all subjective evaluations.

Why Total Cost?

When private businesses decide to expand operations or undertake a new service, they ask whether they should make or buy the additional output needed. Standard business practice directs that the additional cost of providing the service in-house (also called marginal cost) should be compared to the cost of purchasing the service outside. In private business, this is a sensible method for minimizing total cost.

But government agencies do not operate in the private sector with the same competitive pressures as private business. They often maintain excess productive capacity or overhead and allocate resources inefficiently. For this reason, public-sector estimates of the marginal cost of expansion often are unrealistically low. To assess the relative efficiencies of public and private service, the total cost or fully allocated cost of both should be compared. Total cost is the sum of the direct and overhead cost of providing a particular service.

Common Mistakes

Below are described a number of the common errors public-sector agencies make in trying to arrive at an estimate of the costs of in-house service provision.

Cross-Subsidizing. Costs to a target bureau often are borne by other bureaus in the same agency and not reported as a bureau expense. When determining costs, managers should be on the lookout for in-house units attempting to subsidize that part of their operation that must compete with private firms from protected parts of the unit. In several cities, for example, solid-waste pickup has been broken up into quadrants, some subject to competition and some reserved for in-house operation. On several occasions, private firms have argued that the low bids offered by city units are the result of cross-subsidization from in-house units serving the reserved quadrants to those bidding for the competitive quadrants. The best way to guard against this is to bring in an objective third party to determine the agency’s true costs.

Failure to Allocate Overhead. Indirect costs, or overhead, such as insurance, utilities, facilities and administration, are often shared by many bureaus within an agency. A portion of these costs should be allocated to the target bureau or service based on its use of overhead support in proportion to other bureaus’ usage.

Failure to Understand Capital Requirements or Replacement Reserves. Assets such as buildings, computers and heavy equipment lose value over their lifetime. They wear out or become obsolete and eventually are dumped, sold, overhauled or replaced. The cost of this loss in value is the asset’s depreciation cost, which usually is calculated as the value of the asset plus interest divided by the asset’s useful life (in years), less its salvage value, if any, when sold. Depreciation costs, or replacement reserves, must be figured into the total cost of a particular activity.

Failure to Include the Cost of Capital. Interest expense on borrowed funds and debt also must be included in any calculation of total costs.

Exclusion or Underestimation of Costs. A catch-all category, costs may be excluded or underestimated due to oversight, accounting practices that do not fully allocate cost, cross-subsidizing or the desire to make a particular service appear more cost-effective than it actually is. Underestimating costs is especially likely when making projections of future costs. Key areas include underfunded pensions, employer-paid benefits, liability and legal costs, and administrative costs.

Failure to Account for Higher Service Levels. When calculating costs, managers should make sure they are comparing “apples to apples” when discussing privately delivered services versus in-house services. It would not be fair to compare a higher level of service from a contractor with in-house expenditure on lower quality service. Therefore, it may be necessary to cost-out what the in-house provider would have to spend to deliver the defined performance level expected of the contractor.

Comparing Costs

When deciding whether to contract out for a particular service, additional costs must be considered. Total in-house costs should be compared to contractor costs plus contract administration costs plus conversion costs (amortized) minus new revenue.

Contractor Cost. This is the price charged to the agency for performing a service.

Contract Administration Cost. This can include the costs of bidding, contract negotiations and any other cost the agency would not have incurred had it not contracted for service. The cost of monitoring and evaluating performance is incurred by in-house and contract providers alike and therefore should not be viewed as part of the additional cost of contract administration.

Conversion Cost. Sometimes a public agency will incur one-time conversion costs when switching from in-house to contract service, such as legal fees or employee incentives. Or the provider may require certain changes in existing facilities before it can begin service. If these costs are paid by the public agency, they should be included in the total contract cost on an amortized basis.

New Revenue. Some contracting will create new revenue for the public agency. New revenue should be deducted from the total cost of contract service for comparison to the cost of in-house service. Revenues may be the result of government asset sales, income from operations or new tax revenues generated by the private contractor.

Forgone Tax Revenue. Private contractors pay taxes. They pay corporate income taxes, property taxes, sales taxes, user fees and other taxes, which accrue to the public. Public-sector providers pay very few, if any, of these taxes. When public-sector agencies are used to provide particular services, the public experiences a net loss in tax revenue over that which would be realized if the services were provided by tax-paying private enterprises. Public officials should consider tax revenue in the decision whether to contract for services. Governments in New Zealand and Australia assess a tax equivalency charge to public units in managed competitions.

The San Diego, California school district serves as an excellent case study of what not to do when considering contracting out service provision. The San Diego public schools system (SDPS) wanted to save money on busing. Its in-house provider cost an average of $55,018 per bus; its contract providers cost $30,496, a difference of 80 percent. What did the school district decide to do? It decided to expand the expensive public operation and eliminate the efficient private providers all in the name of lower costs. In coming to its decision, the school district made several mistakes.

The SDPS confused marginal with total costs. The district’s financial analysis compared the cost of adding services in-house against the total cost of contract-carrier service, thereby sidestepping the more important issue of overall cost efficiency. As a financial tool, a marginal-cost analysis will not reveal indirect costs, such as overhead, which drive up the cost of an operation.

The district also ignored cross-subsidy. Some costs incurred by the transportation unit were charged to other departments. For example, the cost of workers’ compensation claims is spread across all SDPS bureaus even though the transportation unit’s actual cost for workers’ compensation claims were two to five times higher than what it was charged for this expense, due to the costs’ being spread over the whole SDPS.

The SDPS excluded certain costs. The financial analysis excluded $3.25 million in property purchase and development for a new parking lot. Although land is a capital asset, it is a real cost and must be included in the cost of providing transportation services.

Finally, officials ignored a blatant conflict of interest. The decision to expand in-house services was based on a financial analysis prepared by the district’s in-house transportation unit, which had a stake in the outcome of the decision. There was no third-party review of the process. There was no public discussion of the analysis nor review of the financial analysis by an outside party. Subsequent questions about the plan were referred to the in-house transportation unit.

Importance of Competition

None of the cost efficiencies of private or public providers will last in the absence of competition. Private enterprises often provide lower-cost services because competition forces them to keep close watch on their expenditures. Likewise, competition from private providers forces public providers to control their costs. The issue is not public versus private. It is monopoly versus competition. Competitive markets can lead to efficient operations in both the public and private sector.

Removing Special Privileges

Some governments have unfairly tilted the playing field against the private sector by exempting in-house units from the requirement of submitting sealed, blind bids. Several cities have made it a practice to allow in-house units to put together their bids after being shown the best bids from the private sector. In addition to corrupting the competitive process, such an approach is likely significantly to reduce future cost savings from competition. The reason is that, if private firms feel as though they are being used by politicians only to obtain concessions from in-house units, they soon will decide it is not worth the trouble and expense of putting together serious contract bids. The result will be less competition.

In an effort to create as equal a standing as possible between public units and private companies, the New Zealand and Australian governments require competitive neutrality between the public and private sectors. To the extent possible, all protections and special privileges that public units usually enjoy over private firms have been removed. Public-service entities have been “commercialized” and are required to pay taxes (or a tax equivalent), comply with regulations imposed on private firms, institute accrual-based and full-cost accounting, and carry capital charges on their books.

To ensure a fair bidding process, managers must maintain an arm’s length relationship between the public entity administering the competition and the unit bidding on the contract. All bidders, whether public or private entities, should be held to the same performance standards and be subject to the same financial penalties and incentives as each other.

Removing Onerous Regulations

The flip side of the coin is that, to be competitive with private firms, government units need to be relieved of many of the regulations and bureaucratic procedures that decrease their productivity. For instance, a road-maintenance crew in Indianapolis complained that it took a week to get supplies from the city’s purchasing department, while private firms could of course purchase necessary supplies immediately. Unless government units are given more autonomy when governments institute competition, they are forced to operate in both worlds – the entrepreneurial and the bureaucratic.

In New Zealand, individual agencies now have the power to hire, fire, pay, promote, reduce (or eliminate) job classifications and negotiate collective bargaining contracts. Control over procurement and financial management also have been devolved down to the agencies.

Keys to Fair Competition

To sum up, then, these are the keys to fair competition:175

Cost Savings

Make sure the public-sector bids contain all the cost elements associated with the delivery of the service.

Control of Results

Use the same or a similar service agreement for either a private company or group of public employees.

Risk Allocation

The private sector is typically better able to share risk with the community than are public employees. If this risk assumption is desired, then a value should be placed on it and included in the evaluation criteria.

Guarantees versus Costs

Items such as performance bonds and unlimited liquid damages add to the private sector’s costs. If you do not need these, do not ask for them.

Evaluation Criteria

Be clear and up front about the nature of the desired services and about the criteria that will be used to evaluate competing proposals.

Contract Termination

Be willing to pull the trigger and terminate public and private agreements that do not work.

Resources

This section presents some expert studies useful for learning about managing competition.

Janet R. Beales, “Total Costing for School Transportation Service: How the San Diego City Schools Missed the Bus,” Reason Foundation Policy Study, No. 199, December 1995.

William D. Eggers “Rightsizing Government: Lessons from America’s Public-Sector Innovators,” Reason Foundation How-To Guide, No. 11, January 1994.

Lawrence Martin, “How to Compare Costs between In-House and Contracted Services,” Reason Foundation How-To Guide, No. 4, March 1993.

E.S. Savas, Privatization: The Key to Better Government (Chatham, N.J.: Chatham Publishers, 1987).

XI. Political and Organizational Strategies

Many attempts to inject competition and market forces into government operations fail. Established monopoly service providers will in all likelihood wage all-out war to prevent the successful execution of privatization plans. We have therefore identified six key political and organizational strategies for successfully implementing competitive strategies. Reform-minded administrations must remember these tips:

A Political Champion

A revolution does not just “happen.” Quantum changes such as those described in this guidebook require leaders – forceful leaders who possess a coherent vision of a new and better governance. Citizens must provide the impetus for dramatic change by expressing their discontent, but it requires leadership to direct that energy into constructive channels.

Achieving privatization and competitive government reforms requires leaders who will expend political capital on the issue and who have the skills to secure the approval of – or at least the acquiescence of – public-sector service providers and other wings of government whose cooperation is key to success.

Out of hundreds of governments the authors have studied over the past two decades, we have found relatively few examples where the kinds of changes we have outlined have occurred without a strong and determined political champion who is willing and able to withstand withering opposition to reform. Writes historian James MacGregor Burns: “Leaders, whatever their professions of harmony, do not shun conflict; they confront it, exploit it, ultimately embody it…. But leaders shape as well as express and mediate conflict.”176

The political champion is bound to make some enemies in the process. Barry Rosen, the former director of the Milwaukee Public Museum, who took the museum private in 1992, told us: “You make a lot of enemies when you do this, and you don’t get them back just because you’re successful. You’re not going to be the most beloved human being in the world. But I wouldn’t let it stop me. I was obstinate.”

Last, successful leadership in streamlining government requires vision. A coherent vision consists not only a concept of a desired outcome, but a workable framework for achieving that outcome. Opponents of change – within the government, the legislature and among special interests – almost always will prevail over a political champion who lacks vision. You cannot beat something with nothing.177

The successful leader, says Tom Peters, should be a “cheerleader, enthusiast, nurturer of champions, hero finder, wanderer, coach, builder and dramatist.”178 Leaders persuade. They change people’s beliefs about what is possible – and about what is desirable. They communicate a sense of urgency and purpose.

If politics is the art of the possible, the political champion must redefine what is possible. He must bring bold ideas to fruition. With visionary leadership, the “politically impossible” can become reality.

A Comprehensive Approach

Let us assume that a newly elected mayor in a formerly premiere league but now decaying city has decided to embark on a competition/ privatization program. How does he get started? One idea might be to announce a pilot project in one department and then see it gets on. In fact, this would be entirely the wrong approach

Such an approach likely would doom the competition program to failure before it even got started. Why? Entrenched interests and other opponents of privatization would concentrate all their ire on the one unlucky manager who happened to run the only privatization program in town. Opponents would marshal all their firepower to sabotage this one project in the knowledge that killing this one program might very well kill the whole concept. With only one municipal service privatized, and dozens still publicly delivered, no corpus of institutional support will have developed for competition, though there will be plenty of organized opposition to it. Also, the funds saved by contracting out one lone function may very well not be impressive enough to attract the attention of taxpayers.

A superior approach would be to announce the launch of a comprehensive competition program, making clear that competition is to become a way of life in town. Announce that the new privatization plan will start off with several projects in each of the major departments. Let all residents know that eventually nearly all services the government delivers will be subject to competition.

This approach is far more likely to succeed. It does several things. First, it spreads out opponents. They not only will have to kill numerous projects, but they will forced to try to defeat the whole broad concept of competition. Second, this approach democratizes the process. No one unit will feel singled out. Everyone will know that his agency, too, eventually will have to compete. Third, by putting projects out to bid from every agency, there will be a better chance of achieving a ripple effect across government. This will occur when even within in-house units not yet subject to privatization, because they will come up with cost-savings proposals in an effort to stave off contracting. Finally, the comprehensive approach will save much bigger sums of money, more quickly. This will put opponents of competition in the difficult position of trying to justify to taxpayers why they, the taxpayers, should in short order have to return to earlier, inflated funding levels.

One last word: None of this means that reform administrations should not start up with the easier, low-hanging fruit. By all means they should, but only within the context of a comprehensive approach. Pick several bunches of low fruit at a time.

Studying Privatization to Death

Public-sector opponents of reform are experts at studying issues to death – “death by committee.” This process gives the illusion of progress, then degenerates into an exercise in generating paper. In summer 1992, Michigan created a commission to study privatization opportunities. By winter 1993, the state had introduced a process called PERM, by which every function in every department would be reviewed, and a recommendation made to privatize, eliminate, retain or modify. For more than two years, this ambitious effort chugged along with little real impact.179

The real progress that has occurred in Michigan has happened since then. And it has been the result of strong-willed individual administrators who have pushed for it. The moral: Just do it! Managers should spend some time putting together a sound RFP stating precisely what outcomes are desired (though leaving inputs to the discretion of the contractor) and then see what comes back from the market.

Managing Outsourcing Relationships

A government’s successful operation increasingly depends on its being able to manage a network of service providers and market-based arrangements (e.g., vouchers, internal markets and public/private partnerships). Doing so effectively requires creating a new high-level position whose responsibilities include establishing, maintaining and cultivating outsourcing relationships. This individual should have experience in, or be trained in, the following:

Such executives must handle a variety of complex issues and relationships like: employee transitions; asset transfers; developing outcomes, performance goals and penalties; terminations; dispute resolution; and risk management.

In addition, a centralized unit, where a critical mass of knowledge about streamlining issues is set, should be established to manage the privatization process. Such a unit also would act as an institutional advocate for reform – publicizing and riding herd over departments that drag their feet.

Uncoupling Purchaser from Provider

When the purchaser and provider are split, policy and regulatory functions are separated from service delivery and compliance functions and transformed into separate and distinct organizations. When the purchaser and the provider are the same entity – as in, say, the average American municipal public works department – there is very little incentive for cost savings. Increasingly, however, governments are embracing the concept of the purchaser/provider split: Australia, Great Britain and New Zealand all have embraced this reform. The United Kingdom has uncoupled three-fourths of its civil service, while in New Zealand the percentage is more like 90 percent.

The goal is to free policy advisors to advance policy options that are in the public’s best interest but may be contrary to the self-interests of the department. For example, a central problem with government organizations is “agency capture.” This refers to the tendency of service departments to capture the policy-advising process from policy makers and top managers, using this power to recommend themselves as service providers and to bias policy advice towards increasing the size of their budgets. One example: a housing authority recommending staff and budget increases in order to build and manage more government housing. On the other hand, splitting policy functions from service delivery creates incentives for governments to become more discriminating consumers by looking beyond government monopoly providers to a wide range of public and private providers.

In the state of Victoria, Australia, the government has separated policy and delivery functions in the corrections department. The correctional services agency is now exclusively a service delivery agency. A separate entity called the “contract administrator” has been established to administer contracts with the private sector. The contract administrator is charged with “purchasing” correctional services and monitoring and evaluating the performance of private and public operators on a neutral basis. In this way, the government is creating a “market” for correctional services.

Likewise, in Kansas the agency that previously delivered child welfare services such as adoption and foster care no longer delivers these services – it purchases them. The agency is almost exclusively a purchaser of services and contract monitor.

Uncoupling also is designed to reduce the conflicting objectives that arise when the same agency is involved in service delivery, regulation and compliance. For example, the Federal Aviation Authority, which regulates airline safety, is at the same time is charged by Congress with promoting low-price airline travel. This has led to frequent criticisms that the FAA does not take airline safety seriously enough. In contrast, in New Zealand, agencies regulating transportation industries – airlines, railroads, trucking and road safety – have been split off from the Transport Ministry into separate independent entities and put under private-sector boards of directors. Regulatory outputs are now “purchased” from each agency by the transport minister.

An Employee-Adjustment Strategy

Privatization is a political process. Despite evidence of sizable cost savings, public officials often face strong opposition to privatization and competitive contracting.180 The greatest political opposition comes from public employees and their unions.181 Experience in the United States and overseas has demonstrated that making privatization attractive for impacted workers is vital to achieving the political support needed to implement competition strategies.

The best way to reduce opposition is to communicate to workers a commitment to fair treatment. Keeping employees informed can reduce antagonism and avoid the morale problems often associated with organizational change. The cooperation of public workers is essential to a successful privatization program. One of the principal reasons public employees are hostile to privatization is the perception that they will lose their jobs as a result of it. Fortunately, privatization need not be a hardship for public workers.

The most comprehensive evaluation of the effect of privatization on government workers was conducted in 1989 by the National Commission on Employment Policy (NCEP), a research arm of the U.S. Labor Department. The study, titled The Long-Term Employment Implications of Privatization, examined 34 privatized city and county services in a variety of jurisdictions around the country.182 The report found that, of the 2,213 government workers affected over a five-year period by the privatizations, only seven percent had been laid off. More than half the workers (58 percent) went to work for the private contractor; 24 percent of the workers were transferred to other government jobs; and seven percent of workers retired.

Another NCEP study of 28 local governments found that nearly a third of them (29 percent) had, upon instituting competition, employed a no-layoff policy. And over a third (35 percent) gave the union workers the right of first refusal for a job with the winning contractor. (See table 21.) The study concluded that “in the majority of cases, cities and counties have done a commendable job of protecting the jobs of public employees.”183

These findings are similar to those of other studies examining job displacement from privatization. A 1985 General Accounting Office (GAO) study found that, of the 9,650 defense employees affected by contracting out, 94 percent were placed in other government jobs or retired voluntarily from their positions.184 Of the six percent displaced employees, half obtained jobs with the private contractor.

Recent large-scale privatization initiatives have demonstrated similar results. Indianapolis has privatized 70 services over the course of the past half dozen years or so, yet no public union workers have been laid off.

It also must be recognized that privatization is not a zero-sum equation: Although the number of public jobs may decrease, jobs also are created in the private sector from privatization. Since launching its comprehensive competition program, for example, Indianapolis has experienced its most rapid private-sector job growth in decades.

There are a number of techniques available to officials to insulate workers almost entirely from the potential of job loss. Techniques that can attenuate the impact on current workers include:

Working within the Attrition Rate

Workers on a function targeted for privatization are simply shifted to other government work, with staff reductions occurring only as employees retire. Government officials typically make a strong effort to provide for current public workers even when embarking on extensive privatization programs. Between 1982 and 1986, for example, Los Angeles County privatized functions that affected over 1,300 workers, yet only 36 permanent employees were laid off due to the contracting out program.185

First Consideration by Private Contractors

A common strategy for reducing current employee impact involves encouraging or requiring a contractor to offer first consideration for employment openings to all qualified public workers. Private contractors are usually quite happy to have access to an experienced labor pool. In adopting this policy, however, government officials should be careful not to constrain contractors with burdensome mandates. And public officials should certainly avoid restrictions that mandate wage or benefit levels for contractors. Requiring private providers to match public-sector wages and benefits in perpetuity can reduce the potential cost savings from privatization. Contractors should be allowed maximum flexibility to perform the given function in the most cost-effective fashion possible.

Early Retirement Incentives

Given that privatization often entails a reduction in the overall labor force, another strategy for avoiding layoffs is enticing public workers voluntarily to leave government employment by offering them early-retirement incentives. Such programs can be cost effective if they enable governments to adopt otherwise politically unattainable cost-saving privatization measures. In cases when the vacated slots are left unfilled, early retirement programs can generally save money by reducing the government payroll.

Letting Public Departments Bid on Contracts

Because it reduces opposition to privatization, allowing public-employee units to compete for contracts makes good political sense. It also makes good economic sense. Cost savings from privatization arise from the efficient operating practices that a competitive market promotes. As we stated earlier, the difference is not one of public versus private, but of monopoly versus competition.

Structuring the Transition

For public employees that go to work for private contractors and for public departments that bid for contracts, the government can and should take steps to ease their transition into a competitive market. The change from a protected monopoly to a competitive environment can be accomplished more smoothly if public officials take steps to assist public workers.

One strategy to enhance the chances of successful bidding by public departments is to train the managers and workers in productivity, cost-saving strategies and customer service. Workers and managers may require new skills to excel in a competitive environment. Training can provide them with the tools needed to make the transition as painlessly as possible and increase their awareness of the need for continuous improvement and productive efficiency.

As governments move to competitive contracting and providing public managers with more work-force flexibility, human-resource departments will need to evolve. Rather than simply reacting to the changes in government and processing paperwork, human-resource departments will need to become employee advocates – assisting employees with career paths and identifying new career opportunities within and outside government. Human-resource departments will have to take a more active role in the city’s long-term planning process and should be included from the beginning when devising privatization processes.186

Human-resource agencies should take the lead in analyzing the government’s capability to absorb surplus workers from outsourced areas elsewhere within government. Among the variables that should be analyzed to assess absorption capacity are turnover statistics, feasibility of hiring freezes, rate of growth of the work force, pay scales relative to private-sector employment alternatives, availability of early-retirement incentive programs, professional capability of human-resources functions and the quality of facilitating systems (job postings, etc.)

Gain Sharing

In addition to providing managerial incentives for privatization, governments may want to consider sharing part of the savings from implementing privatization with department employees. Indianapolis structured gainsharing incentives for its public employees into most of its public/private competitions.

Conclusion

Privatization is a proven, cost-effective technique for delivering public services. Nevertheless, due to political resistance from public employees and their unions, many governments fail to pursue privatization opportunities. The result is that taxpayers are forced to pay more for services than would be necessary in a more competitive market.

This need not occur. By following the six strategies outlined in this chapter, American cities and counties may overcome bureaucratic inertia and the resistance of interest groups and successfully implement competitive government strategies.

Resources

This section presents some expert studies useful for learning about managing competition.

William D. Eggers and John O’Leary, “Leading the Revolution: Lessons in Making Government Smaller, Better and Closer to Home,” Common Sense, No. 9, Winter 1996

_____, Revolution at the Roots: Making Our Government Smaller, Better and Closer to Home (New York, N.Y.: Free Press, 1995).

End Notes

[Back] 1. As quoted in David Osborne and Peter Plastrik, Banishing Bureaucracy: The Five Strategies for Reinventing Government (Reading, Mass.: Addison-Wesley Publishing Co., 1997), p. 141.

[Back] 2. U.S. Bureau of the Census, Internet site, “Median Household Income by Type of Household” (http://www.census.gov/hhes/ income/mednhhld/t4.html); “Poverty 1997″ (http://www.census.gov/hhes/poverty/poverty97/pv97est1.html); and “Model-Based Income and Poverty Estimates for Maryland in 1995″ (http:// www.census.gov/hhes/www/saipe/estimate/cty/cty24000.htm), downloaded July 8, 1999.

[Back] 3. Nick Johnson and Steve Bartolomei-Hill, Chartbook on Taxes in Maryland, 2nd ed. (Baltimore, Md.: Maryland Budget and Tax Policy Institute, July 1999), p. iii.

[Back] 4. Barry W. Poulson, 1998 Report Card on Fiscal Policy in the States, Part I: State Fiscal Policy & State Tax Systems, An Analysis of Fiscal Discipline (Washington, D.C.: American Legislative Exchange Council, August 1998), p. 22, table 2.3.

[Back] 5. John Byars, Robert McCormick and Bruce Yandle, Economic Freedom in America’s 50 States: A 1999 Analysis (Clemson, S.C.: Clemson University Center for Policy and Legal Studies, March 1, 1999), p. 58.

[Back] 6. State of Maryland, General Assembly, Spending Affordability Committee, Report of the 1997 Interim (Annapolis, Md.: Department of Legislative Services, December 1997), p. 64.

[Back] 7. Spending Affordability Committee, Report of the 1997 Interim, p. 64.

[Back] 8. From data provided by State of Maryland, General Assembly, Department of Legislative Services (DLS) and DLS, Analysis of the Maryland Executive Budget for the Fiscal Year Ending June 30, 1999, Vol. I (Annapolis, Md.: DLS, March 1998), p. 35.

[Back] 9. Inflation-adjustment figures derived using gross domestic product (GDP) deflator inflation index, based on the inflation rate during the U.S. government fiscal year, which begins on October 1 and ends on September 30. An on-line version of the GDP deflator calculator may be found at the Internet site of the U.S. National Aeronautical and Space Administration (NASA), located at http://www.jsc.nasa.gov/bu2/ inflate.html, downloaded July 8, 1999.

[Back] 10. U.S. Bureau of the Census, Internet site, “Model-Based Income and Poverty Estimates for Maryland in 1995″ (http://www.census.gov/hhes/www/saipe/ estimate/cty/cty24000.htm) and “Model-Based Income and Poverty Estimates for Baltimore City, Maryland in 1995″ (http:// www.census.gov/hhes/ www/saipe/estimate/cty/cty24510.htm), downloaded July 8, 1999.

[Back] 11. U.S. Bureau of the Census, State and Metropolitan Area Data Book, 1997-98, 5th ed. (Washington, D.C.: Government Printing Office, April 1998), table D, at pp. 173-177.

[Back] 12. Eric Siegel, “Shrinking Cities Led by D.C., Baltimore,” (Baltimore) Sun, July 1, 1999, p. 1B.

[Back] 13. Douglas P. Munro, “Reforming the Schools to Save the City, Part II: Survey Shows School Choice Would Prevent Middle-Class Flight from Baltimore,” Calvert Issue Brief, Vol. I, No. 2, August 1997, p. 9, table 2.

[Back] 14. U.S. Data on Demand, Inc. and State Policy Research, Inc. (USDD/SPR), States in Profile: The State Policy Reference Book, 1995 (McConnellsburg, Pa.: USDD/SPR, 1995), table D-14.

[Back] 15. U.S. Bureau of the Census, Statistical Abstract of the United States, 1998 (Washington, D.C.: Government Printing Office, October 1998), p. 326, table 521.

[Back] 16. U.S. Bureau of the Census, Statistical Abstract of the United States, 1998, p. 328, table 524.

[Back] 17. City of Baltimore, Department of Finance (DF), Comprehensive Annual Financial Report, Year Ended June 30, 1997 (Baltimore, Md.: DF, December 5, 1997), p. 54.

[Back] 18. Kantayhanee Whitt, “Padded Payroll: An Examination of Municipal Employment Practices in Baltimore City,” Calvert Issue Brief, Vol. II, No. 1, May 1998, p. 6, table 1.

[Back] 19. Regional Economic Studies Institute (RESI), 1997 Maryland Statistical Abstract (Towson, Md.: RESI, Towson University, [no date]), p. 149, table 6.5.

[Back] 20. William R. Brown, Jr., “Calvert’s ‘Padded Payroll’ Leaves False Impression of City Government,” (Baltimore) Sun, June 9, 1998, p. 9A.

[Back] 21. Derived from: (a), for raw functional spending data, U.S. Bureau of the Census, Statistical Abstract of the United States, 1997 (Washington, D.C.: Government Printing Office, October 1997), p. 319, table 502; (b), for population figures, U.S. Bureau of the Census, State and Metropolitan Area Data Book, 1997-98, table D, at pp. 173-177; and (c), for cost-of-living conversion, Yahoo!, Inc., “City Comparison: Compare Salaries,” Internet site (http://verticals.yahoo.com/cities/salary.html), downloaded, July 14, 1999.

[Back] 22. DF, Comprehensive Annual Financial Report, Year Ended June 30, 1997, p. 54.

[Back] 23. Douglas P. Munro, “Schmoke’s Gamble: A Conversation with Urbanologist Fred Siegel,” Calvert News, Vol. III, No. 2, Fall 1998, p. 4.

[Back] 24. The Washington/Baltimore consolidated metropolitan statistical area is, in fact, a large one, covering: (a) the District of Columbia; (b), in Maryland, Baltimore City and Anne Arundel, Baltimore, Calvert, Carroll, Charles, Frederick, Harford, Howard, Montgomery, Prince George’s, Queen Anne’s and Washington counties; (c), in Virginia, Arlington, Clarke, Culpeper, Fairfax, Fauquier, King George, Louden, Prince William, Spotsylvania, Stafford and Warren counties; and (d), in West Virginia, Berkeley and Jefferson counties. See U.S. Bureau of the Census, County and City Data Book, 1994, 12th ed. (Washington, D.C.: Government Printing Office, August 1994), pp. C-31, C-72 and C-73.

[Back] 25. U.S. Bureau of the Census, “Federal Funds & Grants: Total Expenditures Per Capita, 1996,” Internet site (http://www.census.gov/Press-Release/ metro26.prn), downloaded July 12, 1999.

[Back] 26. U.S. Bureau of the Census, Statistical Abstract of the United States, 1997, p. 318, table 501.

[Back] 27. All figures taken from U.S. Bureau of the Census, Statistical Abstract of the United States, 1997, p. 318, table 501.

[Back] 28. Ivan Penn, “Baltimore Mayor’s Power Base Shrinking,” (Baltimore) Sun, July 25, 1999, p. 1C.

[Back] 29. Penn, “Baltimore Mayor’s Power Base Shrinking.”

[Back] 30. Penn, “Baltimore Mayor’s Power Base Shrinking,.”

[Back] 31. See for example, Michael Anft, “Private Functions: Against a Backdrop of Tight Budgets and Fleeing Residents, the Debate Over Contracting Out City Services Rages On,” (Baltimore) City Paper, December 30, 1998, p. 14; Anft, “Job Security: Unions Want a Say in the City’s Move Toward Privatizing Services,” (Baltimore) City Paper, January 6, 1999, p. 12; and Gerard Shields, “Board Votes to Study Privatizing City Services,” (Baltimore) Sun, January 7, 1999, p. 3B.

[Back] 32. Paul D. Samuel, “Behind the Drive to Privatize: City Initiative Ignites Chain Reaction among Public Unions,” (Baltimore) Daily Record, January 23, 1999, p. 1A.

[Back] 33. Ivan Penn, “Workers March at City Hall to Save Union Jobs,” (Baltimore) Sun, June 15, 1999, p. 3B.

[Back] 34. Gerard Shields, “Advice for Mayor: Accent the Negative,” (Baltimore) Sun, May 30, 1999, p. 1B.

[Back] 35. Gerard Shields, “Coming City Deficit Galvanizes Council,” (Baltimore) Sun, May 27, 1999, p. 1A.

[Back] 36. Gerard Shields, “”Democrats Offer their Ideas at Mayoral Forum,” (Baltimore) Sun, July 13, 1999, p. 1B.

[Back] 37. For a further discussion of these service-provision methods, see William D. Eggers, “Privatization Opportunities for States,” Reason Foundation Policy Study, No. 154, January 1993, passim.

[Back] 38. William D. Eggers, “Rightsizing Government: Lessons from America’s Public-Sector Innovators,” Reason Foundation How-To Guide, No. 11, January 1994, p. 13.

[Back] 39. Samuel, “Behind the Drive to Privatize.”

[Back] 40. The purpose of the bill was to require “political subdivisions that receive more than $10 million in any fiscal year under the State’s Disparity Grant Program to adopt a competitive reengineering program; requiring the withholding of 10% of disparity grant revenues should the political subdivision fail to comply; offering local government employees an opportunity to compete to provide targeted services; requiring the Legislative Auditor to monitor compliance; etc.” See the synopsis of H.B. 1046 at State of Maryland, General Assembly, “Bill Information,” Internet site (http://mlis.state.md.us/ 1998rs/ billfile/ hb1046.htm), downloaded May 19, 1999.

[Back] 41. See, for example, Shields, “Board Votes to Study Privatizing City Services.”

[Back] 42. See Anft, “Private Functions” and “Job Security.”

[Back] 43. Kenneth W. Clarkson and Phillip E. Fixler, Jr., The Role of Privatization in Florida’s Growth (Miami, Fla.: Law and Economics Center, University of Miami and Reason Foundation, 1986).

[Back] 44. Stephen H. Hanke, “The Literature on Privatization,” in Stuart M. Butler (ed.), “The Privatization Option: A Strategy to Shrink the Size of Government,” Heritage Foundation Heritage Lectures, No. 42, August 1985, pp. 83-97.

[Back] 45. See “U.S. Market Approaches 1,000 Water and Wastewater Facilities,” Public Works Financing, January 1997, pp. 24-27.

[Back] 46. Reason Foundation, Privatization 1996: Tenth Annual Report on Privatization (Los Angeles, Calif.: Reason Foundation, 1996), p. 60.

[Back] 47. See “Indy Sewage Contract Is a Success,” Reason Foundation Privatization Watch, May 1995, p. 1.

[Back] 48. Osborne and Plastrik, Banishing Bureaucracy, pp. 122-124.

[Back] 49. Clarkson and Fixler, The Role of Privatization in Florida’s Growth.

[Back] 50. The data were from the largest investor-owner water firms in California and municipal providers in Alameda and Contra Costa counties.

[Back] 51. Kathy Neal, Patrick J. Maloney, Jonas A. Marson and Tamer E. Francis, “Restructuring America’s Water Industry: Comparing Investor-Owned and Government-Owned Water Systems,” Reason Foundation Policy Study, No. 200, January 1996.

[Back] 52. Kambiz Raffiee, “Ownership and Sources of Inefficiency in the Provision of Water Services,” Water Resources Research, Vol. 29, No. 6, 1993.

[Back] 53. “U.S. Market Approaches 1,000 Water and Wastewater Facilities.”

[Back] 54. James B. Groff, “Interest Grows in Public/Private Partnerships for Public Water Systems,” Reason Foundation Privatization Watch, Sep. 1994, p. 4.

[Back] 55. Alexander Volokh, “New Jersey City Privatizes Water Department,” Reason Foundation Privatization Watch, July 1996, p. 6.

[Back] 56. See “Special Report: Water/Wastewater Privat-ization,” Public Works Financing, June 1996, p. 11.

[Back] 57. “Special Report: Water/Wastewater Privatization.”

[Back] 58. Barbara Stevens, Comparative Study of Municipal Service Delivery (New York, N.Y.: Ecodata, Inc., February 1984).

[Back] 59. William D. Eggers, “Competitive Government for a Competitive Los Angeles,” Reason Foundation Policy Study, No. 182, November 1994.

[Back] 60. Mercer Group, Contracting Public Services Survey: 1995 Update (Atlanta, Ga.: Mercer Group, 1995).

[Back] 61. Jonathon Burgiel, 1996 Solid Waste Survey (Seattle, Wash.: R.W. Beck, 1996).

[Back] 62. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 30.

[Back] 63. Osborne and Plastrik, Banishing Bureaucracy, pp. 119-120.

[Back] 64. Osborne and Plastrik, Banishing Bureaucracy, pp. 119-120.

[Back] 65. The term “greenwaste” refers to such items as lawn clippings and the like.

[Back] 66. See “Traverse City Puts Innovation into Waste Contracting,” Mackinac Center Michigan Privatization Report, 1994.

[Back] 67. Lynn Scarlett and J.M. Sloan, “Solid Waste Management: A Guide for Competitive Contracting for Collection,” Reason Foundation How-To Guide, No. 16, September 1996.

[Back] 68. Clarkson and Fixler, The Role of Privatization in Florida’s Growth.

[Back] 69. Barbara Stevens, Delivering Municipal Services Efficiently: A Comparison of Municipal and Private Service Delivery (Washington, D.C.: U.S. Department of Housing and Urban Development, 1984).

[Back] 70. Mercer Group, Contracting Public Services Survey: 1995 Update.

[Back] 71. Donna Lee Braunstein, “Trash Collection and Street Maintenance Contracting Save Cities Thousands of Dollars,” Reason Foundation Privatization Watch, May 1994.

[Back] 72. William D. Eggers and John O’Leary, Revolution at the Roots: Making Our Government Smaller, Better and Closer to Home (New York, N.Y.: Free Press, 1995), pp. 110-111.

[Back] 73. Reason Foundation, Privatization 1990: Fourth Annual Report on Privatization (Los Angeles, Calif.: Reason Foundation, 1990), p. 17.

[Back] 74. Clarkson and Fixler, The Role of Privatization in Florida’s Growth, ch. IV.

[Back] 75. Robert W. Poole, Jr., “Privatizing Airports,” Reason Foundation Policy Study, No. 119, Jan. 1990, p. 17.

[Back] 76. International City Management Association (ICMA), The Municipal Yearbook, 1994 (Washington, D.C.: ICMA, 1994).

[Back] 77. Reason Foundation, Privatization 1996, p. 52.

[Back] 78. Darren Leon, “Firm’s Job with County Airports Grounds Critics,” Antelope Valley Press, May 2, 1993.

[Back] 79. Robert W. Poole, Jr., “Guidelines for Airport Privatization,” Reason Foundation How-To Guide, No. 13, October 1994, p. 8.

[Back] 80. Poole, “Guidelines for Airport Privatization,” p. 15.

[Back] 81. William H. Payson and Steve A. Steckler, “Expanding Airport Capacity: Getting Privatization off the Ground,” Reason Foundation Policy Study, No. 141, July 1992.

[Back] 82. U.S. Department of Transportation (USDOT), “Public Sector Involvement in Public Transportation,” USDOT Private Sector Briefs, 1992.

[Back] 83. KPMG Peat Marwick, Subhash R. Mundle & Associates and Transportation Support Group, Denver RTD Privatization Performance Audit Update (Denver, Colo.: KPMG Peat Marwick, Subhash R. Mundle & Associates and Transportation Support Group, November 1991).

[Back] 84. Wendell Cox and Jean Love, “Reclaiming Transit for the Riders and the Taxpayers,” in Edward L. Hudgins and Ronald D. Utt (eds.), “How Privatization Can Solve America’s Infrastructure Crisis,” Heritage Foundation Critical Issues series, 1992.

[Back] 85. Price Waterhouse, Subhash R. Mundle & Associates, Benjamin D. Porter and Patti Post & Associates, Bus Service Continuation Project: Final Report (Los Angeles. Calif.: Price Waterhouse, Subhash R. Mundle & Associates, Benjamin D. Porter and Patti Post & Associates, January 1992).

[Back] 86. Roger F. Teal, Genevieve Giuliano and Edward K. Morlok, Public Transit Service Contracting (Washington, D.C.: U.S. Department of Transportation, March 1986).

[Back] 87. ICMA, Municipal Yearbook, 1994.

[Back] 88. Wendell Cox and Jean Love, “Privatization for New York,” in E.S. Savas (ed.), Competing for a Better Future: A Report of the New York State Senate Advisory Commission on Privatization (Albany, N.Y.: New York State Senate, January 1992), p. 159.

[Back] 89. John C. Hilke, “Cost Savings from Privatization: A Compilation of Study Findings ” Reason Foundation How-To Guide, No. 6, March 1993.

[Back] 90. John O’Leary, “Comparing Public and Private Bus Transit Services: A Study of the Los Angeles Foothill Transit Zone,” Reason Foundation Policy Study, No. 163, July 1993.

[Back] 91. Ernst & Young, “Evaluation of the Foothill Transit Zone, Phase III, Fiscal Year 1992: Final Report,” unpublished document prepared for the Los Angeles County Transportation Commission, September 1992.

[Back] 92. Tiffany Pace, “MBTA Privatization Called Most Aggressive in Transit History,” Metro magazine, September/October 1996, pp. 64-66.

[Back] 93. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 73.

[Back] 94. There are currently a number of contractors performing parking-enforcement services. JL Services (now Serco) is the contractor for West Hollywood, California and for Baltimore and Montgomery counties in Maryland. Public Services, Inc. was the contractor for Montgomery County from 1988 to 1993. Pedus International is a security-services contractor that provides the City of Anaheim with parking-enforcement services; the security firm, Bonafide Security Services, was the city’s previous contractor.

[Back] 95. ICMA, Municipal Yearbook, 1994.

[Back] 96. Eggers, “Competitive Government for a Competitive Los Angeles,” pp. 73-75.

[Back] 97. Clarkson and Fixler, The Role of Privatization in Florida’s Growth.

[Back] 98. Mercer Group, Contracting Public Services Survey: 1995 Update.

[Back] 99. City of Fullerton, “Report on Contract Tree Trimming,” document prepared by the City of Fullerton’s Maintenance Service Department, June 1994.

[Back] 100. City of Fullerton, “Report on Contract Tree Trimming.”

[Back] 101. Eggers and O’Leary, Revolution at the Roots, pp. 353-354.

[Back] 102. Clarkson and Fixler, The Role of Privatization in Florida’s Growth.

[Back] 103. I.e., International Business Machines, Inc.

[Back] 104. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 113.

[Back] 105. Mercer Group, Contracting Public Services Survey: 1995 Update.

[Back] 106. Mercer Group, Contracting Public Services Survey: 1995 Update, p. 113.

[Back] 107. City of Indianapolis, Office of the Mayor, press released dated October 1995.

[Back] 108. I.e., local area network.

[Back] 109. Reason Foundation, Privatization 1996, p. 65.

[Back] 110. Reason Foundation, Privatization 1996, p. 65.

[Back] 111. See “Cities Find New Applications for Privatization,” Nation’s Cities Weekly, January 20, 1997, p. 9.

[Back] 112. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 112.

[Back] 113. “Cities Find New Applications for Privatization.”

[Back] 114. Clarkson and Fixler, The Role of Privatization in Florida’s Growth.

[Back] 115. Mercer Group, Contracting Public Services Survey: 1995 Update.

[Back] 116. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 100.

[Back] 117. City of Chicago, “Summary of Custodial Privatization Initiative, 1990-1992,” unpublished document circulated within municipal government, 1993.

[Back] 118. Reason Foundation, Privatization 1996, pp. 22-23.

[Back] 119. A. Campbell, “Private Delivery of Public Services: Sorting out the Policy and Management Issues,” Public Management, Vol. 68, No. 12, December 1988.

[Back] 120. ICMA, Municipal Year Book, 1994.

[Back] 121. Mercer Group, 1990 Privatization Survey (Atlanta, Ga.: Mercer Group, October 1990).

[Back] 122. Janet Beales, “Fleet Maintenance Outsourcing Growing Trend Across the Country,” Reason Foundation Privatization Watch, December 1994, p. 3.

[Back] 123. Donna Lee Braunstein, “Competition Prompts City Employees to Cut Operating Costs,” Reason Foundation Privatization Watch, March 1994, p. 4.

[Back] 124. Osborne and Plastrik, Banishing Bureaucracy, p. 126.

[Back] 125. Osborne and Plastrik, Banishing Bureaucracy, p. 126.

[Back] 126. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 115.

[Back] 127. Lynn Scarlett and Robert W. Poole, Jr., “Cutting State Deficits: The Role of Privatization,” Reason Foundation Policy Study, No. 132, November 1991, p. 14.

[Back] 128. Adrian T. Moore, “Private Services Expand Police Effectiveness,” Reason Foundation Privatization Watch, September 1996, p. 3.

[Back] 129. John W. Donlevy, “Intergovernmental Contracting for Public Services,” Reason Foundation How-To Guide, No. 12, January 1994, p. 4.

[Back] 130. Donlevy, “Intergovernmental Contracting for Public Services,” p. 9.

[Back] 131. Kathy Kessler and Julie Wartell, “Community Law Enforcement: The Success of San Diego’s Volunteer Policing Program,” Reason Foundation Policy Study, No. 204, May 1996.

[Back] 132. Susan Golding, “Senior Patrol San Diego Neighborhoods,” Nation’s Cities Weekly, Vol. 20, No. 1, January 6, 1997, p. 1.

[Back] 133. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 46.

[Back] 134. Geoffrey Cady and Tom Scott, “EMS in the United States: 1995 Survey of Providers in the 200 Most Populous Cities,” EMS: Journal of Emergency Medical Services, Vol. 21, No. 1, January 1996.

[Back] 135. Robert W. Poole, Jr., “Privatizing Emergency Medical Services: How Cities Can Cut Costs and Save Lives,” Reason Foundation How-To Guide, No. 14, May 1996, p. 4.

[Back] 136. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 50.

[Back] 137. John C. Hilke, “The Impact of Volunteer Firefighters on Local Government Spending and Taxation,” Municipal Finance Journal, Vol. 7, No. 1, Winter 1986, p. 36.

[Back] 138. John R. Guardino, David Haarmeyer and Robert W. Poole, Jr., “Fire Protection Privatization: A Cost-Effective Approach to Public Safety,” Reason Foundation Policy Study, No. 152, January 1994.

[Back] 139. Guardino, Haarmeyer and Poole, “Fire Protection Privatization.”

[Back] 140. R. W. Poole, Jr., “Private Fire Fighting Heats Up,” Reason Foundation Privatization Watch, Jan. 1995.

[Back] 141. Guardino, Haarmeyer and Poole, “Fire Protection Privatization.”

[Back] 142. Guardino, Haarmeyer and Poole, “Fire Protection Privatization,” p. 32.

[Back] 143. Guardino, Haarmeyer and Poole, “Fire Protection Privatization,” p. 34.

[Back] 144. Clarkson and Fixler, The Role of Privatization in Florida’s Growth.

[Back] 145. ICMA, Municipal Yearbook, 1994.

[Back] 146. State of Wisconsin, Department of Health and Social Services (DHSS), 1999 Plan: Wisconsin Works (Madison, Wis.: DHSS, 1996).

[Back] 147. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 88.

[Back] 148. Mercer Group, Contracting Public Services Survey: 1995 Update.

[Back] 149. Eggers, “Competitive Government for a Competitive Los Angeles,” p. 92.

[Back] 150. Clarkson and Fixler, The Role of Privatization in Florida’s Growth.

[Back] 151. Stevens, Delivering Municipal Services Efficiently.

[Back] 152. William D. Eggers, “Rancho Palos Verdes Commercializes Recreation Services,” Reason Foundation Privatization Watch, September 1993, p. 5.

[Back] 153. Frederick F. Siegel, “Reclaiming our Public Spaces,” Manhattan Institute City Journal, Spring 1992, p. 38.

[Back] 154. Siegel, “Reclaiming our Public Spaces,” p. 38.

[Back] 155. Richard Gilder, “Set the Parks Free,” Manhattan Institute City Journal, Winter 1997, pp. 43-44.

[Back] 156. Eggers and O’Leary, Revolution at the Roots, p. 81.

[Back] 157. Sheila Rees, former President, Charles Village Civic Association, interview with author Munro, July 7, 1999.

[Back] 158. Charles Village is located in one of three Baltimore City “special benefits districts” (the Charles Village Benefits District, in this case). The three districts have limited revenue-raising authority by means of a surcharge on property taxes; the funds are generally spent on extra sanitation and security services.

[Back] 159. Reason Foundation, Privatization 1996, p. 40.

[Back] 160. Elizabeth Larson, “Library Renewals,” Reason magazine, March 1994, p. 37.

[Back] 161. Larson, “Library Renewals.”

[Back] 162. William D. Eggers, “Performance-Based Contracting: Designing State-of-the-Art Contract Administration and Monitoring Systems,” Reason Foundation How-To Guide, No. 17, May 1997.

[Back] 163. For a further discussion, see Eggers and O’Leary, Revolution at the Roots, pp. 353-358.

[Back] 164. World Bank, Bureaucrats in Business: The Economics and Politics of Government Ownership (New York, N.Y.: Oxford University Press, 1995), p. 143.

[Back] 165. State of Maryland, General Assembly, Department of Fiscal Services (DFS), Analysis of Budget Recommendations of the Maryland Taxpayers Association (Annapolis, Md.: DFS, February 1997), pp. 12-13.

[Back] 166. Shelley Finlayson, “Prevailing Wage Law – Repeal,” Department of Fiscal Services Fiscal Note, February 14, 1997, p. 2. The Department of Fiscal Services is now known as the Department of Legislative Services.

[Back] 167. “Fast Qiale Recovery Redeemed State Transportation Department,” Engineering News Record, January 16, 1995, p. 33.

[Back] 168. As quoted in “Contracting out Government Services: Lessons from the Private Sector,” Public Administration Review, Vol. 54, No. 2, March/April 1994, p. 182.

[Back] 169. Tom Olson, interview with author Eggers, June 18, 1996.

[Back] 170. Olson, interview with Eggers.

[Back] 171. As quoted in F. Warren McParlan and Richard I. Nolan, “Outsourcing at Kodak,” Sloan Management Review, January 1995.

[Back] 172. E.S. Savas, Privatization: The Key to Better Government (Chatham, N.J.: Chatham Publishers, 1987), p. 259.

[Back] 173. Lawrence Martin, “How to Compare Costs between In-House and Contracted Services,” Reason Foundation How-To Guide, No. 4, March 1993, p. 2.

[Back] 174. Jonathan Richmond, The Costs of Contracted Services: An Assessment of Assessments (Cambridge, Mass.: MIT Center for Transportation Studies, July 20, 1992).

[Back] 175. See “Making Managed Competitions Work,” Public Works Financing, June 1996.

[Back] 176. James MacGregor Burns, Leadership (New York, N.Y.: Harper and Row, 1978), p. 39.

[Back] 177. William D. Eggers and John O’Leary, “Leading the Revolution: Lessons in Making Government Smaller, Better and Closer to Home,” Common Sense, No. 9, Winter 1996, p. 25.

[Back] 178. Tom Peters, Thriving on Chaos: Handbook for Management Revolution (New York, N.Y.: Harper Perennial, 1987), p. 265.

[Back] 179. Eggers and O’Leary, Revolution at the Roots, p. 360.

[Back] 180. Hilke, “Cost Savings from Privatization.”

[Back] 181. Derived from data in a 1992 Reason Foundation survey of service providers in the 24 largest U.S. cities.

[Back] 182. U.S. Department of Labor, National Commission on Employment Policy (NCEP), The Long-Term Employment Implications of Privatization (Washington, D.C.: NCEP, 1989).

[Back] 183. U.S. Department of Labor, National Commission on Employment Policy (NCEP), Privatization and Public Employees: The Impact of City and County Contracting Out on Government Workers (Washington, D.C: NCES, May 1988).

[Back] 184. U.S. General Accounting Office, DOD Functions Contracted Out under OMB Circular A-76: Costs and Status of Certain Displaced Workers (Washington, D.C.: Government Printing Office, July 12, 1985).

[Back] 185. NCEP, Privatization and Public Employees.

[Back] 186. Charles “Skip” Stitt, [then] Director of Enterprise Development, Office of the Mayor, Consolidated City of Indianapolis, interview with auther Eggers, May 27, 1993.

Posted in: Efficiency in Government, Issue Brief