Briefing Report: Privatizing California's Local Governments

Improving Efficiency, Saving Taxpayer Dollars
Wednesday, January 5, 2011

Facing a lingering economic downturn and increasing debt, California's 5,000 units of local government find themselves in a difficult two front battle. On one hand, municipal leaders are confronting declining property and sales tax revenues coupled with burgeoning costs. At the same time, citizens are demanding new services as well as the expansion of existing ones. All the while, federal and state governments continue to pass more responsibility for public services down the line to escape the onus of tax or fee increases.1

In light of these new economic and political realities, there is growing pressure upon local governments both from within and from outside to find alternative service delivery models that provide greater efficiency and improved outcomes for tax dollars spent.

A New Model for Service Delivery

Recent years have demonstrated that governments of all political complexions are increasingly embracing privatization - shifting some or all aspects of government service delivery to private sector provision - as a strategy to lower the costs of government and achieve higher performance and greater cost effectiveness.2

Once a concept viewed as radical and ideologically based, the shift to privatization in recent decades has become a well-established, proven policy management tool that serves as a viable service delivery option.

The spread of the privatization movement is grounded in the fundamental belief that market competition in the private sector presents a more efficient way to provide services, while also providing greater citizen choice. Virtually every local government service - including road maintenance, fleet operations, public works, education and public health services - has been successfully privatized at some point in time somewhere in the world.

The deteriorating financial condition of many local governments has put municipal leaders on a quest seeking more efficient and cost effective service delivery models. As the privatization movement continues to grow, the following short list of examples demonstrates some of the most common opportunities for privatization within local governments.3

Privatizing County Library Systems

Several Southern California cities are moving towards a divestment from county library systems, contracting with a national firm to operate local libraries. Two cities in Ventura County and the city of Santa Clarita are in position to shift service at three local libraries through a six-year contract with LSSI (Library Systems & Services, based in Maryland) which will take effect July 1, 2011.4

In other examples, Chicago Mayor Richard Daley claimed that the city saved $3.7 million by contracting out management of the city's Harold Washington Library. And in 2009, the Brooklyn ( New York) Public Library became one of first libraries in the country to use UPS, rather than a local or internal courier system, in an effort to reduce costs and move materials more efficiently throughout its 60 branches. Under the UPS contract, turnaround time was reduced from 14 days to 24 hours, taking advantage of the company's overnight service focus, and former library staffers and truck drivers now work as full-time sorters.

Infrastructure, Public Works and Transportation

A decade ago, California voters approved Proposition 35, also known as the Public Works Project Act of 2000. This proposition granted local governments greater freedom to pursue partnerships with the private sector on infrastructure projects. As such, the infrastructure arena is amongst the ripest areas for employing a range of creative privatization techniques.

In what was one of the nation's largest conversions to a private sector public works contract, Centennial, Colorado privatized all of its public works functions in 2008. Under the five-year contract, worth approximately $8.6 million in 2009, contractor CH2M HILL OMI and partners DMJM Harris and American Civil Constructors manage all public works functions for the city, including traffic engineering, permit processing, inspections, administrative services, road maintenance and snow removal. The city reviews and re-approves the contract annually, offering regular opportunities to review the contractor's performance and revise the annual budget appropriation, if necessary, to address revenue shortfalls or variations in service demand.

For services such as public transit, sanitation, parking enforcement and tree trimming, competitive contracting and public-private competition can lead to significant cost savings. West Hollywood saved 28 percent in operating costs and increased revenues by over $2 million from contracting out parking enforcement. Newport Beach saves over $200,000 annually from contracting for tree trimming services.

General and Administrative Services

Maintenance, janitorial, data processing and printing are among the most frequently contracted out services by public and private sector organizations. Many general and administrative services are delivered primarily internally to other government departments, making it easier to monitor service quality and iron out privatization transition problems.

Private vehicle fleet maintenance is widespread among county and municipal governments that have discovered contracting out offers the potential for significant financial savings, improved quality, and greater timeliness of service. Privatizing vehicle fleet management also allows governments to achieve other important goals, such as inventory consolidation and divestiture, or minimizing government's capital and long-term operations and maintenance risk exposure.

Cost savings through privatization typically range from 10 percent to 25 percent. A prime example is San Mateo. In 1993, the city put its fleet maintenance operations out to bid. The winning bidder, Management Logistics Systems ( MLS), agreed to provide the service for 20 percent less than the city was delivering it.5

Parks Operation, Maintenance & Recreation

Private management and maintenance of municipal parks and recreation facilities are commonplace. Nearly 40 percent of American cities contract out for various recreation services. Cost savings from outsourcing recreation facilities operation and management typically range from 20 to 50 percent, and cost savings from outsourcing park landscaping and maintenance generally range from 10 to 30 percent.

Local officials are also showing increasing interest in privatizing what Governing magazine called "perhaps the most non-essential of the non-essential public services": public golf courses. Between 1987 and 1995, the number of cities contracting out to private firms for golf-course services increased by 67 percent. Today, 25 percent of U.S. cities with golf operations contract out for maintenance and service. In Los Angeles County, which contracts out 16 of its 19 municipal golf courses, revenues have doubled or tripled at some courses since operations were contracted out.

Information Technology

More and more, state and local governments across the nation are realizing a dramatic cost savings by switching to cloud computing services (using third-party providers and the Internet to host applications like e-mail, calendars, shared documents, etc). By switching from the traditional ‘on-site' IT model to cloud based systems, localities are reducing expenses by eliminating the need for new servers, anti-virus protection, licensing, storage and manpower.

In January of 2010, Orlando became one of the first cities to switch all of its employees to Google e-mail services. For city officials, the move cut annual e-mail costs by two-thirds, saving taxpayers an estimated $262,500 a year. New York City agreed with Microsoft on a wide-ranging contract for that company's cloud computing services. The pact includes moving 30,000 employees to e-mail hosted in the cloud by Microsoft. New York City officials say the five-year contract will save $50 million.

The Cost Benefit Analysis of Privatization

Are there costs involved in privatizing a municipal service? The answer is definitively yes, and these costs should be carefully examined and compared to the full cost of services being offered by local governments (i.e. labor costs, pensions, and fringe benefits).

However, just as business and industry concentrate on their "core" mission, emphasizing what they do best, so too local governments should be reviewing and questioning the services which they provide, asking whether there may be a better way. When implemented with care, due diligence and a focus on maximizing competition, privatization is an approach that puts results, performance and outcomes first to deliver high-quality public services at a lower cost and ensure communities will continue to have access to excellent and affordable services.

Leonard Gilroy of the Reason Foundation appropriately noted:

"Competition done right drives down costs and incentivizes performance. Private firms operating under government contracts have strong incentives to deliver on performance.... On the government's side, applying competition forces management to identify the true cost of doing business, and, with efficiency as a goal, compels an agency to use performance measurement to track and assess quality and value. At its root competition promotes innovation, efficiency and greater effectiveness in serving the shifting demands of customers."

Outside of public safety services, the courts and policymaking functions, the private sector has proven repeatedly that there is nothing in the routine operations of government - those things that citizens interface with most directly - that cannot be privatized. For those localities focused on managing through a recession and beyond, privatizing some of governments' non-core functions has time and again resulted in significant long-term savings.

 

For more information on this report or other Local Government issues , contact Ryan Eisberg, Senate Republican Office of Policy at 916/651-1796.

1Wertz, Richard D. and Charlie Tyer. "The Privatization of Local Government Services: A Growing Trend," The South Carolina Policy Forum Magazine, Vol. 8, no. 2 (Spring 1997): 30-41.

2Leonard C. Gilroy, " Local Government Privatization 101," March 16, 2010, Policy Brief 89. Reason Foundation Out of Control policy blog.

3Information referenced in this document was gathered in part from a Reason Foundation Policy Brief (#89, March 2010). This policy brief was one of a series of papers intended to identify and analyze outsourcing opportunities for Cleveland Ohio.

4Howland, Lance (2010, November 22) " Cities Move Towards Contracting Out Library Systems" PublicCeo.com

5Cal Tax. (July 1997) " Competition and Privatization Strategies to Reduce Government Costs"