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238 January 11, 1983 I I MUNICIPAL SER VICES THE PRIVATlZATION OPTION INTRODUCTION Strong criticism of the Administration's New Federalism form of scaled down block grants, will mean less spending on initia tive has come from the nation's city officials. They assume that the transfer of many programs to the states in the urban areas. The usual response of city officials to funding cutbacks is to present local citizens with an unappealing choice either put up with increases in local taxes or face drastic cuts in public services. Both alternatives pose political and economic risks. Politically, the mood of the country is still against tax increases; Propositions 235 (Massachusetts) and 13 (California still comm and large majorities in their favor. Yet citizens also tend to resist cutbacks in local public services. Unlike many federal government activities, they are generally not perceived as wasteful. This dismal analysis of the situation overlooks another alternative-privatization. States, cities have been discovering that public services do not necessarily have to be produced by government or paid for by taxes lifted, a whole range of possibilities for alternative service delivery opens up. And the evidence to date indicates that services provided via privatization are generally produced more cost effectively than services provided by tax funded local monopolies. Privatization, therefore, offers cities a way out of the dilemma posed by the New Federalism, and i s an effective mechanism to allow cutting the size of the federal budget while maintaining--or even improving--the quality of many services at the local level Here and there around the United Once the government-production/ tax-funding constraint is 2 THE D ILEMMA To understand why the New Federalism proposals have been met with such cries of alarm from local officials, it is necessary to understand the extent to which local governments have become dependent on the federal government. Ever since the New Deal local governments have relied on various forms of I'intergovernmental revenue" for a significant fraction of their income. This fraction increased gradually from 1940 to 1970, growing from one quarter of local revenues to one third-an increase of 8 percen t in thirty years. But during the 1970s, such aid leaped by another 7 percent, mounting to 40 percent of all local revenue. As Table 1 reveals, the principal shift has been for outside aid to offset local property tax revenue. Whereas property'taxes accoun ted for 54.5 percent of local government revenue in 1940 and remained in the 40 percent range throughout the 1950s and 1960s, they had shrunk to 30.7 percent in 1977, the year before Proposition 13 and subsequent grass-roots revolts against property taxes . Table 1 combines federal and state aid to local governments into a single category. While it is true that the fraction of this total going directly from the federal government to local entities had grown from only about 5 percent in 1950 to 22 percent by the end of the 1970s, this figure by itself is not very meaningful because a large fraction of state aid to local governments also is federal in origin. From the local officials' viewpoint, what is most relevant is the total revenue available from outsid e sources. Direct aid from Washington is often preferred, since competing interests within the state do not then have access to the money. But New Federalism threatens the level of all nonlocal revenue. President Reagan's New Federalism proposes to reduce, in absolute terms, the amount of federal aid that has been going to state and local governments. The original (February 1982) plan called for turning over sixty-one federal aid programs to the states, in five categories: education and training, social se r vices, transportation, community development, and revenue sharing. scope, real cuts in aid are planned. This small but definite reduction in the role and outlays of the federal government represents a dramatic reversal of the trend of the last forty years , and especially of the past decade Although the turnback of programs has been reduced in Regardless of how the details of New Federalism are finally ironed out, it seems clear that cities are going to end up with significantly less outside aid over the ne x t decade. Their direct federal aid via such categorical programs as social services and community development will be cut. And their state aid, much of it paid for with federal funds, will also shrink. Cities are faced, therefore, with a painful dilemma: D o they raise taxes or cut services? Either action is politically risky. Or will they n In C 0 d d d rl n W rn aJ E u aJ ai I PIC daJ BE mc eu Y 0 0 d m U 0 I4 C 4 rl In a C aJ Ld b 1" 0 2 0 m d I u U rn rl z LI rn 3 0 In aJ x m e 4 aJ c JJ 0 X m 0 b aJ a 0 k PI k m aJ r)hlococooommou I CE 1 uo ox Q ab u UaJ a b h rl U E m In I U D L4 u V Ld 1 0 rn 4 have the imagination and courage to seek more efficient ways of providing public services? ANOTHER ALTERNATIVE: PRIVATIZATION The conventional approach to prov iding municipal services is I service and to deliver the service as well. The implicit premise in this view is that local public services are all Ifpublic goodsIl--i.e I goods or services that can only be produced and paid for collectively. Yet the fact is that most local public services (other than strictly wealth-transfer functions) have few attributes of true public goods. Most of them--including garbage collection, park and recreation services, libraries, airports, transit, and aspects o f police and fire protection--have specific, identifiable users who are the services' principal beneficiaries. To the extent that discrete user/beneficiaries can be identified, user fees become a viable alternative to taxation as a source of revenue. Moreover, even for services that are closer to being pure public goods, it is not at all clear that government must be the provider. Even where the revenue'is best obtained via taxation, the service can be produced by (a a private, for-profit firm, (b) a nonpr ofit organization, or (c) some other government jurisdiction that may be able to do the job more efficiently for the local government to collect the revenues needed for the Shifting to an alternative means of public service delivery is often referred to a s privatizat1on.l Three variants of privatiza tion are of particular significance in the case of municipal services, namely user fees, contracting out, and load shedding 1) User fees To the extent that a service is shifted from tax funding to user fees, th e tax increase dilemma for revenue squeezed local governments is eased. Moreover, there is much economic evidence that services will be produced more efficiently and responsively when users provide direct feedback through utilization according to the price charged than when they provide only indirect feedback via the political process 2) Contractinq out Contracting out refers to a variety of situations in which local government remains responsible for the funding of a service but selects one or more provide r s by a process of competitive See, for example, E.S. Savas, Privatizing the Public Sector (Chatham N.J Chatham House, 1982 James T. Bennett and Manuel H. Johnson Better Government at Half the Price (Ottawa Ill: Caroline House, 1981 and Robert W. Poole, Jr . , Cutting Back City Hall (New York: Universe Books, 1980). 5 bidding. There are several reasons why this alternative to traditional city provision usually leads to less costly, more responsive services. First, it is not likely that the area defined by a c i ty's jurisdictional limits will coincide with the optimum area for most public services, since economies of scale vary dramatically among public services. A city that is the ideal size for the most efficient garbage collection system is probably far too s mall to provide a water or sewer system at the least cost to residents. Contracting for services permits selection of least cost producers without regard to jurisdictional boundaries. Second, the need to compete for the contract changes the incentives faci ng the provider. In contrast to a conventional monopoly city agency a private firm or a nonprofit agency which must compete with. other providers for, say, a three-year garbage contract, has powerful incentives to rethink its use of personnel and equipmen t in order to deliver the required services in the most efficient manner c) Load sheddinq This third form of privatization refers to a decision by local government to step back and allow the private sector to produce the service and offer it directly to co nsumers. Common examples are commercial and industrial (but usually not residential refuse collection and personalized transit services (taxis). Both are usually left to the marketplace to provide on a voluntary basis, albeit usually with some degree of municipal regulation. Studies of privatization via load shedding suggest that additional current municipal services could be provided this way and that local governments' budget problems would be further eased. EXAMPLES OF PRIVATIZATION A close look at the variety of ways in which public services are delivered across the country reveals numerous examples of successful privatization. And where studies of cost effectiveness have been completed, the evidence strongly supports the theoretical case for signific ant cost savings. Garbaqe Collection Garbage collection is a service that provides examples of all three types of privatization. Commercial and industrial refuse collection is largely a function of the private sector. In large central cities, it is still common for residential collection to be a function of a city sanitation department, and the service is generally provided without charge. But over the last five years a number of cities e.g El Paso and Fort Worth, Texas) have instituted specific fees to p a y exclusively for garbage service. 6 The most important trend over the past decade has been the move toward contracting out residential collection. Nationwide studies in the United States, Canada, and Switzerland, as well as regional studies in Connecticu t and the Midwest, have shown that government garbage collection is 29 to 37 percent more costly than private contract collection.2 These comparisons actually underestimate the true disparity in the United States A study by E. S. Savas found that municipal sanitation department budget practices understate the true cost of service by an average of 23 percent.3 As these cost data have become better known, more and more cities have shifted some or all their residential garbage collection to a contract basis. A mong those doing so in the past decade are Boston, Dallas, Gainesville (Florida), Jackson (Mississippi Minneapolis, Oklahoma City, Omaha St. Paul, and Utica (New York). There are also a few examples of load shedding where cities decide to get out sf the refuse collection business altogether. One such case is Wichita. Until 1978 that cityls municipal sanitation department.provided residential collection in part of the city while the rest was served by private firms which contracted with individual homeowner s workers in 1978, however, the city decided to cease providing garbage services. Resisting pleas to divide the city into districts and franchise a single firm to operate in each on a monopoly basis, city officials instead stepped back and allowed the mar k et place to function. Today there are dozens of companies in the Wichita market; in any given neighborhood, residents have a choice of several firms offering various combinations of price and service. The city's only responsibility is to ensure that each h ousehold makes some provision for disposing properly of its garbage In the wake of a strike by city sanitation Fire Services Although most people do not realize it, fire protection also provides illustrations of all three types of privatization In the wak e of Proposition 13 in California, several cities passed legislation providing for a fire service fee to pay for a portion of the fire department's costs In so doing they were supported by the analysis of such economists as Urban Institute researcher Willi a m Pollak who concluded a decade ago that government provision of fire suppression services at no charge had led to an underinvest I E.S. Savas, "Public vs. Private Refuse Collection: A Critical Review of the Evidence Journal of Urban Analysis, Vol. 6, 197 9. E.S Savas, "Policy Analysis for Local Government: Public vs. Private Collection Policy Analysis, Vol. 3, No. 1 (Winter 1977). 7 ment in fire prevention efforts by building owners. A fire service fee, based on the extent to which a building places a dema nd on the fire suppression system, provides positive incentives to invest in alarm systems, sprinklers, and other preventive measures. Inglewood, California, in 1978, was the first city to actually implement a fire service fee. The plan was for only tlbas iclf fire protection to be funded from property taxes, with a business service financed by fees based on the calculated "fire blow requirements of each commercial and industrial structure. The fee system was put into effect in the summer of 1978, but it p roved politically unpopular, and it was suspended after the first year. Faced with the fiscal stress of Proposition 2 Boston officials introduced a fire service fee in July 19 82. Like the Inglewood fee, it is applicable only to larger commercial and industrial buildings, and is expected to bring in some 8 million a year. But there is already talk of a court challenge by the real estate industry. Fire service fees obviously hav e a long way to go to gain general acceptance. Equally controversial, but with a longer record of success is the practice of contracting out fire service. The best-known example is Scottsdale Arizona, a Phoenix suburb of 90,000 residents which has been ser ved by private fire services under contract since the city was incorporated in 19 52. In 1976 a team of researchers from the California-based Institute for Local Self-Government made a detailed study of the cost and performance of the fire protection syst em in Scott~dale.~ Comparing Scottsdalels fire service with that of nearby Glendale, Mesa, and Tempe (which have conventional government fire departments they found that (1 response time was best in Scottsdale, even though it is the largest in land area 2 ) the insurance rating of the fire departments is comparable--homeowners' rates, in particular, are the same in all four cities, (3) average annual fire loss is comparable in all the cities except Tempe (where it was nearly twice as high as in the other th r ee little between Scottsdale and the other three cities, the per capita cost over the 1971-75 period averaged $6.48 in Scottsdale compared with $12.62 in Glendale 11.43 in Mesa, and $10.68 in Tempe. In other words, by contracting out, Scottsdale was recei v ing comparable fire protection at only 56 percent of the cost in a city such as Mesa While the quality of fire protection differed William Pollak Pricing Fire Protection Services ,I1 in Selma Mushkin ea Public Prices for Public Products (Washington, D.C T he Urban Institute, 1972). Alternatives To Traditional Public Safety Delivery Systems: Civilians in Public Safety Services (Berkeley, California: Institute for Local Self Government, 1977). I 8 Scottsdale is not an isolated example of private fire protecti on It is part of a clear trend towards contracting out. The firm providing fire services in Scottsdale, Rural/Metro Fire Department Inc also contracts with several other Arizona cities. In 1977 the metro government in Nashville/Davidson County contracted w ith five small private f1r.e companies to provide fire services in unincorporated areas. Two years later American Emergency Services Corporation won a contract to serve Elk Grove Township, Illinois adjacent to Chicago's O'Hare Airport. At the same time, H a ll County, Georgia, abolished its fire department and contracted out the service to Rural/Metro of Arizona. In January of 1982, the Hall County contract was won by Florida-based Wackenhutt Corporation the nation's fourth largest private security firm. In a ddition Wisconsin-based J.J. Security, Inc has won fire and crash rescue contracts at the airports in Green Bay and Madison, Wisconsin Oklahoma City, and Kansas City International Airport. There is even a trade association for private fire companies creat ed in January 1982, the Private Sector Fire Association There are also some examples of load shedding in fire protection. In a number of unincorporated communities in Arizona, Georgia Montana, Oregon, and Tennessee, fire services are provided on a subscrip tion basis by private, profit-making companies. In some cases, these firms are the outgrowth of volunteer fire departments as an area develops, citizens often demand a higher level of service than that which can be provided by a strictly volunteer organiz a tion. Because of the threat of fire spreading from house to house in high density urban areas, subscription fire service is not likely to be acceptable in most cities. But it appears to be a viable alternative for lower density suburbs and unincorporated areas. Parks and Recreation There seems to be no clear pattern for changing (or not) the system of park and recreation services. Some cities, such as Washington, D.C make most of these services available with no user fees at all. At the other extreme are c ities like Wheeling West Virginia, and El Cerrito, and Newark, California, whose recreation programs are entirely supported by user fees. The principal objection made against recreation program user fees is that they will deprive the poor. There are two i mportant counterarguments. The first is that generally the poor are already paying for such programs--via property taxes (included in their rent payments sales taxes, and excise taxes. Yet many municipal recreation facilities--tennis courts, golf courses, marinas etc.--are used largely by middle and upper-income people. Although no definitive studies exist, it is likely that significant wealth transfers from the poor to the nonpoor are taking place in recreation programs funded by taxation, rather than by u ser charges. 9 The other counterargument is that the truly needy can always be exempted from the user fees. The Fairfax County, Virginia recreation agency distributes sports complex passes to low-income children identified via the school lunch program. Th e San Juan School District in Sacramento, California, arranges for local businesses to give scholarships for low-income children to attend recreation facilities. And the Los Angeles County Art Museum provides free admission one day per month so that senior citizens and others with low incomes can avoid the (post-Proposition 13 entry fee.6 Contracting out is being used increasingly in park and recreation services. California has seen a great increase in the contracting out of park maintenance since Propositi o n 13. Most cities have dozens of commercial landscaping firms which are well-equipped to take over tree trimming, grass cutting, and other park maintenance chores. The savings typically are 30 percent or more; in Los Angeles County, some initial contracts have yielded 50 percent savings. The operation of park and recreation facilities has also been contracted out. The contractors may be golf or tennis pros commercial firms or nonprofit organizations. In Rohnert Park California, the city was plagued with a money-losing golf course that had become a considerable drain on the taxpayers. The city went out to bid and ended up with a thirty-year lease to a private firm, which is guaranteeing the city a minimum income of $60,000 a year, in addition to rebuilding t he c0urse.l There are even some examples of load shedding in the leisure services area. Long-term leasing of large-scale facilities, such as golf courses, represents de facto load shedding. And the recent adopt-a-park trend onToth the east and west coasts (including the San Francisco Bay Area and New York City) is a form of load shedding, whereby citizen groups and/or local businesses voluntarily agree to take over responsibility for maintaining specific parks. Mass Transit Nearly all municipal transit is operated on at least a partial user-fee basis. The problem is that the fares typically cover less than half of the cost of operation. The reason has to do with the changes in land-use patterns after World War 11 Other examples of park and recreation user fees, and arguments for their use, can be found in Fees and Charges Handbook (Washington, D.C.: U.S. Department of the Interior, Heritage Conservation and Recreation Service 1979). Further examples and guidelines can be found in the Contract Services Hand book (Washington, D.C.: U.S. Department of the Interior, Heritage Conservation and Recreation Service, 1979 10 In the 1950s most transit operations were private businesses As people migrated to the suburbs, political pressures and bad business judgment ca u sed the transit systems to spread out after them. But conventional bus systems found it difficult to-stay profitable in low density areas, and bus systems began to go bankrupt. Nobel Prize winning economist F. A. Hayek speaks of the market as a giant info rmation system. In this case, the market was telling us that'the traditional form of busline was obsolete in the suburbs. But people and politicians refused to listen and cities took over the buslines in an effort to preserve the obsolete structure. When t hat became increasingly difficult for cities, the federal response in the 1960s was to provide capital grants to enable cities to buy new buses. The theory was that new equipment would attract new riders and make the systems viable again. When that didn't work, the next major federal program, in the 1970s provided large subsidies to help pay operating costs. Yet two-thirds of all the increased spending in the 1970s went directly into higher wages for bus driverst8 and transit unions resisted strenuously se nsible measures to hold down costs--such as using part-time drivers at peak hours. Si mply raising user fees to full-cost levels would leave this inefficient transit system intact. Nor would contracting out make much of a difference, though there are transit management firms that can bring about some modest improvements in efficiency withi n the constraints of monopoly structure and price controls. Yet, given the cutback in federal operating subsidies, drastic changes are going to be necessary. Economist James Ramsey has proposed load shedding as the solution for one especially beleaguered transit system--the New York City subways.g Pointing out that monopoly structure (and hence monopoly unionism and highly inefficient staffing practices and price controls are primarily responsible for the system's deterioration, and citing the rising popu larity of private express buses at three to four times the subway fare, Ramsey urges that the subway lines be auctioned off to the highest bidder, to be operated free of any government controls. Other municipal transit monopolies could be treated in the sa me way. If that were done, the transit lfsystemlf that would emerge'would be radically decentralized. If anti-jitney laws were repealed, and taxi pricing and entry restrictions decontrolled as they have been in San Diego), low-density transit in a city Ch arles Lave Dealing with the Transit Deficit Journal of Contemporary Studies, Vol. IVY No 2 (Spring 1981). James B. Ramsey Selling the Subways in New York: Wild-Eyed Radicalism or the Only Feasible Solution?" New York University, Department of Economics Jan uary 1982 11 I could be provided cost effectively by hundreds (or thousands) of jitneys, minibuses, and shared rides in cabs. Such systems operate profitably in many cities in South America and Southeast Asia High-density commuter service would be provide d by dozens of private express bus companies, of the kind that have sprung up in Southern California, New York City, and Chicago. Infrastructure It has become a clichC that the infrastructure--roads bridges, water and sewer systems--in many cities is decaying. The pressure to "do somethingll about this has resulted various federal programs to bail out the cities--most recently, of course the misnamed llrepairll plan, to be funded by an increase in the gasoline tax. What most people fail to appreciate, howe ver, is the institutional nature of the underlying problem. For many years elected officials in the criimbling cities have been balancing budgets by putting off until the next adminis tration needed expenditures on infrastructure maintenance. New York Cit y's water and sewer systems should be being replaced on a 100-year cycle. Instead, they are being replaced on a 300-year cycle. New Yorkls streets are on a 200-year cycle instead of the required twenty to twenty-five years. Needless to say, this cannot go on indefinitely. But politically, it is much easier for officials to heed the pleas of special interest groups for transfer payments and subsidies than to spend money on unglamorous projects like sewer maintenance. Furthermore, federal capital programs fo r new construction only add to the incentive to allow systems to run down to the point where they must be replaced with the help of Washington, rather than properly maintained by regular city expenditures. Privatization provides an alternative answer to th e infrastructure problem If specific public works were placed on a self-supporting basis with user fees, the temptation of politicians to divert general fund money away from maintenance would be eliminated. The key to doing this is the creation of legal m echanisms, which separate the user fee revenue and earmark it exclusively for the system that generates it In California this is frequently accomplished via separate "enterprise funds I' In New York City separate authorities--the Triborough Bridge and Tun n el Authority and the Port Authority of New York and New Jersey--were created for the same purpose. The bridges and tunnels run by the city are in very poor repair; those run by the separate authorities are kept in excellent shape lo See Gabriel Roth and G e orge G. Wynne, Learning from Abroad: Free Enterprise Urban Transportation (Washington, D.C Council for International Urban Liaison 1982). i2 Although the President referred to it as a "user fee the recently enacted federal gasoline tax increase is not a t r ue user charge. For one thing, although it is collected from users of roads, one-fifth of the money is to be spent on mass transit systems. More fundamentally, the gasoline tax.bears only a crude relationship to the relative share of the cost imposed on t h e road system by different types of users. In particular, heavy trucks pay only 60 percent of their fair share of highway costs according to the Federal Highway Administrationls cost allocation studies In contrast, the tolls imposed by turnpike operators- -a type of weight-distance charge--accurately ref.lect the relative costs of serving cars, buses, light trucks, and heavy trucks. Tolls are true user fees: the gasoline tax is not. Proper user charges--for example, water and sewer bills or bridge tolls--can be the key to solving the infrastructure problem as long as they can be legally earmarked to prevent diversion. But what about the roads? For over a decade economists have set forth the virtues of tolls on urban expressways. Not only would adequate fun ds for proper maintenance be assured, but the use of time-of-day pricing would provide economic incentives to reduce rush-hour congestion In addition to political resistance however, a principal drawback has been technological. Automated vehicle identific a tion (AVI) systems, which would allow vehicles so equipped to bypass toll booths and be billed once a month were simply not on the market. The good news is that such systems are nearing commercial feasibility.ll The New York Port Authority is planning a l arge-scale test of several systems in the near future. Once such systems are in production, the practical barrier to user fees on urban expressways will be removed. Contract operation of public works is also a viable option. A number of cities and special districts have had great difficulty operating modern sewage treatment plants in compliance with EPA requirements. At least two companies-Envirotech Systems, Inc and Environmental Services, 1nc.--have succeeded in winning contr acts to operate such facilities for local governments. There is even a role for load shedding in public works. Both Laredo, Texas, and St. Louis actively encourage residents to purchase neighborhood streets which carry little through traffic. A study by noted urban planner Oscar Newman found that privatized streets in St. Louis, many of them in poor neighborhoods, became islands of tranquility in the midst of chaos. Crime dropped substantially and investment in home.repair and maintenance rose because pe o ple who had formed a neighborhood association to l1 R.S. Taylor-Radford Rush-Hour Remedy Reason, Vol. 13, No. 9 (January 1982). 13 purchase the street felt very protective about their block.12 In addition, serious suggestions have been made that bridges b e privatized gave examples of privately owned bridges (e.g. Ambassador Bridge linking Detroit and Windsor, Ontario) and pointed out the financial advantages that accrue to investors--sizable cash flows and huge depreciation ~r1te-offs.l~ Full-fledged priva t ization via load shedding may be the most feasible way of raising the billions of dollars needed to repair America's 200,000 deficient bridges A detailed.cover story in Technoloqy magazine IMPLEMENTING PRIVATIZATION The foregoing discussion has made clear that privatization techniques make it possible to provide more public services for less money, especially less tax money. Why, then, aren't these techniques more widely used? The fact is that certain legal tax, political, and psychological barriers to pri vatization must be addressed before the full benefits can be realized. Legal constraints Local officials do not always have the legal authority to privatize services. State laws vary in what they allow local government to do. In some states, for example, c ontracting out public safety services (e.g. police patrol) to private firms is not permitted. Other states impose no such restriction In other cases, what is permissible for one form of local government such as charter cities) may not be permissible for o t hers (such as general law cities; special districts). Even the pricing of public services is frequently constrained by legislation. In some cases, charges of any kind may not be imposed; in other cases shortsighted restrictions on the type of charges (e.g ., prohibiting peak-load pricing) may exist. What is needed at the state level is legal clarification of the right of all units of government to contract out, charge for and/or simply supervise any and all public services. The federal government could assi st by drafting model legislation for consider ation by state legislatures. HUD's Division of Governmental Capacity Sharing should be the lead agency for researching and drafting such a model privatization law Tax Barriers Another barrier to privatization- -spec,ifically to user charges and load shedding-is tax discrimination. State and local tax payments are deductible from citizens' federal income l2 Oscar Newman, Community of Interest (New York: Doubleday, 1980). Jeanne McDermott Bridges: Back to Private Enterprise Technology, Vol. 1, No. 2 (January-February 1982). 14 tax bills. But direct payments for public services, whether a user fee to local government or a fee paid directly to a private firm, are not deductible. Thus, taxpayers often object to propo s als for privatizing services on the grounds that they will have to pay more in federal taxes A useful reform at the federal level, therefore, would be to enumerate the public services traditionally provided by local government--police, fire, recreation, p a rks, garbage collection and allow fees for these services, whether public or private to be deductible from federally taxable income. This would put user-charge funded public services on an equal footing with tax supported, governmentally produced public s ervices. Another tax barrier exists at the local level. When citizens provide and pay for their own public services (e.g a neighborhood association takes over responsibility for a street) rather than obtaining them from local government, they usually must continue to shoulder the same local tax burden as citizells who are not providing any of their own services. A sensible local reform would therefore be to provide tax credits against local property taxes for all expenditures by neighborhood or homeowners' associations which, by providing substitute public services, relieve the load on tax supported services. Once again, HUD could research and draft a model ordinance A precedent for this approach to privatization exists in Kansas City, Missouri, where, down t own, the garbage service is provided by a city department, and in the suburbs by private firms under contract with the city. In both cases, funding comes from local taxes. But Kansas City allows neighborhood associations and apartment buildings to opt out and hire their own garbage service, for which they receive a per-household rebate on property taxes from the city. As of 1978-1979, some forty-one homeowners associations had opted out and were being served by twelve different garbage collection firms. Fe deral Rules A third barrier concerns local mass transit agencies. In order to implement the load shedding option, existing local transit agencies must be free to declare bankruptcy and sell off their assets to would-be private enterprise providers. Yet be c ause nearly all of these systems' vehicles have been purchased with 80 percent funding from the Urban Mass Transit Administration that federal money would have to be returned to UMTA upon dissolution of any of its grantees. Clearly, such a regulation is c o ntrary to the public interest in solving severe transit problems of cities A helpful reform at the federal level would be to rescind UMTA regulations requiring repayment of the grant funds, provided that the vehicles remained in service to the public unde r the new ownership following the dissolution of an existing mass transit agency. 15 lead to political corruption in the selection of contractors. If privatization is to spread, the answers to these claims must be made available to local officials All of t hese factors suggest the need for developing and disseminating information on privatization to local officials. In England, the Adam Smith Institute has developed and implemented an extensive privatization information program, including a basic Government and Union Obstruction A fourth type of barrier is political and psychological the resistance of city officials to privatization. In part, this simply reflects the generally status quo orientation of- local politicians and bureaucrats. After all, for decad e s city department heads have been rewarded in proportion to the size of their departments, not how cost effectively they were operated. City officials are not used to thinking of themselves as facilitators of public service delivery rather than direct pro d ucers of the service. So they tend to resist privatization proposals and are skilled at coming up with numerous objections pointing out that while such measures may have worked elsewhere, their city is different A similar effort would.be very effective in this country. It would provide local officials with case studies in privatization sample contracts, model bidding procedures designed to frustrate attempts at corruption, and perhaps directories of cities where privatized specific services and private fir ms are available as contractors. Private, nonprofit organizations such as the Reason Foundation's Local Government Center located in Santa Barbara California, and the Sabre Foundation and the Taxpayers' Foundation both of Washington, D.C.) have already de veloped some of the necessary materials.15 l4 John D. Hanrahan, Government for Sale: Contracting-Out, the New Patronage Washington, D.C American Federation of State, Country, and Municipal Employees, 1977). The Local Government Center is compiling a Direct ory of Private Service Providers and publishes a monthly privatization newsletter Fiscal Watchdog The Sabre Foundation has produced a privatization oriented Sourcebook on Enterprise Zones. And the Taxpayers' Foundation published both a handbook Private Co n tracting and a detailed technical manual on contracting, More for Less l5 16 CONCLUSION A fundamental change has taken place in the fiscal relation ship between the federal government and 'localities. City officials must face up to the reality that outsid e aid will shrink, in real terms, over the next decade. Rather than simply accepting the dismal trade-off of either cutting back on public services or raising local taxes, cities would benefit far more by taking full advantage of the various forms of priva tization. By contracting out public services, they can shift from high-cost monopoly producers to lower-cost producers who must compete for the business. By changing from taxes to user fees, they can relieve the burden on already st rained local tax sources. And by selectively shedding the load of certain services altogether (garbage collection transit, certain bridges, and streets they can reduce their public service responsibilities to a more manageable size. The federal government cannot force cities to make these changes. But it can facilitate the process, by providing the legal research necessary to draft model legislation and ordinances and by collecting and disseminating information on how to make privatization work. Such mode st efforts could make a large contribution to the ultimate success of privatization. Prepared for The Heritage Foundation by Robert W. Poole, Jr Robert W. Poole, Jr. is president of the Reason Foundation and serves as director of its Local Government Center. City Hall. He is also the author of Cutting Back
238 January 11, 1983 I I MUNICIPAL SER VICES THE PRIVATlZATION OPTION INTRODUCTION Strong criticism of the Administration's New Federalism form of scaled down block grants, will mean less spending on initia tive has come from the nation's city officials. They assume that the transfer of many programs to the states in the urban areas. The usual response of city officials to funding cutbacks is to present local citizens with an unappealing choice either put up with increases in local taxes or face drastic cuts in public services. Both alternatives pose political and economic risks. Politically, the mood of the country is still against tax increases; Propositions 235 (Massachusetts) and 13 (California still comm and large majorities in their favor. Yet citizens also tend to resist cutbacks in local public services. Unlike many federal government activities, they are generally not perceived as wasteful. This dismal analysis of the situation overlooks another alternative-privatization. States, cities have been discovering that public services do not necessarily have to be produced by government or paid for by taxes lifted, a whole range of possibilities for alternative service delivery opens up. And the evidence to date indicates that services provided via privatization are generally produced more cost effectively than services provided by tax funded local monopolies. Privatization, therefore, offers cities a way out of the dilemma posed by the New Federalism, and i s an effective mechanism to allow cutting the size of the federal budget while maintaining--or even improving--the quality of many services at the local level Here and there around the United Once the government-production/ tax-funding constraint is 2 THE D ILEMMA To understand why the New Federalism proposals have been met with such cries of alarm from local officials, it is necessary to understand the extent to which local governments have become dependent on the federal government. Ever since the New Deal local governments have relied on various forms of I'intergovernmental revenue" for a significant fraction of their income. This fraction increased gradually from 1940 to 1970, growing from one quarter of local revenues to one third-an increase of 8 percen t in thirty years. But during the 1970s, such aid leaped by another 7 percent, mounting to 40 percent of all local revenue. As Table 1 reveals, the principal shift has been for outside aid to offset local property tax revenue. Whereas property'taxes accoun ted for 54.5 percent of local government revenue in 1940 and remained in the 40 percent range throughout the 1950s and 1960s, they had shrunk to 30.7 percent in 1977, the year before Proposition 13 and subsequent grass-roots revolts against property taxes . Table 1 combines federal and state aid to local governments into a single category. While it is true that the fraction of this total going directly from the federal government to local entities had grown from only about 5 percent in 1950 to 22 percent by the end of the 1970s, this figure by itself is not very meaningful because a large fraction of state aid to local governments also is federal in origin. From the local officials' viewpoint, what is most relevant is the total revenue available from outsid e sources. Direct aid from Washington is often preferred, since competing interests within the state do not then have access to the money. But New Federalism threatens the level of all nonlocal revenue. President Reagan's New Federalism proposes to reduce, in absolute terms, the amount of federal aid that has been going to state and local governments. The original (February 1982) plan called for turning over sixty-one federal aid programs to the states, in five categories: education and training, social se r vices, transportation, community development, and revenue sharing. scope, real cuts in aid are planned. This small but definite reduction in the role and outlays of the federal government represents a dramatic reversal of the trend of the last forty years , and especially of the past decade Although the turnback of programs has been reduced in Regardless of how the details of New Federalism are finally ironed out, it seems clear that cities are going to end up with significantly less outside aid over the ne x t decade. Their direct federal aid via such categorical programs as social services and community development will be cut. And their state aid, much of it paid for with federal funds, will also shrink. Cities are faced, therefore, with a painful dilemma: D o they raise taxes or cut services? Either action is politically risky. Or will they n In C 0 d d d rl n W rn aJ E u aJ ai I PIC daJ BE mc eu Y 0 0 d m U 0 I4 C 4 rl In a C aJ Ld b 1" 0 2 0 m d I u U rn rl z LI rn 3 0 In aJ x m e 4 aJ c JJ 0 X m 0 b aJ a 0 k PI k m aJ r)hlococooommou I CE 1 uo ox Q ab u UaJ a b h rl U E m In I U D L4 u V Ld 1 0 rn 4 have the imagination and courage to seek more efficient ways of providing public services? ANOTHER ALTERNATIVE: PRIVATIZATION The conventional approach to prov iding municipal services is I service and to deliver the service as well. The implicit premise in this view is that local public services are all Ifpublic goodsIl--i.e I goods or services that can only be produced and paid for collectively. Yet the fact is that most local public services (other than strictly wealth-transfer functions) have few attributes of true public goods. Most of them--including garbage collection, park and recreation services, libraries, airports, transit, and aspects o f police and fire protection--have specific, identifiable users who are the services' principal beneficiaries. To the extent that discrete user/beneficiaries can be identified, user fees become a viable alternative to taxation as a source of revenue. Moreover, even for services that are closer to being pure public goods, it is not at all clear that government must be the provider. Even where the revenue'is best obtained via taxation, the service can be produced by (a a private, for-profit firm, (b) a nonpr ofit organization, or (c) some other government jurisdiction that may be able to do the job more efficiently for the local government to collect the revenues needed for the Shifting to an alternative means of public service delivery is often referred to a s privatizat1on.l Three variants of privatiza tion are of particular significance in the case of municipal services, namely user fees, contracting out, and load shedding 1) User fees To the extent that a service is shifted from tax funding to user fees, th e tax increase dilemma for revenue squeezed local governments is eased. Moreover, there is much economic evidence that services will be produced more efficiently and responsively when users provide direct feedback through utilization according to the price charged than when they provide only indirect feedback via the political process 2) Contractinq out Contracting out refers to a variety of situations in which local government remains responsible for the funding of a service but selects one or more provide r s by a process of competitive See, for example, E.S. Savas, Privatizing the Public Sector (Chatham N.J Chatham House, 1982 James T. Bennett and Manuel H. Johnson Better Government at Half the Price (Ottawa Ill: Caroline House, 1981 and Robert W. Poole, Jr . , Cutting Back City Hall (New York: Universe Books, 1980). 5 bidding. There are several reasons why this alternative to traditional city provision usually leads to less costly, more responsive services. First, it is not likely that the area defined by a c i ty's jurisdictional limits will coincide with the optimum area for most public services, since economies of scale vary dramatically among public services. A city that is the ideal size for the most efficient garbage collection system is probably far too s mall to provide a water or sewer system at the least cost to residents. Contracting for services permits selection of least cost producers without regard to jurisdictional boundaries. Second, the need to compete for the contract changes the incentives faci ng the provider. In contrast to a conventional monopoly city agency a private firm or a nonprofit agency which must compete with. other providers for, say, a three-year garbage contract, has powerful incentives to rethink its use of personnel and equipmen t in order to deliver the required services in the most efficient manner c) Load sheddinq This third form of privatization refers to a decision by local government to step back and allow the private sector to produce the service and offer it directly to co nsumers. Common examples are commercial and industrial (but usually not residential refuse collection and personalized transit services (taxis). Both are usually left to the marketplace to provide on a voluntary basis, albeit usually with some degree of municipal regulation. Studies of privatization via load shedding suggest that additional current municipal services could be provided this way and that local governments' budget problems would be further eased. EXAMPLES OF PRIVATIZATION A close look at the variety of ways in which public services are delivered across the country reveals numerous examples of successful privatization. And where studies of cost effectiveness have been completed, the evidence strongly supports the theoretical case for signific ant cost savings. Garbaqe Collection Garbage collection is a service that provides examples of all three types of privatization. Commercial and industrial refuse collection is largely a function of the private sector. In large central cities, it is still common for residential collection to be a function of a city sanitation department, and the service is generally provided without charge. But over the last five years a number of cities e.g El Paso and Fort Worth, Texas) have instituted specific fees to p a y exclusively for garbage service. 6 The most important trend over the past decade has been the move toward contracting out residential collection. Nationwide studies in the United States, Canada, and Switzerland, as well as regional studies in Connecticu t and the Midwest, have shown that government garbage collection is 29 to 37 percent more costly than private contract collection.2 These comparisons actually underestimate the true disparity in the United States A study by E. S. Savas found that municipal sanitation department budget practices understate the true cost of service by an average of 23 percent.3 As these cost data have become better known, more and more cities have shifted some or all their residential garbage collection to a contract basis. A mong those doing so in the past decade are Boston, Dallas, Gainesville (Florida), Jackson (Mississippi Minneapolis, Oklahoma City, Omaha St. Paul, and Utica (New York). There are also a few examples of load shedding where cities decide to get out sf the refuse collection business altogether. One such case is Wichita. Until 1978 that cityls municipal sanitation department.provided residential collection in part of the city while the rest was served by private firms which contracted with individual homeowner s workers in 1978, however, the city decided to cease providing garbage services. Resisting pleas to divide the city into districts and franchise a single firm to operate in each on a monopoly basis, city officials instead stepped back and allowed the mar k et place to function. Today there are dozens of companies in the Wichita market; in any given neighborhood, residents have a choice of several firms offering various combinations of price and service. The city's only responsibility is to ensure that each h ousehold makes some provision for disposing properly of its garbage In the wake of a strike by city sanitation Fire Services Although most people do not realize it, fire protection also provides illustrations of all three types of privatization In the wak e of Proposition 13 in California, several cities passed legislation providing for a fire service fee to pay for a portion of the fire department's costs In so doing they were supported by the analysis of such economists as Urban Institute researcher Willi a m Pollak who concluded a decade ago that government provision of fire suppression services at no charge had led to an underinvest I E.S. Savas, "Public vs. Private Refuse Collection: A Critical Review of the Evidence Journal of Urban Analysis, Vol. 6, 197 9. E.S Savas, "Policy Analysis for Local Government: Public vs. Private Collection Policy Analysis, Vol. 3, No. 1 (Winter 1977). 7 ment in fire prevention efforts by building owners. A fire service fee, based on the extent to which a building places a dema nd on the fire suppression system, provides positive incentives to invest in alarm systems, sprinklers, and other preventive measures. Inglewood, California, in 1978, was the first city to actually implement a fire service fee. The plan was for only tlbas iclf fire protection to be funded from property taxes, with a business service financed by fees based on the calculated "fire blow requirements of each commercial and industrial structure. The fee system was put into effect in the summer of 1978, but it p roved politically unpopular, and it was suspended after the first year. Faced with the fiscal stress of Proposition 2 Boston officials introduced a fire service fee in July 19 82. Like the Inglewood fee, it is applicable only to larger commercial and industrial buildings, and is expected to bring in some 8 million a year. But there is already talk of a court challenge by the real estate industry. Fire service fees obviously hav e a long way to go to gain general acceptance. Equally controversial, but with a longer record of success is the practice of contracting out fire service. The best-known example is Scottsdale Arizona, a Phoenix suburb of 90,000 residents which has been ser ved by private fire services under contract since the city was incorporated in 19 52. In 1976 a team of researchers from the California-based Institute for Local Self-Government made a detailed study of the cost and performance of the fire protection syst em in Scott~dale.~ Comparing Scottsdalels fire service with that of nearby Glendale, Mesa, and Tempe (which have conventional government fire departments they found that (1 response time was best in Scottsdale, even though it is the largest in land area 2 ) the insurance rating of the fire departments is comparable--homeowners' rates, in particular, are the same in all four cities, (3) average annual fire loss is comparable in all the cities except Tempe (where it was nearly twice as high as in the other th r ee little between Scottsdale and the other three cities, the per capita cost over the 1971-75 period averaged $6.48 in Scottsdale compared with $12.62 in Glendale 11.43 in Mesa, and $10.68 in Tempe. In other words, by contracting out, Scottsdale was recei v ing comparable fire protection at only 56 percent of the cost in a city such as Mesa While the quality of fire protection differed William Pollak Pricing Fire Protection Services ,I1 in Selma Mushkin ea Public Prices for Public Products (Washington, D.C T he Urban Institute, 1972). Alternatives To Traditional Public Safety Delivery Systems: Civilians in Public Safety Services (Berkeley, California: Institute for Local Self Government, 1977). I 8 Scottsdale is not an isolated example of private fire protecti on It is part of a clear trend towards contracting out. The firm providing fire services in Scottsdale, Rural/Metro Fire Department Inc also contracts with several other Arizona cities. In 1977 the metro government in Nashville/Davidson County contracted w ith five small private f1r.e companies to provide fire services in unincorporated areas. Two years later American Emergency Services Corporation won a contract to serve Elk Grove Township, Illinois adjacent to Chicago's O'Hare Airport. At the same time, H a ll County, Georgia, abolished its fire department and contracted out the service to Rural/Metro of Arizona. In January of 1982, the Hall County contract was won by Florida-based Wackenhutt Corporation the nation's fourth largest private security firm. In a ddition Wisconsin-based J.J. Security, Inc has won fire and crash rescue contracts at the airports in Green Bay and Madison, Wisconsin Oklahoma City, and Kansas City International Airport. There is even a trade association for private fire companies creat ed in January 1982, the Private Sector Fire Association There are also some examples of load shedding in fire protection. In a number of unincorporated communities in Arizona, Georgia Montana, Oregon, and Tennessee, fire services are provided on a subscrip tion basis by private, profit-making companies. In some cases, these firms are the outgrowth of volunteer fire departments as an area develops, citizens often demand a higher level of service than that which can be provided by a strictly volunteer organiz a tion. Because of the threat of fire spreading from house to house in high density urban areas, subscription fire service is not likely to be acceptable in most cities. But it appears to be a viable alternative for lower density suburbs and unincorporated areas. Parks and Recreation There seems to be no clear pattern for changing (or not) the system of park and recreation services. Some cities, such as Washington, D.C make most of these services available with no user fees at all. At the other extreme are c ities like Wheeling West Virginia, and El Cerrito, and Newark, California, whose recreation programs are entirely supported by user fees. The principal objection made against recreation program user fees is that they will deprive the poor. There are two i mportant counterarguments. The first is that generally the poor are already paying for such programs--via property taxes (included in their rent payments sales taxes, and excise taxes. Yet many municipal recreation facilities--tennis courts, golf courses, marinas etc.--are used largely by middle and upper-income people. Although no definitive studies exist, it is likely that significant wealth transfers from the poor to the nonpoor are taking place in recreation programs funded by taxation, rather than by u ser charges. 9 The other counterargument is that the truly needy can always be exempted from the user fees. The Fairfax County, Virginia recreation agency distributes sports complex passes to low-income children identified via the school lunch program. Th e San Juan School District in Sacramento, California, arranges for local businesses to give scholarships for low-income children to attend recreation facilities. And the Los Angeles County Art Museum provides free admission one day per month so that senior citizens and others with low incomes can avoid the (post-Proposition 13 entry fee.6 Contracting out is being used increasingly in park and recreation services. California has seen a great increase in the contracting out of park maintenance since Propositi o n 13. Most cities have dozens of commercial landscaping firms which are well-equipped to take over tree trimming, grass cutting, and other park maintenance chores. The savings typically are 30 percent or more; in Los Angeles County, some initial contracts have yielded 50 percent savings. The operation of park and recreation facilities has also been contracted out. The contractors may be golf or tennis pros commercial firms or nonprofit organizations. In Rohnert Park California, the city was plagued with a money-losing golf course that had become a considerable drain on the taxpayers. The city went out to bid and ended up with a thirty-year lease to a private firm, which is guaranteeing the city a minimum income of $60,000 a year, in addition to rebuilding t he c0urse.l There are even some examples of load shedding in the leisure services area. Long-term leasing of large-scale facilities, such as golf courses, represents de facto load shedding. And the recent adopt-a-park trend onToth the east and west coasts (including the San Francisco Bay Area and New York City) is a form of load shedding, whereby citizen groups and/or local businesses voluntarily agree to take over responsibility for maintaining specific parks. Mass Transit Nearly all municipal transit is operated on at least a partial user-fee basis. The problem is that the fares typically cover less than half of the cost of operation. The reason has to do with the changes in land-use patterns after World War 11 Other examples of park and recreation user fees, and arguments for their use, can be found in Fees and Charges Handbook (Washington, D.C.: U.S. Department of the Interior, Heritage Conservation and Recreation Service 1979). Further examples and guidelines can be found in the Contract Services Hand book (Washington, D.C.: U.S. Department of the Interior, Heritage Conservation and Recreation Service, 1979 10 In the 1950s most transit operations were private businesses As people migrated to the suburbs, political pressures and bad business judgment ca u sed the transit systems to spread out after them. But conventional bus systems found it difficult to-stay profitable in low density areas, and bus systems began to go bankrupt. Nobel Prize winning economist F. A. Hayek speaks of the market as a giant info rmation system. In this case, the market was telling us that'the traditional form of busline was obsolete in the suburbs. But people and politicians refused to listen and cities took over the buslines in an effort to preserve the obsolete structure. When t hat became increasingly difficult for cities, the federal response in the 1960s was to provide capital grants to enable cities to buy new buses. The theory was that new equipment would attract new riders and make the systems viable again. When that didn't work, the next major federal program, in the 1970s provided large subsidies to help pay operating costs. Yet two-thirds of all the increased spending in the 1970s went directly into higher wages for bus driverst8 and transit unions resisted strenuously se nsible measures to hold down costs--such as using part-time drivers at peak hours. Si mply raising user fees to full-cost levels would leave this inefficient transit system intact. Nor would contracting out make much of a difference, though there are transit management firms that can bring about some modest improvements in efficiency withi n the constraints of monopoly structure and price controls. Yet, given the cutback in federal operating subsidies, drastic changes are going to be necessary. Economist James Ramsey has proposed load shedding as the solution for one especially beleaguered transit system--the New York City subways.g Pointing out that monopoly structure (and hence monopoly unionism and highly inefficient staffing practices and price controls are primarily responsible for the system's deterioration, and citing the rising popu larity of private express buses at three to four times the subway fare, Ramsey urges that the subway lines be auctioned off to the highest bidder, to be operated free of any government controls. Other municipal transit monopolies could be treated in the sa me way. If that were done, the transit lfsystemlf that would emerge'would be radically decentralized. If anti-jitney laws were repealed, and taxi pricing and entry restrictions decontrolled as they have been in San Diego), low-density transit in a city Ch arles Lave Dealing with the Transit Deficit Journal of Contemporary Studies, Vol. IVY No 2 (Spring 1981). James B. Ramsey Selling the Subways in New York: Wild-Eyed Radicalism or the Only Feasible Solution?" New York University, Department of Economics Jan uary 1982 11 I could be provided cost effectively by hundreds (or thousands) of jitneys, minibuses, and shared rides in cabs. Such systems operate profitably in many cities in South America and Southeast Asia High-density commuter service would be provide d by dozens of private express bus companies, of the kind that have sprung up in Southern California, New York City, and Chicago. Infrastructure It has become a clichC that the infrastructure--roads bridges, water and sewer systems--in many cities is decaying. The pressure to "do somethingll about this has resulted various federal programs to bail out the cities--most recently, of course the misnamed llrepairll plan, to be funded by an increase in the gasoline tax. What most people fail to appreciate, howe ver, is the institutional nature of the underlying problem. For many years elected officials in the criimbling cities have been balancing budgets by putting off until the next adminis tration needed expenditures on infrastructure maintenance. New York Cit y's water and sewer systems should be being replaced on a 100-year cycle. Instead, they are being replaced on a 300-year cycle. New Yorkls streets are on a 200-year cycle instead of the required twenty to twenty-five years. Needless to say, this cannot go on indefinitely. But politically, it is much easier for officials to heed the pleas of special interest groups for transfer payments and subsidies than to spend money on unglamorous projects like sewer maintenance. Furthermore, federal capital programs fo r new construction only add to the incentive to allow systems to run down to the point where they must be replaced with the help of Washington, rather than properly maintained by regular city expenditures. Privatization provides an alternative answer to th e infrastructure problem If specific public works were placed on a self-supporting basis with user fees, the temptation of politicians to divert general fund money away from maintenance would be eliminated. The key to doing this is the creation of legal m echanisms, which separate the user fee revenue and earmark it exclusively for the system that generates it In California this is frequently accomplished via separate "enterprise funds I' In New York City separate authorities--the Triborough Bridge and Tun n el Authority and the Port Authority of New York and New Jersey--were created for the same purpose. The bridges and tunnels run by the city are in very poor repair; those run by the separate authorities are kept in excellent shape lo See Gabriel Roth and G e orge G. Wynne, Learning from Abroad: Free Enterprise Urban Transportation (Washington, D.C Council for International Urban Liaison 1982). i2 Although the President referred to it as a "user fee the recently enacted federal gasoline tax increase is not a t r ue user charge. For one thing, although it is collected from users of roads, one-fifth of the money is to be spent on mass transit systems. More fundamentally, the gasoline tax.bears only a crude relationship to the relative share of the cost imposed on t h e road system by different types of users. In particular, heavy trucks pay only 60 percent of their fair share of highway costs according to the Federal Highway Administrationls cost allocation studies In contrast, the tolls imposed by turnpike operators- -a type of weight-distance charge--accurately ref.lect the relative costs of serving cars, buses, light trucks, and heavy trucks. Tolls are true user fees: the gasoline tax is not. Proper user charges--for example, water and sewer bills or bridge tolls--can be the key to solving the infrastructure problem as long as they can be legally earmarked to prevent diversion. But what about the roads? For over a decade economists have set forth the virtues of tolls on urban expressways. Not only would adequate fun ds for proper maintenance be assured, but the use of time-of-day pricing would provide economic incentives to reduce rush-hour congestion In addition to political resistance however, a principal drawback has been technological. Automated vehicle identific a tion (AVI) systems, which would allow vehicles so equipped to bypass toll booths and be billed once a month were simply not on the market. The good news is that such systems are nearing commercial feasibility.ll The New York Port Authority is planning a l arge-scale test of several systems in the near future. Once such systems are in production, the practical barrier to user fees on urban expressways will be removed. Contract operation of public works is also a viable option. A number of cities and special districts have had great difficulty operating modern sewage treatment plants in compliance with EPA requirements. At least two companies-Envirotech Systems, Inc and Environmental Services, 1nc.--have succeeded in winning contr acts to operate such facilities for local governments. There is even a role for load shedding in public works. Both Laredo, Texas, and St. Louis actively encourage residents to purchase neighborhood streets which carry little through traffic. A study by noted urban planner Oscar Newman found that privatized streets in St. Louis, many of them in poor neighborhoods, became islands of tranquility in the midst of chaos. Crime dropped substantially and investment in home.repair and maintenance rose because pe o ple who had formed a neighborhood association to l1 R.S. Taylor-Radford Rush-Hour Remedy Reason, Vol. 13, No. 9 (January 1982). 13 purchase the street felt very protective about their block.12 In addition, serious suggestions have been made that bridges b e privatized gave examples of privately owned bridges (e.g. Ambassador Bridge linking Detroit and Windsor, Ontario) and pointed out the financial advantages that accrue to investors--sizable cash flows and huge depreciation ~r1te-offs.l~ Full-fledged priva t ization via load shedding may be the most feasible way of raising the billions of dollars needed to repair America's 200,000 deficient bridges A detailed.cover story in Technoloqy magazine IMPLEMENTING PRIVATIZATION The foregoing discussion has made clear that privatization techniques make it possible to provide more public services for less money, especially less tax money. Why, then, aren't these techniques more widely used? The fact is that certain legal tax, political, and psychological barriers to pri vatization must be addressed before the full benefits can be realized. Legal constraints Local officials do not always have the legal authority to privatize services. State laws vary in what they allow local government to do. In some states, for example, c ontracting out public safety services (e.g. police patrol) to private firms is not permitted. Other states impose no such restriction In other cases, what is permissible for one form of local government such as charter cities) may not be permissible for o t hers (such as general law cities; special districts). Even the pricing of public services is frequently constrained by legislation. In some cases, charges of any kind may not be imposed; in other cases shortsighted restrictions on the type of charges (e.g ., prohibiting peak-load pricing) may exist. What is needed at the state level is legal clarification of the right of all units of government to contract out, charge for and/or simply supervise any and all public services. The federal government could assi st by drafting model legislation for consider ation by state legislatures. HUD's Division of Governmental Capacity Sharing should be the lead agency for researching and drafting such a model privatization law Tax Barriers Another barrier to privatization- -spec,ifically to user charges and load shedding-is tax discrimination. State and local tax payments are deductible from citizens' federal income l2 Oscar Newman, Community of Interest (New York: Doubleday, 1980). Jeanne McDermott Bridges: Back to Private Enterprise Technology, Vol. 1, No. 2 (January-February 1982). 14 tax bills. But direct payments for public services, whether a user fee to local government or a fee paid directly to a private firm, are not deductible. Thus, taxpayers often object to propo s als for privatizing services on the grounds that they will have to pay more in federal taxes A useful reform at the federal level, therefore, would be to enumerate the public services traditionally provided by local government--police, fire, recreation, p a rks, garbage collection and allow fees for these services, whether public or private to be deductible from federally taxable income. This would put user-charge funded public services on an equal footing with tax supported, governmentally produced public s ervices. Another tax barrier exists at the local level. When citizens provide and pay for their own public services (e.g a neighborhood association takes over responsibility for a street) rather than obtaining them from local government, they usually must continue to shoulder the same local tax burden as citizells who are not providing any of their own services. A sensible local reform would therefore be to provide tax credits against local property taxes for all expenditures by neighborhood or homeowners' associations which, by providing substitute public services, relieve the load on tax supported services. Once again, HUD could research and draft a model ordinance A precedent for this approach to privatization exists in Kansas City, Missouri, where, down t own, the garbage service is provided by a city department, and in the suburbs by private firms under contract with the city. In both cases, funding comes from local taxes. But Kansas City allows neighborhood associations and apartment buildings to opt out and hire their own garbage service, for which they receive a per-household rebate on property taxes from the city. As of 1978-1979, some forty-one homeowners associations had opted out and were being served by twelve different garbage collection firms. Fe deral Rules A third barrier concerns local mass transit agencies. In order to implement the load shedding option, existing local transit agencies must be free to declare bankruptcy and sell off their assets to would-be private enterprise providers. Yet be c ause nearly all of these systems' vehicles have been purchased with 80 percent funding from the Urban Mass Transit Administration that federal money would have to be returned to UMTA upon dissolution of any of its grantees. Clearly, such a regulation is c o ntrary to the public interest in solving severe transit problems of cities A helpful reform at the federal level would be to rescind UMTA regulations requiring repayment of the grant funds, provided that the vehicles remained in service to the public unde r the new ownership following the dissolution of an existing mass transit agency. 15 lead to political corruption in the selection of contractors. If privatization is to spread, the answers to these claims must be made available to local officials All of t hese factors suggest the need for developing and disseminating information on privatization to local officials. In England, the Adam Smith Institute has developed and implemented an extensive privatization information program, including a basic Government and Union Obstruction A fourth type of barrier is political and psychological the resistance of city officials to privatization. In part, this simply reflects the generally status quo orientation of- local politicians and bureaucrats. After all, for decad e s city department heads have been rewarded in proportion to the size of their departments, not how cost effectively they were operated. City officials are not used to thinking of themselves as facilitators of public service delivery rather than direct pro d ucers of the service. So they tend to resist privatization proposals and are skilled at coming up with numerous objections pointing out that while such measures may have worked elsewhere, their city is different A similar effort would.be very effective in this country. It would provide local officials with case studies in privatization sample contracts, model bidding procedures designed to frustrate attempts at corruption, and perhaps directories of cities where privatized specific services and private fir ms are available as contractors. Private, nonprofit organizations such as the Reason Foundation's Local Government Center located in Santa Barbara California, and the Sabre Foundation and the Taxpayers' Foundation both of Washington, D.C.) have already de veloped some of the necessary materials.15 l4 John D. Hanrahan, Government for Sale: Contracting-Out, the New Patronage Washington, D.C American Federation of State, Country, and Municipal Employees, 1977). The Local Government Center is compiling a Direct ory of Private Service Providers and publishes a monthly privatization newsletter Fiscal Watchdog The Sabre Foundation has produced a privatization oriented Sourcebook on Enterprise Zones. And the Taxpayers' Foundation published both a handbook Private Co n tracting and a detailed technical manual on contracting, More for Less l5 16 CONCLUSION A fundamental change has taken place in the fiscal relation ship between the federal government and 'localities. City officials must face up to the reality that outsid e aid will shrink, in real terms, over the next decade. Rather than simply accepting the dismal trade-off of either cutting back on public services or raising local taxes, cities would benefit far more by taking full advantage of the various forms of priva tization. By contracting out public services, they can shift from high-cost monopoly producers to lower-cost producers who must compete for the business. By changing from taxes to user fees, they can relieve the burden on already st rained local tax sources. And by selectively shedding the load of certain services altogether (garbage collection transit, certain bridges, and streets they can reduce their public service responsibilities to a more manageable size. The federal government cannot force cities to make these changes. But it can facilitate the process, by providing the legal research necessary to draft model legislation and ordinances and by collecting and disseminating information on how to make privatization work. Such mode st efforts could make a large contribution to the ultimate success of privatization. Prepared for The Heritage Foundation by Robert W. Poole, Jr Robert W. Poole, Jr. is president of the Reason Foundation and serves as director of its Local Government Center. City Hall. He is also the author of Cutting Back
