Rural. Innovation in Rural Illinois: Contracting Practices in Nonmetropolitan Counties. by Robin A. Johnson and Norman Walzer 1

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1 Rural RESEARCH REPORT Published by the Illinois Institute for Rural Affairs Stipes Hall 518 Western Illinois University 1 University Circle Macomb, IL Innovation in Rural Illinois: Contracting Practices in Nonmetropolitan Counties Winter Volume 10, Issue 4 309/ Local governments across the United States face difficult issues that have, in turn, forced them to consider alternative approaches to service delivery. Unfunded intergovernmental mandates, demands for new and improved services, citizen opposition to tax increases, and devolution of more services to local governments are just some of the issues encountered. In Illinois, county governments face similar issues, plus the challenge of property tax caps and other restrictions on their ability to govern. 2 Officials in nonmetropolitan counties are further challenged by demographic and population changes adversely affecting finances and service delivery methods. Population declines, increasing numbers of elderly residents, and stagnant tax bases have forced officials in rural counties to consider alternate methods of service delivery. Traditionally, local officials have selected one of two options in the face of financial difficulties: (1) increasing revenues or (2) decreasing expenditures. This choice has usually resulted in raising taxes, borrowing, or cutting services. Innovative officials have discovered a third option to dealing with financial stress: increasing efficiency in operations through intergovernmental agreements and privatization of services. by Robin A. Johnson and Norman Walzer 1 Innovative officials have discovered a third option to dealing with financial stress: increasing efficiency in operations through intergovernmental agreements and privatization of services. The number of these agreements has increased as officials try to reduce the cost of government while maintaining, or enhancing, the quality of services. While much research has been conducted on innovative management techniques in large units of local government, little is known about contracting strategies in counties, especially those in nonmetropolitan areas. This report examines the extent of contracting in rural counties in Illinois and the process that county officials use to arrive at contracting decisions. Findings are based on a 1994 mail survey of county governments in Illinois and numerous discussions with local officials who have successfully implemented innovative strategies. The survey was undertaken by the Illinois Center for Competitive Government, a partnership between the Office of the Comptroller and the Illinois Institute for Rural Affairs located at Western Illinois University. Statewide, 57 of 102 counties responded to the survey, a 55.9 percent response. This report presents findings from the 20 (39.3 percent) respondents in nonmetropolitan adjacent counties and 24 (39.3 percent) in nonmetropolitan rural counties. 3 1 The authors are director, Illinois Center for Competitive Government, a cooperative arrangement between the Office of the Comptroller, State of Illinois, and the Illinois Institute for Rural Affairs at Western Illinois University; and director, Illinois Institute for Rural Affairs at Western Illinois University. Layout by Darrell Sutton. 2 Currently, 32 of 102 counties in Illinois have property tax caps that limit the growth of property tax revenues. 3 Illinois has 28 counties located in Metropolitan Statistical Areas (MSAs) as defined by the U.S. Bureau of the Census. The other 74 counties are categorized as nonmetropolitan and are further classified as adjacent or rural/remote. There are 32 counties adjacent to metropolitan counties to which they have close economic and social bridges. The remaining 42 counties are nonmetropolitan remote and are largely located in rural areas. 1

2 Factors Causing Innovative Management A variety of factors cause local officials to consider alternate service delivery techniques. Size and population trends can create pressures to manage counties more efficiently. In Illinois, many counties have small populations that lead them to consider alternative arrangements with another local government or a private firm. For example, 41 counties have fewer than 20,000 residents. In addition, 12 counties are smaller than 10,000, and one has a population fewer than 5,000. Counties with small populations may find it necessary to coordinate services with other governmental units to avoid duplication and to increase efficiency. Financial pressures are another common reason cited by county officials for contracting a service. Contracting can reduce the cost of government and yet maintain the level and quality of services. Since property taxes are the largest revenue source for counties, tax caps that limit the growth of property tax dollars have forced officials to examine contracting as an alternate service delivery method. Of the 32 counties with tax caps, eight are adjacent counties and nine are rural/remote counties. The survey asked county officials about current and future financial conditions. Statewide, most officials (57.1 percent) report stable conditions with adequate revenues but not enough to expand services or reduce taxes. These findings are reasonable given the relative economic prosperity and low unemployment in recent years. While jobs are relatively plentiful, for the most part, service jobs with minimum wages have replaced higher paying employment opportunities in many counties. Growth in lower paying service jobs, especially in rural areas, adversely impacts county revenues because increases in sales taxes and property taxes often vary with income changes. Agriculture is important in many rural counties and, following several years of favorable prices for crops, prices since 1998 have fallen dramatically, placing significant pressures on many small farmers. Reduced farm incomes could translate into stagnant or lower levels of sales tax revenues. These economic concerns are shown by comparisons of statewide numbers on current financial conditions. Metropolitan counties rated the current financial condition better than those in adjacent or rural areas where 27.3 percent reported they may reduce services because of inadequate revenues. In fact, all of the counties in the survey that reported possible service reductions are rural. Also, half the rural counties report inadequate revenues at the current time. This finding supports other trends such as slower population growth and a growing divergence between wages in metro and nonmetro counties. 4 County governments across Illinois are less sanguine about their financial outlook in the near future. Overall, nearly half (43.6 percent) of reporting counties face inadequate revenues. Many officials in rural counties expressed concern about future trends, especially if the economy experiences a downturn. Future prospects are worse in rural counties, with 54.5 percent reporting inadequate revenues and 31.8 percent projecting reductions in services (Figure 1). Rural counties with tax caps are also more likely to report financial difficulties compared with rural counties without tax caps. Officials from adjacent counties reported the most stable financial future with 57.1 percent projecting adequate revenues but not enough to expand services. This group is mixed; some suburban counties, especially in the Chicago area, are prospering while adjacent counties surrounding slower-growing or declining areas in southern Illinois are not experiencing similar growth. Figure 1. Future Financial Conditions 20.0% Statewide 9.1% 31.8% Rural 9.1% 23.6% 47.3% Adequate revenue and able to reduce taxes Inadequate revenue but not reducing services 22.7% 36.4% Adequate revenue but but not not able able to to expand services Inadequate revenue and reducing services Source: Illinois Center for Competitive Government, County Privatization Survey, Crump, Jeff. Winter Hard Work and Low Wages: Earnings Among Rural Workers in Illinois. Rural Research Report Vol. 6, Issue 2. Macomb: Illinois Institute for Rural Affairs. 2

3 Extent of Contracting County governments in Illinois provide many basic services for residents, including law enforcement in unincorporated areas, jail operations, administration of the judicial system, highway maintenance, operation of the election system, and health care services. The number and types of services provided by counties depend on citizen demands and the financial resources available. Counties generally provide fewer public services than municipalities; nevertheless, they provide a broad range of vital services, especially in rural areas. They privatize services less often than municipalities because some county services are poor candidates for contracting due to a lack of private sector involvement such as in the administration of the election and judicial systems. According to survey responses, nearly half (49.1 percent) of the responding counties contract with private firms for 10 or more services, and 12.3 percent have privatized at least 20 services or parts thereof. Metropolitan counties are more likely to contract than nonmetropolitan counties. For example, 61.5 percent of metro counties contract at least ten services compared with 55.0 percent of adjacent counties and 37.5 percent of those classified as rural. Most counties contract at least a few services. Similar results were found regarding intergovernmental agreements. Statewide, 57.3 percent of responding officials reported that their county provides services for other governments by contract, with results varying by size and type of county (84.6 percent in metropolitan counties compared with 54.5 percent in adjacent and 45.5 percent in rural). Large counties with more resources offer a broader range of services and are in a better position to provide services through contracts. Services Contracted. Counties are likely to contract with private firms for services that have widespread private sector involvement. Intergovernmental agreements are common for services where equipment and personnel can be efficiently shared or where a large government can provide a service for a small one. The survey explored the extent of contracting in several areas (Figure 2): Public Works/Infrastructure Public works services, especially infrastructure projects, offer opportunities for contracting with private firms and other governments. For example, 70.6 percent of responding nonmetro counties contract with private firms for commercial solid waste Figure 2. Services Contracted with Private Firms in Nonmetro Counties EMS Emergency vehicles Delinquent tax collection Bill collection Building security Compost/yard waste services Tree trimming Food service Fleet maintenance Ambulance Recycling Commercial solid waste collection Solid waste disposal Residential solid waste collection Vehicle towing 11.8% 12.1% 12.2% 15.0% 16.7% 20.8% 22.7% 26.3% 27.3% 27.8% 37.0% 70.6% 74.2% 76.5% 80.8% Source: Illinois Center for Competitive Government, County Privatization Survey, % 20% 40% 60% 80% 100% 3

4 collection and 76.5 percent for residential solid waste collection. Carroll County is one of many counties that reported its most successful example of contracting is solid waste services. In addition, 22.6 percent of counties report providing public works services, such as composting, for other governmental units. Highway Maintenance While most counties provide highway maintenance services in-house, some (e.g., Massac and Clay Counties) contract with private firms for construction and specialized projects where they do not have staff with adequate experience. Some of the most innovative intergovernmental agreements in nonmetro counties involve highway maintenance. For example, several counties share the services of a highway engineer. In three counties Coles, Moultrie, and Piatt the highway department contracts with township road districts for routine maintenance on county roads. Public Safety Nearly half (45.3 percent) of responding counties report that they provide public safety services for other governments through contractual agreements. One common form of intergovernmental agreement is county sheriffs deputies providing patrols for small villages. Examples of such agreements include Lee, White, and Hancock Counties. Rural counties experiencing economic decline and population loss will probably see increases in police protection contracts in the future, because of a greater need for services and the potential cost-savings. Nonmetro sheriffs also report using contracts for operation of county jails. Some counties (e.g., Coles and DeWitt) are earning funds by housing prisoners from nearby overcrowded prisons or jails. Three counties in southern Illinois Union, Alexander, and Pulaski entered into an innovative publicprivate partnership to create a regional jail facility.... all of the counties in the survey that reported possible service reductions are rural. Health Services Contracting arrangements for health services primarily involve county health departments entering into agreements with neighboring counties or local health agencies. Crawford County officials report that privatized services in the health department are among the best examples of contracting in the county. Because healthrelated expenditures are growing more rapidly than any other spending category in counties, contracting for health services will likely increase in the future. Administrative/Support Services These services are prime candidates for privatization because private markets already exist for these services. Additionally, intergovernmental agreements are likely because most counties provide internal administrative/ support services and can save funds, increase efficiency, and avoid duplication through cooperative arrangements. Successful examples of contracting for these services include bill collection, payroll administration, fleet maintenance, building security, and janitorial services. For example, Vermillion County has saved approximately $20,000 annually since 1994 through competitive bidding for janitorial services without layoffs of maintenance staff. Privatization Trends. Contracting with private firms is more prevalent in large metropolitan counties with more services and, thus, greater opportunities for privatization and cost savings. To better understand past trends and future contracting opportunities, county officials were asked how the number of current contracts compares with five years ago, and whether the county plans to increase contracting in the next five years. While most officials report the current number of contracts is about the same as earlier, 4.8 percent of adjacent counties and 10.0 percent of rural counties say the number has increased. Nearly one in 10 (9.5 percent) of adjacent counties report fewer contracts. Privatization of public safety services exists mainly for specific support functions such as food services. Stephenson County reported its sheriff s department saved money through privatized food services. Officials from adjacent counties more often privatize ambulance services (41.2 percent) and contract with other governments (23.5 percent) than rural counties. This is probably because their location is closer to qualified private bidders and to public sector ambulance systems in metro areas. According to survey results, the level of contracting in nonmetro counties will stay the same in the near future. No nonmetro counties report expected increases in contracting in the future and one rural county reported an expected decrease. One explanation of these responses is the fact that small counties may not offer many opportunities for large cost-savings. Employees may already perform more than one job; this provides flexibility and versatility in county operations. Some county seats are small, and private firms offering services that could be contracted may not be available. Also, it could be that most counties have a proper balance of services provided in-house and by private firms. 4

5 The Contracting Process The decision to contract with a private firm for services involves many key issues. Successful privatization agreements or intergovernmental contracts require a systematic process that considers cost-savings, employee displacement, performance monitoring, customer service, and public acceptance. The survey covered several issues related to privatization and contracting to determine whether officials adopted methods recommended by experts to ensure successful agreements. The Decision To Contract. Officials contract services for many reasons and under varying circumstances. In some cases, county officials may examine service delivery alternatives during a general review of operations. There are also times when the decision to privatize results from an emergency, such as a financial crisis or impending deadline to meet state or federal environmental regulations. While most officials enter into contracting agreements as part of a planned, systematic process, nearly one in five (18.2 percent) officials in rural counties report contracting because of a budget crisis or other perceived emergency. This figure is higher than the statewide average of 11.8 percent and points to the less certain financial condition in many small counties. Rural counties may also have less flexibility to respond to tightened regulations from the state or federal governments. Officials also listed the three most important factors causing them to consider contracting. While most respondents, statewide, cited internal financial pressures as the leading factor, officials from rural counties reported external financial pressures most often. This could involve property tax caps imposed by voters or statutory limitations on revenue alternatives. Rural officials also more often cited concerns about liability than other officials. This is because a major claim could have a devastating financial impact on a small government with fewer resources. Selling Privatization. Entering into a privatization agreement can generate controversy and fierce opposition from groups who perceive that they will be adversely affected. Public employees, supervisory personnel, employee unions, and users of a service may feel that a privatization plan will harm their interests. To overcome the fears and possible misinformation about privatization, public officials use several... county officials adopted a rational, well-thought-out approach to identify and develop contractual agreements. methods to provide accurate information and communicate their intentions. Survey respondents were given a list of methods through which privatization could be promoted and were asked to choose the three used most often. The responses show that county officials adopted a rational, well-thought-out approach to identify and develop contractual agreements. While most officials (78.3 percent) statewide analyzed the feasibility of a privatization arrangement before moving forward with a proposal and ultimate implementation, the responses vary by size and location. Fewer officials from rural counties (66.7 percent) adopted this approach, probably because they have insufficient staff to conduct an analysis. Still, the fact that two-thirds of rural counties conducted an analysis shows the care with which officials enter into the privatization process. Officials from adjacent (77.8 percent) and rural (66.7 percent) counties were more likely than officials from metro counties to identify successful use of privatization in other jurisdictions as part of their decisionmaking process. Obstacles. Many groups may oppose a privatization agreement because they do not understand how it might work. Elected officials may sense a loss of control over public policy decisionmaking. Employees, unions, and supervisory personnel may perceive a threat to their jobs and livelihood. Most officials (70.0 percent) from adjacent counties cite lack of evidence of the effectiveness of privatization as a leading obstacle. The fact that local officials make better decisions about contracting based on accurate data means that officials need more and better information about privatization. An equal number of officials report loss of control as a major obstacle. Officials may fear that private firms provide lowquality services and that the governing entity will be unable to do anything in response. In practice, these concerns are overcome with an effective performance monitoring and control contract, but some officials may still remain unconvinced. Another 40.0 percent of officials from adjacent counties reported an insufficient supply of qualified local private companies to provide a public service under review for contracting. This is more common in nonmetro areas where fewer qualified contractors exist. 5

6 The leading obstacle reported by officials from rural counties (62.5 percent) was restrictive labor contracts. These can include an agreement restricting contracting to only services not currently provided by the county or one mandating a minimum level of cost-savings before contracting. Surprisingly, fewer rural officials (25.0 percent) reported an insufficient number of qualified bidders than those in larger counties. This could be because rural counties offer fewer services and do not contract much for those they currently provide. Contract Monitoring. Once a private firm has been chosen, a system must be in place for a county to monitor the contractor s performance. A common mistake is to assume that all of the responsibilities rest with the contractor after execution of the contract. In fact, the county is still accountable for the costs and quality of services provided. A major cause of failure in privatization agreements is disagreements and misunderstandings regarding contract language, roles, and responsibilities. Overall, approximately three-quarters of responding counties (75.7 percent) have a contract monitoring system in place. The response varies by size of county, with adjacent and rural counties slightly less likely to have monitoring systems in place because they have less staff and fewer resources to manage this type of system. Most rural counties (77.8 percent) report a department head has oversight responsibility for contracts. Fewer adjacent counties (45.5 percent) report departmental oversight, and 18.2 percent say responsibility rests with a county administrator. Larger counties are more likely to have the resources for a full-time county administrator. Success Factors. Overall, most officials in nonmetro counties (68.1 percent) judged privatization to be a success in at least a few instances. More than one-third (36.3 percent) rated privatization a success in most cases, with 31.8 percent reporting they did not know. It is significant, however, that no county official responding to the survey said privatization failed. The leading success factor in nonmetro counties was financial considerations; quality of work was cited second among adjacent counties, while past experience was cited second in rural counties. Presumably, counties saved money while providing a similar or better quality of service through the privatization agreement. Consequently, privatization meets the expectations of officials who cited financial concerns as the main reason they entered into contracting in the first place.... no county official responding to the survey said privatization failed. Employee Issues. Lack of active support and involvement of employees make the privatization initiative more difficult and could lead to failure. It is important to involve employees early in the process and to keep them informed in regards to the benefits, costs, and potential of a privatization agreement. Providing employees with accurate data may overcome unwarranted fears and make them better participants in the decisionmaking process. Among nonmetro counties, 34.1 percent of officials reported that privatization had no effect on public employees. This could be because the service contracted was newly provided. Three counties said affected employees were hired by the private contractor, two reported that affected employees retired, and six reported a combination of strategies to accommodate impacted employees. Other options include transferring displaced employees to other government positions or reducing the workforce through attrition. Significantly, no county in the survey relied solely on layoffs to achieve a privatization agreement. Two nonmetro counties reported layoffs as part of a combination of strategies. This finding shows most counties adopt strategies that minimize the effect on employees impacted by a privatization agreement. Unionized employees affected by privatization efforts may be concerned whether the contract is simply a way of breaking the union. The survey asked whether affected employees were unionized and whether the private firm recognized the union. Only two nonmetro counties reported that employees were unionized. Of those counties, one said the private contractor recognized the union in some cases, and one reported the union was not recognized. The small numbers make generalizations from these comparisons difficult. Most responding officials did not know the levels of wages or benefits provided by the private contractors. Of respondents able to compare, 33.3 percent reported wages were about the same and 24.0 percent said benefit levels were similar. More than one-fourth (25.9 percent) of nonmetro officials reported wages were higher in the private sector and 11.1 percent said they were lower. Among respondents, 12.0 percent reported benefits paid by private firms were more than the county provided, an equal number reported they were less. Overall, based on the survey findings regarding employee issues, there is little evidence that employees are worse off as a result of a privatization agreement. 6

7 Cost Savings. County officials typically view costs as the main reason for consideration of a privatization agreement. When asked if their county saved money through privatization, 56.3 percent of nonmetro officials said yes in at least some instances. In rural counties, 12.5 percent of respondents said they saved money in most instances. Private firms achieve cost-savings through more efficient purchasing practices and other economies of scale. They can bring expertise to local governments and save money through better management practices gained from working with other governments. For example, private firms have accountants, labor relations specialists, and other expertise available in-house that would have to be hired separately by a local government. Private companies can use specialized equipment and computers not readily accessible to small public entities. Through these and other techniques, private firms can bring greater efficiencies in providing services, maintain the level of services, and still save money. Cost Comparisons. Before public officials can make informed decisions about whether a service can be provided less expensively with a private firm, they must grasp the total cost of providing the service in-house. Without detailed cost information, public officials have no way to determine the delivery method of least cost. This can be difficult because many costs are allocated to different parts of the public agency. Significantly, no county in the survey relied solely on layoffs to achieve a privatization agreement. issue can become monopoly versus competition, not public versus private provision of services. Competition can create efficiency, stimulate innovation, and achieve cost-savings, but does not always mean that the private company receives a contract to provide the service. An alternate process is managed competition where public employees structure bids and compete against the private sector. In the mail survey, 89.5 percent of adjacent and 80.0 percent of rural counties report that most county contracts with private firms are competitively bid. In addition, 78.9 percent of adjacent and 70.0 percent of rural counties report sufficient contractors on most county contracts. The differences by size are probably because there are fewer qualified contractors to bid on contracts in rural areas. Only two nonmetro counties allow employees to bid on contracts, a number too small to permit generalizations. Information Sources. County officials considering contracting for a service require access to accurate and dependable information. Small counties in remote areas do not have the same access to information as larger counties with full-time administrators and adequate staff and resources. Because privatization can evoke intense and emotional feelings in opposition and because of potential misinformation on its benefits and drawbacks, it is imperative that county officials have access to accurate information. In nonmetro Illinois, most adjacent (70.0 percent) and rural (55.0 percent) counties report comparisons of private sector and in-house costs. Small rural counties are less likely to conduct cost comparisons. Further research is needed to determine the methodologies used and the accuracy of the results. Competitive Bidding. Competitive bidding is the most common procurement method used by local governments, and most purchases or contracts involving capital improvements or equipment are competitively bid. Purchases of more than a specific dollar amount are required by statute and/or ordinance to be competitively bid. Competition for government services works best when an adequate number of qualified bidders exists. Simply turning over a public service to a private firm in a monopoly situation can result in lower quality services at a higher cost. The real Nearly half (49.8 percent) of adjacent counties use a combination of sources for information. One-fourth rely solely on private contractors for information; these may be firms currently contracting with the county. Most officials (36.4 percent) in rural counties identified other county officials as the most useful information source. Some officials (40.0 percent) expressed a desire for more information about privatization practices. The reason more do not is probably because they do not actively engage in privatizing services or because they offer limited services that do not lend themselves to contracting. The topics officials identified as needing more information about most often are cost comparisons between in-house and contracted services, effective bidding systems for competitive contracting, performance reviews, and contractor evaluation. 7

8 Summary Innovative county officials from nonmetro areas across the state have discovered a third option in response to financial stress increasing efficiency in operations through alternative service delivery techniques. In some cases, officials have been able to avoid the traditional options of raising taxes or cutting expenditures by introducing innovation and competition into the service delivery process. At the very least, officials have been able to delay unattractive choices or make them an option of last resort. While many creative efforts occur in larger counties, this report clearly demonstrates that counties of all sizes and from all regions of the state are adopting innovative ways to provide services through contractual agreements with other governments and private firms. Neither idea is a panacea for county governments.... Privatization and intergovernmental agreements are simply management tools that officials should consider in facing the financial challenges of the future. The Rural Research Report is a series published by the Illinois Institute for Rural Affairs to provide brief updates on research projects conducted by the Institute. Rural Research Reports are distributed to public officials, libraries, and professional associations involved with specific policy issues. Printed on recycled paper Neither idea is a panacea for county governments. Each is suited to some services but not for others. Privatization and intergovernmental agreements are simply management tools that officials should consider in facing the financial challenges of the future. Both involve risks that should be recognized by county officials and dealt with in an open and honest fashion. Both also offer opportunities for greater efficiency in operations and cost-savings with minimal impact on employees. If properly considered, and carefully planned for and implemented, contracts with other governments and private firms will probably be more widely used by county officials in the future. Illinois Institute for Rural Affairs Stipes Hall 518 Western Illinois University 1 University Circle Macomb, IL NONPROFIT U.S. Postage PAID Macomb, IL PERMIT No