Privatization, Local Edition

I was recently asked to speak to a study committee of the local League of Women Voters about privatization on the local level.

As I told them, a fair amount of my academic research has focused on privatization–or more accurately, contracting out. Privatization, as Morton Marcus frequently notes, is what Margaret Thatcher did in England: she sold off government-owned enterprises to private sector owners. An example closer to home is Washington State’s decision to auction off its state-run liquor stores, which will be privatized on June 1st. In the US, however, when we use the term privatization, we usually mean the practice of contracting with for-profit and non-profit organizations to provide government services-–a very different thing. In the examples from England and Washington State, an enterprise has become private, and is no longer a concern of government; when we’re talking about contracting-out, however, government retains responsibility for providing the service.

In other words, a service that government is obligated to provide or has decided to provide continues to be paid for with tax dollars, and government remains responsible for ensuring that the work is being done in a manner that’s consistent with the Constitution, the terms of the contract, and (ideally, at least) the public interest.

My research has convinced me of three things: 1) while contracting may be appropriate under some circumstances, it is not the panacea that so many politicians seem to think. Sometimes it makes sense, sometimes it doesn’t.  2) the cost savings that are touted by privatization advocates are largely mythical, the result of omitting what it costs government to manage these contracts–or the even greater costs of failing to manage them. And 3) far from shrinking the size of government, as proponents seem to believe, contracting actually expands both the size and scope of government, while at the same time making that expansion less visible and government less accountable.

Recent studies confirm those conclusions.

A few months ago, the Government Accounting Office released the results of its investigation of contracting costs. It found that contracting was often more costly than providing the same services in-house. And I think it is particularly interesting that, during a debate over a proposed federal contracting rule, the number of federal contract workers–people working full-time for the federal government as contract workers rather than federal employees–was estimated at approximately 7.1 million. That’s in contrast to the full-time civilian federal workforce of 2.1 million.  The Economic Policy Institute estimates that 43% of all employees who do the government’s work are employed not by a government agency, but by contractors. (It further estimates that 20% of that 43% are paid “poverty wages.”)

When you add the “shadow” employees who are working under contract for state and local governments, estimates of the total number of contracted government employees run as high as 17 million. It’s impossible to know for certain, because there is very little data available that would allow government agencies to monitor the number of contract workers, and considerable resistance from the business community to the Obama administration’s recent efforts to collect and analyze such information.

The bottom line here is NOT that government should never contract out for services. Contracting is a tool, and like any tool it can be used appropriately or inappropriately.  This is not an “either-or” issue—it’s a “when” and “how” issue.

In my classes, I tell students that there are important “preliminary questions” policymakers need to address before the decision to contract out is made.

• Is this something government should do at all? Or is the intended activity one that is better left to the private or nonprofit sector? (If we are talking about air quality, I think government needs to do it; if it’s golf courses, I can make case pro or con; if it’s football stadiums, “Houston, I have a problem…”)
• If the answer to that first question is yes, this is a service government should provide, the next question is: should government provide the service through its own employees, or through a third-party surrogate? Again, there’s a big difference between hiring a company to fill chuckholes and letting a private contractor decide who is eligible for a welfare check.
• Finally, if the decision is made to contract out, does the responsible government agency have the capacity to adequately structure the contract, ensure that it protects taxpayers, and to vet, monitor and manage the contractor?

As with so many other issues, the devil is in the details. How something is done is every bit as important as whether it is done.

The academic literature documents three major problems associated with contracting. The first is political: contracting can easily become a form of patronage—one variety of what some call “crony capitalism.”  The second is the lack of transparency and accountability that I alluded to earlier. Both have been real problems with the parking meter deal. And the third, which has been the subject of a great deal of research and concern by nonprofit scholars, is the “hollowing out” of both government and the not-for-profit organizations that are such an important part of civil society–a troubling reduction of institutional memory and capacity.

Okay—enough of that brief romp through the background of the issue. Let’s look at how those concerns play out in four local examples: the parking meter giveaway (my characterization probably gives you a clue to my assessment of the merits of THAT deal); the Water Company sale; the Toll Road “lease” (please note air quotes); and the Welfare Intake contract.

First, the one that absolutely fries me—the parking meter deal.

In one of his campaign debates with Melina Kennedy (no relation!) Mayor Ballard defended his record in part by pointing with pride to the privatization of parking meters. As I blogged at the time, “Excuse me? Let’s deconstruct that. We are supposed to re-elect Ballard in gratitude for his decision to give away control of our parking infrastructure and over 60% of the fees we would otherwise earn for the next fifty years?”

Finances aside, the ability of the city to control its meters may seem inconsequential. It isn’t. My husband spent six years as the Director of Metropolitan Development, and he will tell you that decisions about parking and parking lane management are a significant element in all sorts of development decisions; for one, the ability to “bag” meters without penalty during downtown construction is a cost-control measure important to developers and others. It has been estimated that the city’s deal–which requires compensating ACS when more than a certain number of meters are bagged–added over a million dollars to the costs of the Cultural Trail. And most of the trail had already been built. Furthermore, until now, the City has never entered into any agreement for so long a period—for good reason. Think about what Indianapolis looked like just 20 years ago, let alone 50. It is impossible to know what our civic needs will be in 2070.

Then there’s the issue of money. When many of us protested the decision to contract away the lion’s share of parking revenues that would otherwise flow to the city, we were told that we needed the “expertise” of ACS–that the city couldn’t finance and manage its meters without the help of a sophisticated mega-corporation. (Evidently, the disastrous experiences of cities like Chicago that had entered into similar deals were considered irrelevant.) I never understood why we could not bond for the new meter technology, and keep the parking revenues for ourselves. With all due respect, managing meters is not rocket science.

The Ballard Administration begged to differ. Ballard insisted that it was necessary to trade away city control over our parking infrastructure and the lion’s share of the money those meters will generate for the next fifty years in order to get competent, experienced management. I thought then that was a bad deal, and a recent article in the Indianapolis Star is evidence that it may be a worse deal than I originally thought: according to the Star, the city’s share of parking revenue generated in 2011 was just under $1.4 million, or 30 percent—considerably less than the City’s original projection of $2.1 million. (And that original projection was what led many of us to conclude that it was a bad deal.) Worse, the city didn’t end up seeing even that amount, because the vendor subtracted $286,000 to compensate for times the city bagged metered spaces, often for RebuildIndy road construction work.

I always thought this was bad policy and a bad business deal, but I did assume the private vendor would at least provide competent management. Evidently, I was naive.

Last semester, in my Media and Policy class, a student raised the issue of how poorly local media had covered the administration’s privatization of both the water company and parking meters. That led another student to complain that she had received a ticket despite having fed the meter the proper amount–and was helpless to prove her payment since the “state of the art” meters don’t dispense receipts.

It turned out that–out of the 23 students in class–no fewer than 8 of them had experienced similar problems. Several had attempted to complain–complaints that, as one put it, were “blown off.” One student who had paid with a credit card was told the only way she could get a refund was to bring in her Visa bill. Another reported that her credit card was charged twice; when she tried to get the improper extra charge removed, the response was “how do we know you didn’t park twice?” Subsequent to that classroom discussion, local blogger Paul Ogden has reported having a similar experience. His comment was telling; as he said, “I’m sure these problems will keep the city from renewing the contract when it terminates—in 2070!” Point taken: among other assets, we also contracted away accountability.

Until the most recent story, the local press had pretty uncritically repeated the administration’s claim that the parking meters are “netting” additional revenues since they were privatized.  For example, an IBJ story repeated a City claim that total revenue from meter operations had grown over the same quarter the previous year. According to the administration spokespersons quoted in that story, the city’s share of parking revenue totaled $498,273, compared with $108,265 from meter operations from March through June a year ago—a whopping 360-percent increase. Pretty good, right?

As the more recent Star article reported, those numbers weren’t quite the whole story, but even if they had proved accurate, the spin was very misleading, because it ignored a couple of rather inconvenient facts. (1) the hours of required meter use were increased from 7:00 PM to 9:00 PM every night and ACS added a day to the week (it used to be Mon.-Fri., now it is Mon-Sat.); and (2) the hourly rates were increased in Broad Ripple and most of downtown.  These changes would have generated substantially more revenue whether it was ACS or the City that had increased hours and raised rates–and if we hadn’t privatized the meters, the City would be able to keep all of the increased revenues after making a relatively modest investment in new meter technology. Instead, we get 30%, less deduction for bagged meters.

There’s lots more I could say about the parking meter deal—and the none-too-savory reputation of the contractor, ACS—a company that seems very well connected politically. But let me just conclude the parking discussion with what I consider the most egregious part of this particular deal: the vote to approve it.

Leading up to the required City-County Council vote, there was a very intense debate about the merits and terms of that agreement, the unusual length of the lease, the bona fides of ACS as the chosen vendor, and the wisdom of handing over control of the City’s curb lanes to a private contractor. Ultimately, the Council approved the lease by a single vote. The transaction would have failed had the Council President—a lawyer employed by the same firm that represents ACS—recused himself.

Several local legal blogs pointed out that this vote constituted a clear conflict of interest and certainly appeared to be in violation of the applicable Canons of Legal Ethics. The mainstream media ignored it. I found it appalling.

Let’s move on to consider two other local privatization initiatives: the water company and the Toll road. I’m discussing them together, because in my view, at least, they shared an important element of many of these deals: they were motivated by a lack of political will, and what we were really outsourcing was the taxing power.

Let me begin by saying that the fact of the water company sale, which included the sewer system, made a lot of sense. It consolidated management of three utilities, and Citizens Gas is a public trust with the management expertise to run it. There is no compelling policy reason that a city needs to own and operate a utility, and the Water Company was struggling to pay the bonds issued when the Peterson Administration bought it for what critics said then was an inflated price. Furthermore, substantial outlays will be required to bring the water and sewer systems up to basic environmental and safety standards after decades of deferred maintenance, and the Environmental Protection Agency will insist that those repairs be done.

So the real question wasn’t why the city would unload it; it was why Citizens—or any other buyer—would pay a billion-plus dollars for two utilities that—according to the City’s own numbers—were somewhere between four and five billion in the hole.

The simple answer—and my objection to the way this transaction was structured–is that a buyer can “monetize the income stream.” In plain English, that means that Citizens wasn’t buying a bunch of fixed, decaying capital assets. It was buying the right to charge—and increase—water and sewer rates. The right to tax.

Had the city kept the Water Company, it would have had to increase rates. But doing so would incur the wrath of citizens who have made it quite clear that they resent paying for even essential city services. Governor Daniels had showed the way with the sale of the toll road. By selling or “leasing” an asset rather than paying to maintain it, a Mayor or Governor achieves two goals: an immediate infusion of cash, and plausible deniability when rates or tolls go up. In the case of the water company, the city was able to pave streets without raising local property taxes—by shifting the costs to utility ratepayers. That’s smoke and mirrors, and it blurs accountability and transparency. In the case of the Toll Road, Indiana lawmakers who lacked the guts to raise tolls essentially sold a public asset to a private company so that they wouldn’t have to make unpopular decisions. And just as with the parking meters, had the state issued bonds and paid them off out of higher tolls, the public would have kept more of the money.

As I’ve said, there is a copious literature about the pitfalls of privatization. What is curiously lacking in that literature is recognition that in too many situations—like the water company and toll road examples–what we are really outsourcing is a quintessentially governmental power—the taxing power.

Then there’s the state’s failed effort to privatize the welfare intake process. This is precisely the sort of governmental responsibility that should NOT be outsourced. When governments are dealing with vulnerable populations, when the task at hand requires familiarity with federal regulations and the complexities of state and federal programs and compliance, it is entirely foreseeable that efforts by for-profit ventures to conduct those tasks will fail. We are now in the “I told you so” stage of this particular experiment; IBM just won the first stage of a lawsuit against the state that I predict will end up costing us much more than we could have saved. I will note that ACS once again evaded accountability and retained its part of that contract, and that the firm that represents ACS is also representing the Daniels Administration in the litigation against IBM, ACS former partner in that contract.I understand from a colleague that the engagement letter included 7 pages of “conflicts disclosures.” Call me old fashioned, but disclosing a conflict does not magically make it go away.

Contracting out often makes sense. Frequently, however, it’s just patronage by a different name.