Privatization in America's Cities: Lessons for Washington - Part I

Report Government Regulation

Privatization in America's Cities: Lessons for Washington - Part I

May 31, 1988 22 min read Download Report
Edmund F.
Senior Policy Analyst on International Economics

(Archived document, may contain errors)


652 May31,1988 PRIVATIZATION IN AMERICAS CITIES LESSONS FOR WASHINGTON PART I INTRODUCTION The seeds of virtually every major poljtical reform movement in United States history can be t raced to the halls of local government. The Progressive movement of the first two decades in this century for example, began in Wisconsin It mobilized grass-roots support for such issues as direct election of senators, child labor laws, and womens suffrag e eventually prompting Congress to consider them. Similarly, the civil rights movement of the 1950s and 1960s attracted the attention of federal laimakers only after a series of demonstrations and marches in the deep South successfully,.overturned local se g regation ordinances. Most recently, the tax revolt movement of the 1970s started as a grass-roots effort in several California towns to cut back city hall. Californias Proposition 13 referendum, passed in 1978, and Massachusetts Proposition 2 1/2, passed. o nefyeardaterq transformed the local tax rebellion into a national crusade. These successful state and local tax limitation efforts prepared the essential political groundwork for the federal Economic Recovery Act of 1981: the largest tax cut in American h istory I Today, a new political movement is gaining a firm foothold in the nations cities.

Potentially it could leave an even more lasting imprint on the way American government functions. This reform idea is privatization, the transference of government f unctions to the private sector. In just two decades, the growth of privatization has been stunning. In 1972, local government contracts with private companies to provide basic municipal services, such as garbage collection and street maintenance, already a mounted to a healthy This study examines local government experiences with privatizing municipal services. Part 11, scheduled to appear this summer, will deal with privatizing social services 22 billion. By 1982, this had soared to 65 billion, and by last year, U.S. cities awarded over 100 billion in such contracts Local Governments Contracting With the Private Sector Many experts believe that even this is only the beginning of privatization's acceleration. Touche Ross and Co a big-eight" accounting firm, e stimates that by the year 2000 the U.S. public sector could have done 3 trillion worth of business with the private sector This local privatization revolution encompasses far more than traditional municipal services. Scottsdale, Arizona, for instance, con t racts its fire protection to Rural Metro Corporation, a for-profit private company. Farmington New Mexico, has privatized its local air traffic control operations. Hamilton County, Tennessee, has a privately run county jail New York City has contracted ou t the management of its public golf course. Dallas has turned to the private sector for its bus system. And San Diego, California, has a private ambulance service. The reason these and other cities turned to rivatization: better service quality and cost re d uctions of typically 20 percent to 50 percent HerltctgOIntoCm 4 The local privatization revolution even has spilled over into such social services as hospitalization, drug treatment, and legal aid for the poor. In 1986, over $1 billion in local funds went to support voluntary organizations to deliver human services Improving Service to Public. Nor is the privatization explosion confined to contracting out government functions. Many jurisdictions now even are selling public assets. This not only helps raise revenue to fund government operations, but also allows sophisticated private management and financing techniques to be used, improving the service to the public. Between 1982 and 1987, one of every four localities sold at least one publicly owned asset to the private sector? Among them: unused lands and mismanaged public facilities such as county hospitals and transit systems. One of the largest and most ambitious local privatization initiatives in U.S. history is now under serious consideration in Anchora g e Alaska. This October, city residents will vote in a referendum to sell the city's wastewater treatment plant, electric utility company, and local telephone system for a minimum price of $1 billion The form of privatization with the most promising future may be the private financing and operation of basic local government infrastructure including bridges, roads hospitals, and sewage treatment plants. Interest in such privatization is hardly surprising 1 "Cities and Counties Going Private to Save Money The Washington Times, August 19,1986, p. 1OA 2 For a review of studies on the cost savings from contracting out, see Stephen Moore How to Privatize 3 Touche Ross and Co Privatization in America: An Opinion Survey of City and County Governments on Federal Savi n g by Contracting Out Heritage Foundation Buckgounder No. 494, March 13,1986 Their Use of Privatization and Their Infrastructure Needs 1987 2 States and cities face at least a $120 billion price tag through the year 2000 to fund necessary improvements in t h eir infrastructure. Most cities openly confess that they will lack the money for this. Several innovative cities and counties thus have begun to explore private financing of new capital investments. A recent example: a just-approved 15-mile private highwa y artery in fast-growing Fairfax County, Virginia. This $150 million dollar project will be built without a penny of taxpayer funds. Instead, a private development firm has agreed to finance and build the road, recouping its investment by collecting tolls.

The American system of federalism permits the states and cities to serve as public policy laboratories for the federal government On the issue of privatization, Uncle Sam certainly has much to learn from lower levels of government, where innovative partne r ships between the public and private sectors are flourishing 4 Regrettably, however, Congress so far shows little interest in reproducing this bipartisan local privatization movement at the national level. But with enormous federal deficits, and hence the need to reduce the cost of federal services while maintaining or increasing their quality, federal lawmakers cannot for long ignore the privatization lessons from America's heartland WHY LOCAL GOVERNMENTS TURN TO PRIVATIZATION The accounting firm Touche R o ss and Co. last year comprehensively surveyed U.S. cities and counties to measure their reliance on privatization. The survey's overall conclusion Nearly 80 percent of the [over 1,000] respondents believe that privatization will represent a primary tool t o provide local government services and facilitiesin the next decade tis Turning to Private Financing. Contracting out was the most popular form of privatization. Some 96 percent of local governments indicate that they have plans to contract out at least s o me services over the next two years. Table 1 shows the fourteen services most commonly contracted out, as measured by the percentage of cities that have awarded contracts during the past five years. Garbage collection, vehicle towing, and janitorial servi c es are the activities most often delivered by private contractors. But private finance of infrastructure is of growing importance. Table 2 indicates the percentage of cities that have privatized various types of infrastructure. About four out of ten.citie s plan to turn to private sources of finance for major infrastructure repair or expansion in the next two years.

Not surprisingly, the Touche Ross survey finds that saving money is the primary motivation for privatization. This is cited by 74 percent of th e local governments responding to the Touche Ross study as an advantage. Yet one-third contract out because of "higher quality senrice 4 "State and Local Initiatives for Privatization: Lessons for Washington Z7ie Privatization Review, Summer 5 Touche Ross and Co op. cit 1987, pp. 8-44 3 I Table 1 Percentage of Cities Contracting Out Services Accounting, Payroll 36 Airport Operations 11 Buildings or Grounds 43 Data Processing 31 Elderly or Handicapped Services 12 Fleet or Vehicle Maintenance 21 Health Care, Emergency Services 16 Recreation, Parks, Convention Halls Stadiums, or bltural Activities 19 Solid-Waste Collection or Disposal 59 Street Cleaning and Snow Removal 29 32 Transit or Tra.kportation 17 Utilities (including meter reading) 10 Vehicle Towhig or Storage 45 Traffic Signals or Street Lighting Source: Touche Ross, 1987 Table 2 Percentage of Cities Privatizing Capital Facilities Housing 11 Municipal Buildings or Garages 19 Roads, Bridges, or Tunnels 34 Solid-Waste or Resource-Recovery Facilities 22 S t adiums, Convention, or Recreational Facilities 10 Street Lights 30 Telecommunications 11 Waste Water, Sewers, or Treatment Plants 30 Water Mains or Treatment Facilities 22 Source: Touche Ross, 1987 Local officials in this and other surveys frequently iden t ify other less obvious benefits to privatization. Among them Private sector firms typically possess more specialized competence in providing a service, leading to improved service performance 6 Many of the advantages of privatization are discussed more My in State and Local Initiatives for Privatization: Lessons for Washington, op. cit 4 I Privatization accelerates the adoption of new technologies and capital equipment.

Often these are unavailable to government agencies, and government procurement procedur es delay direct acquisition of such equipment Private firms often can take advantage of economies of scale in service delivery by performing an activity to more than one locality. This is a common practice of private vendors who contract with small towns i n California The performance of private contractors can serve as a yardstick to measure the output and service quality of an in-house government agency Competition from private contractors can spur in-house worker and management productivity improvements. 7 These multiple benefits of privatization are not ivory-tower theories. They are being demonstrated convincingly by the thousands of U.S. cities that have privatized facilities and services over the past decade. The documented privatization successes in p ioneering local jurisdictions Los Angeles County, Phoenix, Arizona, and Auburn, Alabama, to name a few reveal that privatization is a genuinely effective response to the problems confronted today by all levels of government in the U.S Los Angeles County, C alifornia: Saving Money Through Contracting While Protecting Government Workers' Jobs Los Angeles County, Califorxiia, is the largest local government in the nation. Its 10 million residents exceed the population of 42 states. It also has the most compreh e nsive contracting program of any local jurisdiction in the nation. Approximately 20 percent of the county's $4.2 billion budget is subject to competitive bidding. Since 1980 the county has issued 786 separate contracts to private firms, saving resident ta xpayers $133 million annually. According to the county's bipartisan Economy and Efficiency Commission contracting out has on average reduced service costs by 35.8 percent?

This aggressive contracting program was launched in 1978, when 66 percent of the county's voters approved Proposition A, a companion referendum to Proposition 13.

Proposition A allows the county to "contract for work formerly performed exclusively by public employees Among the activities contracted out under Proposition A food services, janitorial work in public buildings, financial auditing of agency budgets and payroll, vehicle towing, and data processing reap huge budgetary savings without laying off county employees. This has contributed Perhaps the most impressive feature of the pro g ram is that the county has managed to 7 "Public Services Found Better If Pkte Agencies Compete The New Yo& rimes, April 26,1988, p. A-1 8 Los Angles County Economy and Efficiency Commission Report on Contracting Policy in Los Angeles County Government," A u gust 1987 5 significantly to the continued political popularity of the program. Says Michael D Antonovich, of the Los Angeles County Board of Supervisors An important part of our strategy in implementin contracting has been to protect existing workers thr o ugh retraining and referrals? County data show that of the 1,400 workers affected by Proposition A since 1982, some 80 percent were transferred to other jobs within the county 10 percent were hired b the contractor, and 7 percent left voluntarily for anot h er job; only 3 percent were laid off The county has managed to protect public employees by adopting a labor policy more sophisticated than that of the federal government or most other local governments. The Los Angeles County labor policy has four key com p onents A 1) A defacto "no layoff" pledge for permanent county employees affected by privatization contracts. In almost every case, displaced workers are transferred to other county agencies with job openings. The benefits of contracting out are not reduce d seriously by this policy because the county payroll eventually is reduced through the normal attrition of the workforce 2) A policy requiring winning contractors to offer affected county employees the right of first refusal for any job openings resulting from the contract. Contractors accept this because they normally have a need for trained workers after winning a large contract 3) A requirement that the County Board of Supervisors earmark 5 percent of the savings from contracting to retrain displaced em p loyees 4) An incentive system for county managers, known as the Budget Savings Retention Plan, under which a percentage of the savings from contracting are used to pay productivity bonuses to department heads aqd to supplement the agency budget In additio n , Los Angeles County has strengthened community and labor support for privatization by creating a nonpartisan citizens' watchdog committee to oversee the program. This "Economy and Efficiency Commission" referees the unions and the city management and rou t inely conducts performance evaluations of the contractors. The Commission's reports document the success of the Los Angeles program Phoenix, Arizona: Using Competitive Bidding to Boost Public Sectorh.Eff iclency A recent front-page New York Ernes article o n local government privatization notes: 'The key to efficient public services is not replacing government agencies but pitting them against companies in continual competition Indeed, toughening the public sector through competition is the cornerstone of t h e Phoenix privatization program. There, municipal agencies have been encouraged to compete head-to-head with.private contractors by slashing costs and increasing quality productivity. The result: public sector morale has 9 See Statement of Michael D. Anto novich in "State and Local Initiatives for Privatization: Lessons for 10 Los Angeles County Economy and Efficiency Commission, op. cit.

Washington op. cit 6 soared as lean, aggressive city agencies actually have won back some contracts from private firms P ublic Sector Gains. Phoenix saves its taxpayers $18 million annually by taking private bids for over 20 municipal activities, including grounds maintenance, parking lot operations, garbage collection, traffic light maintenance, and security services. The m ost surprising feature of the Phoenix success is that about half of the savings are due to efficiency gains in public sector.departments where contracts have been won back by city employees. 11 The garbage contract typifies how competition can spur produc t ivity improvements in the public sector. For the first two years after private bids were invited in 1981, the contracts were awarded to private waste removal firms at substantial savings. But in 1984, the public works department underbid five private sect o r firms to win back one of the contracts Ronald Jensen, the Public Works Director, recalls the attitude of the city employees at the time: 'The city staff was out to win the contract back. All potential 'cost cutting ideas were pursued in order to become m ore competitive. The city service was earned back with a lot of hard work over a long period of time.''12 The city cut its costs by such measures as purchasing automated trucks similar to those used by private companies, shortening the number of trips to t he dump, and improving worker productivity Wages, however, were not cut. Just this past month the sanitation department won back a second refuse collection contract previously awarded to a private firm High Morale. Contracting out often is criticized for i mpairing public employee morale and work effort. In Phoenix, the reverse has been true. 'Jensen points out The image of city employees being lazy and nonproductive does not exist in Phoenix. Our workers are highly motivated and productive. And we can prov e it. This is the result of using privatization as effective tool to stimulate productivity Concludes Jensen The impact on the morale of the Sanitation Division employees has been tremendous."13 A vital component to the Phoenix competitive contracting prog r am success has been elaborate safeguards to secure the integrity of the bidding process The city's bid is prepared by an independent auditor, not the agency itself, ensuring an accurate assessment of city costs. Furthermore, the city submits a sealed bid i n precisely the same fashion as the private bidders. Neither side knows the contract bid of the other. Then in a public forum all bids are opened and the lowest bidder is selected. Finally, the auditor.monitors' the-costs of the agency or private firm, to ensure that the terms of the contract are met in full. This process has won the applause of both the private and public sectors, and is now being imitated by several other cities 11 Ronald W. Jensen, "The Phoenix Approach to Privatization Testimony before the House Subcommittee on 12 Ibid 13 lbid Small Business, Antitrust Impact of Deregulation and Privatization, June 3,1987 7 Scottsdale, Arizona: Fighting Fires Privately Scottsdale uses private contractors for 40'percent of its municipal budget, including park maintenance, street cleaning, health care, some transit services, and a range of other government functions. In the past ten years the size of the city payroll has shrunk by 30 percent. But what makes Scottsdale a world-renowned pioneer in privatizat i on is that it has destroyed the myth that there are certain "inherently governmental" functions that can be provided only by city workers. In 1951, Scottsdale became the first city in the nation to contract out its fire fighting service to a private firm, Rural Metro Corporation Satisfaction with that contract is so high that it has been renewed continuously since then.14 .The firm now provides ambulance service for the city as well. Concludes Scottsdale Mayor Herbert Drinkwater, "It gets better all the ti me. People are extremely satisfied."15 Little wonder. Scottsdale residents pay a per capita annual fee of just $30 to $40 for private fire service, compared with $50 to $70 paid by neighboring cities of similar size.

City officials are quick to refute the allegation leveled by neighboring public sector firefighter unions that the city is economizing on public safety. "We pay the same fire insurance rates as other cities," insists Dick Bowers, who oversees the program for the city.16 Hence, insurance compan i es clearly rate Scottsdale's private service at least on par with that of public service Rural Metro cut costs through innovation and productivity improvements, not by compromising safety. Scottsdale, for instance, was one of the first cities to purchase s mall quick-attack vehicles" at approximately one-tenth the cost of large; conventional fire trucks. Ronald Butler, President of Rural Metro, acknowledges that its compact, mobile trucks may not look impressive,.but his firm's theory is that ''chrome doesn 't put out fires."

Many communities now use the vehicles pioneered by Rural Metro.

The firm also has cut total labor costs by training the city municipal employees'as reserve fire fighters York County, South Carolina: Selling Assets .to Improve Services T en years ago the Board of Trustees of the York County Hospital in South Carolina faced what seemed an insoluble dilemma. To maintain quality medical care to the 250,000 area residents would require a new hospital and more physicians particularly specialis ts. But York County residents in 1979 by a three-to-one margin voted down-an~$18~million~hospital bond referendum to pay for the new facility.

After two years of frustrated inaction, the Board of Trustees took a bold step: it sold the existing county hospi tal to American Medical International (A.M.I a private hospital chain. In addition to the $11.5 million it paid for the facility, A.M.I. agreed to build a new 30 million hospital within three years. Two years later, the new Piedmont Medical Center opened i ts doors 14 Interview with Scottsdale Deputy City Manager Dick Bowers, May 1988 15 Quoted in Localities Shift to Private Firefighters The New Yo& Times, July 28,1985 16 Bowers, op. cit 8 For county residents, the hospital sale has been an overwhelming suc c ess. The county has a new hospital, built at no cost to the taxpayer and in less than half the time it would have taken the county to construct. A.M.I. h'as doubled the county's resident physician staff attracting badly needed specialists to the community All the former county hospital employees, meanwhile, were retained by A.M.I. And with the 11.5 million raised from the sale of the old facility, the County has created a new program to provide medical care for the indigent.

Carolyn Carpenter, the Director of Public Affairs for Piedmont Medical Center, and a former county hospital employee, insists There is no question that the sale was in the interest of the community and he county employees. And A.M.1 is more responsive to patients than was the county Id Auburn, Alabama: Pioneering Infrastructure Privatization also is an outspoken privatization enthusiast.18 In 1986 Auburn became one of the first cities in the nation to hire a private firm to finance, build, and operate its wastewater treatment plant, fac ilities that clean sewage before it is discharged into lakes and streams.

Dempsey praises the privatization deal that brought the city a new $36 million facility. She explains Auburn Mayor Jan M. Dempsey describes herself as "an old-hat liberal Democrat." She We think privatization is the way to go. The company Even before the new plants started up we received a refund of operating our old plant during the construction period. We're using part of that money to landsca e the area where the old plant was and turn it into a park Metcalf and Eddy, Inc is meeting all of our expectations 35,721, representing money the company has saved while I 8 1118 Ten-Year Federal Delay. Like most cities, Auburn's first choice was not privatization, but rather "free" federal E nvironmental Protection Agency (EPA) grant money. Such grants pay about half the cost of a publicly owned and operated new wastewater treatment plant.

But the city discovered that the federal bureaucratic red tape could delay the project up to ten years. T his was out of the question given the poor state of Auburn's-30~year-old~~existing plants which were violating EPA pollution standards. The sewage posed a potential health hazard to residents.

In 1984, a nonpartisan citizens' committee was appointed by the city to study the wastewater treatment problem.r Its recommendation: total privatization. City officials then 17 Interview with Carolyn Carpenter, Director of Public Affairs, Piedmont Medical Center, May 1988 18 Interview with Jan M. Dempsey, Mayor, Auburn, Alabama, December 1986 19 Quoted in Some Communities Move Ahead Without EPA Dollars EPA Journal, November 1986, p. 6 9 conducted a public education campaign to win support among city reside n ts and within the state legislature for overturning a state law prohibiting private owner hi of ublic facilities Late in 1984 the.legislature passed the necessary enabling legislation lop 25 Million Saving. One year later, Auburn's new $36 million facilit y was operating in about one-tenth the time it would have taken the city to raise the necessary funds and EPA grants and to build the plant. itself. Metcalf and Eddy, Inc. owns and operates the plant, and the city simply pays an annual prearranged fee to u se it. Douglas J. Watson, Auburn City Manager, says that privatization will save Auburn 25 million over the next 25 years.

Auburn residents now pay one-third less for this service than if we used traditional federal funding to upgrade our facilities."21 Th e 1986 federal Tax RefomAct abolished many of the tax advantages associated'with infrastructure privatization. For instance, it eliminated the investment tax credit and reduced the attractiveness of municipal tax-exempt bonds. As a result, last year sever a l planned private wastewater ventures were shelved. But this setback now seems .only temporary. The underlying economics still favor privatization. Early this year; Mount Vernon, Illinois became the first city since the tax law went into effect to privati z e its treatment plant? Indeed, the Touche Ross survey of cities discovers that 30 percent are contemplating privatizing their wastewater treatment plants as Auburn has done South Lake Tahoe, California: Turning Public Employees Into Private Sector Entrepr e neurs In September 1985, South Lake Tahoe terminated its municipal bus service and laid off 30 city transit employees. The city council argued that a community of 25,000 residents could no longer continue a $500,000 annual subsidy for transit services. I I mmediately after the shutdown announcement, two enterprising city bus employees formed a private company Area Transit Management (ATM and offered to provide bus service to the community without a penny of local tax money Under the contract agreement with t he city government, ATM would have to obtain city council approval for all rate hikes and route changes, while the city would lease to ATM at no cost all the existing facilities and the seven municipal buses. ATM immediately hired most of the laid-off bus drivers and offered them ownership shares in the new company. Salaries and benefits were cut slightly by the new firm but still remain above the community's average pay scale. 23 ATM has turned a huge money loser for the city into a profitable, tax-paying private enterprise. The firm receives no direct operating subsidy from the city and only a small 20 For an analysis of how Auburn overcame the many obstacles to privatization, see: Douglas J. Watson 21 Douglas J. Watson Auburn's Trend-Setting Approach Sav e s Money an'd The unpublished 22 William G. Reinhardt, "Public-Private Sewage Expansion A Primer for Post-Tax-Cut Deals," Atblic W 23 Interview with Michael Dooley, co-founder of ATM, May 1988 Privatization: One Possible Solution 77ae Aivufizufion Review, F all 1985, pp. 38-43 memorandum, 1986 Financing, January 1988, pp. 7-8 10 annual grant from the state transit agency. Elsewhere in America, of course, government typically subsidizes about 70 percent of the operating cost of transit systems. In South Lake Tahoe, moreover, elderly and handicapped residents receive monthly passes paid for by the city, while all other riders pay the same $1 fare formerly charged by the city.

Privatization has been very popular with South Lake Tahoe residents And according to E dward Brauner, the director of public works The new transit service has worked extremely well, and we are very happy with the contract. To the commum the new owners are heroes after all, we thought we were going to lose our bus service 2 Newark, New Jerse y : Privatizing in the Northeast The local privatization movement is portrayed often as merely a regional phenomenon popular in growing, newer western cities, but politically unpalatable in the large, politically liberal, and heavily unionized metropolises of the Northeast. This is not true. In fact, many financially strapped Northeast cities are now enthusiastic privatization converts.

Newark would seem an unlikely candidate for privatization. It. has lost population and businesses, is heavily unionized, an d is headed by a liberal mayor, Sharpe James. Yet Newark boasts one of the largest contracting out programs of any local jurisdiction in America. Since 1972 the city has converted to contract about 20 services that had been performed by municipal employee s . These include street repair, park clean-up, and data processing Public-Private Mix. A city brochure summarizes the success of the program: "In 1986 alone, Newark spent more than 25 million on contracts for services generally undertaken by the public sec t or in most medium to large urban cities Citywide when police and fire service are excluded, Newark spends about one dollar in service contracts for every two dollars of in-house service operations. Contract services run from refuse collection to computer d ata entry. Costs for these services have been dramatically reduced and delivery of services improved."25 Newark's strategy is to defuse labor opposition and maintain competition by operating public and private service delivery in tandem. The Public Works D epartment typically spins off just a portion of the service activity to private firms, while retaining an in-house capacity for the remainder. Example: Newark contracts out only 60 percent of its sewer cleaning 50 percent of its data entry, and,65 percent of its street sweeping. The city then monitors the performance of each sector, closely evaluating differences in productivity, service quality and cost 24 Interview with Edward Brauner, Director of Public Works, South Lake Tahoe, California, May 1988. 25 F rank J. Subol and Alvin L. Zach The Newark Experience: Is Contracting the Answer Newark Department of Engineering, 1986 11 The benefits of this competitive approach have been underscored by the improvements in the city's refuse collection. After the first year, independent auditors found that private contractors' costs were 21 percent lower, their workers more productive, their vehicles more efficient and their crews "substantially more diligent than city crews in cleaning up after spills 26' Yet after a s e cond year of public-private competition, the auditors assessment had changed The price gap between city crews and the contractor has narrowed City crews have become more prod~ctive Newark's contracting out program like that of Phoenix, demonstrates that s u bjecting government agencies to private sector competition not only provides savings from private contractors, but stimulated productivity gains in the public sector As Newark Mayor James stresses, "Competition is very healthy to the city in insuring that both public employees and contractors put out their best effort."28 PRWATMATION LESSONS LVED FROM INNOVATIVE CITIES These seven pioneering cities and counties refute many of the. myths distorting the discussion of privatization at the: federal level. Typi cal of the privatization tide sweeping America, these cities and counties provide lessons to be learned by every federal lawmaker seriously concerned with delivering quality services to the public in an era of tight budgets.

Among those lessons 1) Local pr ivatization is a bipartisan and non-ideological movement. Privatization 'in Congress seems ensnared hopelessly in partisan bickering. In contrast, at the local level Democratic Mayors, such as Jan Dempsey of Auburn and Ernest Morial of New Orleans have sp o nsored major privatization projects. Says Morial, New Orleans' first black mayor Mayors do not view privatization or contracting out as conservative or liberal. Mayors simply view it as a pragmatic, efficient and effective way to deliver government servic e s.'tB 2) Privatization is occurring in every region of America. Privatization may be most common in western cities, but has spread to every state, including to'large union-dominated cities of the Northeast and the tradition-bound towns of the deepSouth 3) Savings from contracting out are real and significant. An allegation often made in Congress is that privatization produces "illusory" savings. It is often.charged.tliat*contractor cost overruns erase the projected savings from privatization.30 But the cit i es with successful contracting out programs have documented millions of dollars of budget reductions. These savings have been used for different purposes, depending on the philosophy and goals of 26 hid, p. 8 27 hid p. 13 28 Interview with Sharpe James, M a yor of Newark, May 1988 29 See remarks by Ernest Moreal in "State and Local Initiatives for Privatization: Lessons for Washington 30 "Contracting Out Called Wasteful, Demoralizing 77ie Wahington Post, March 31,1988 op. cit p. 37 12 the city. In some cases the savings have been used to expand underfunded programs; in others the savings have held down local tax burdens?l 4) Privatization need not harm government employees. Local governments very rarely lay off public employees when they privatize services. M o st jurisdictions, like Los Angeles have established "no lay-off" policies. Either they move displaced public workers to other government positions or they require contractors to offer city workers the right of first refusal for jobs that open up because o f the contract. Moreover, wage rates for workers transferred to the private sector are comparable to wages in the public sector?2 5) The sale of government assets can accomplish several public policy objectives. The proposed sale of federal assets has been jeered at by critics of privatization as a mere budget gimmick that may cost the government more money in the long run than it saves.

These charges have been refuted by privatization ~pecialists The most convincing refutation, however, comes from those ci ties that demonstrate in a very real and practical way that selling unused government property or inefficiently run public facilities not only improves cash flow to weather temporary fiscal troubles or fund.essentia1 services, but also can enhance service quality and provide an infusion of new capital for infrastructure 6) Almost all government services are appropriate candidates for privatization The cities prove that there are few, if any sacred cows" in public service delivery. Almost any government ser v ice even fire protection, police service, prison operations, and environmental facilities under certain circumstances can be more capably handled by private companies with special expertise in these areasM The keys to successful delivery of such unusual s e rvices seem to be: hiring firms with established track records in the service field, inserting strict performance specifications into the contract, monitoring closely contractor compliance, and rebidding the contract on a regular basis CONCLUSION An enorm ous amount of press attention has been devoted to the privatiiation phenomenon in Britain and other European nations..Yet the world leaders in many types of privatization, especially contracting, are not overseas but in America's cities and counties.

As ha s been true through most U.S. history, these jurisdictions are the laboratories for the world's social and political experiments. Last year alone, U.S. local governmentswrote 100 billion worth of contracts with private firms for almost every conceivable p u blic service. Americans are demanding better services for less money. A growing number of cities are turning to innovative forms of privatization as the solution to this predicament 31 La Mirada, California, contracts out 60 services, slashing 30 percent o f service costs. Thanks in large part to 32 "The Impact of Privatization on Public Employees National Commission on Employment Policy 33 Stuart M. Butler Why Asset Sales Are Good Public Policy, The Hetiluge Lectum No. 148,1987 34 Dana Joel A Guide to Pris on Privatization Heritage Foundation Buckgrounder No. 650, May 24,19

88. See these budget savings, the town never has levied a property tax on its homeowners forthcoming also "Putting Sacred Cows on a Diet Reason Foundation Fiscuf Wufchdog February 1988 b 13 Policy Pioneers. Cities, counties, and states often are derided in Washington as the "weak little sisters of the federal government. Yet on crucial policy fronts, including welfare reform, economic development, and privatization, state and local govern ments are proving more muscular than the federal government. They are wirining deserved recognition as policy pioneers whose inventiveness hold out valuable lessons for federal policymakers.

Local governments of all political persuasions now realize that t hey must enlist the skills and talent of the private sector if they wish to achieve the goals of their citizens. This message has yet to be received in Washington. But with privatization, like tax reform a decade ago, sweeping the country, it cannot be lo ng before even Congress wakes up to this remarkable sea-change in American government.

Stephen Moore Grover M. HermannFellow in Federal Budgetary Affairs I 14


Edmund F.

Senior Policy Analyst on International Economics