RESEARCH REPORT. Rural. Privatization of Municipal Services in Illinois

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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 City governments, large and small, have experienced several trends since the early 1980s that markedly changed the ways in which they finance services. Cutbacks by the Federal Government in financing services pressured local officials to find less expensive ways to provide services. The general conservative shift at the federal level and the need to balance the budget brought pressures for government downsizing. Part of the privatization movement is carried over from the business world where many larger corporations reduced the number of middle-managers in an effort to become more profitable and compete more effectively in the global marketplace. In the 1990s, contracting became part of the movement towards competitive government, where public employees competed against private firms for the right to perform public services. The attitude changed from a conservative thrust to a more progressive approach, where the issue became not public versus private, but monopoly versus competition to bring more efficiency and productivity into the provision of public services. Privatization of Municipal Services in Illinois by Robin A. Johnson and Norman Walzer 1 Summer 1996 Volume 7, Issue / services. In some instances, privatization efforts were necessitated because cities could no longer afford to provide the same number of services as in the past. In other cases, local public officials realized the potential benefits of having businesses provide certain services and they were willing to experiment with new arrangements. This report examines the efforts by Illinois cities to privatize or at least work more closely with private businesses to produce services that typically were provided completely by city governments. The analyses are based on a 1995 mail survey of Illinois cities (1,284) conducted in a cooperative effort between the Institute for Rural Affairs, the Local Government Affairs Division of the Office of Comptroller Loleta Didrickson, and the Illinois Municipal League. A total of 516 usable returns were obtained, a response rate of 40.5 percent. In subsequent analyses, results are presented by city size less than 1,000; 1,000 to 4,999; and 5,000 or greater. This classification system permits a better understanding of how small cities and larger cities differ in privatization efforts. For many years, there has been a sense that private businesses could provide services typically financed by public agencies at a lower cost. Studies of refuse collection suggested that contracting with the private sector reduced the costs to the city mainly through productivity improvements. Another example is a city such as Scottsdale, Arizona, which led the way in finding innovative ways to provide fire protection. For obvious reasons, not all of those associated with municipal governments greeted these innovative approaches with equal enthusiasm. Public employee organizations feared a loss of jobs. Municipal managers saw reduced control over city services through privatization and, in many instances, the number of employees in an agency reflects status within the city government. Public pressures for smaller government and the need for more partnerships with the business community, however, caused many cities to explore new methods of privatizing Several topics are addressed in detail: First, the types of services most often privatized are described with an attempt to speculate why they tend to be selected; second, the successes of cities with privatization efforts are addressed; third, the procedures used by cities to contract are explored; and fourth, the effects of privatization on public employees are examined with special attention paid to whether the number of employees was reduced. Examples of privatization efforts are discussed throughout the presentation. Technically, differences exist between contracting for a service and privatization. Contracting implies that the city government still has much control over the types of services provided, scheduling, and other service characteristics. Privatization usually implies that the service has been transferred to, and is under the control of, a private business or agency. This distinction has not been made in this analysis and contracting is used almost synonymously with privatization. 1 The authors are director, Local Government Affairs Division, Office of the Comptroller, and director, Illinois Institute for Rural Affairs, Western Illinois University. The Institute and the Local Government Affairs Division have had a cooperative agreement in effect since 1993 to conduct research into local government financial and administrative issues. The authors would like to thank Lori York and Stacey Swisher, IIRA, and Jennifer Van Kirk, an intern with the Comptrollers Office, for their assistance with this project. Layout by Nancy Baird.

2 Privatized Services Privatization exists on two levels in Illinois. In small towns, contracting for services has a long history as a way to avoid expensive labor or equipment costs and liability concerns. In larger cities, officials are turning to privatization as a way to reduce costs while maintaining or improving the quality of services. In Illinois, contracting is fairly widespread, with almost every municipality reporting contracting for at least one service and nearly every one of the 82 services listed is contracted by some city. Many cities use contracting for a large number of services. For example, 274 municipalities (52.7 percent) of the total respondents contract for at least ten services and 418 municipalities (80.4 percent) contract for at least five services. The city services most often reported provided by private entities are public works such as waste collection and disposal. Statewide, 87.7 percent of the municipalities reported private residential solid waste collections and 92.6 percent had commercial solid waste collection provided by private firms (Table 1). These services are provided in at least three ways. Some cities collect refuse using a city crew financed through local revenue sources. Others contract with a private business to provide a certain set of services on a regular schedule. Still other cities have a competitive system in which competing private collectors contract directly with residents for service. In some cities, these arrangements have been in effect for many years. The early evidence suggests that private contractors can provide comparable services at lower cost to residents. 2 Beecher (pop. 2,000) has successfully contracted for refuse collection and reduced the cost to households by nearly 50 percent. Prior to 1990, the village had an open market where citizens individually contracted with private firms for these services. According to the village administrator, several problems arose with this type of system. First, the four firms providing the service collected on different days, which was confusing, disjointed and not aesthetically pleasing. Also, the system brought some inefficiencies because companies with separate sets of similar equipment provided the same service. Beecher officials decided to contract refuse collection with a single, lowest cost, qualified bidder. Contracting to one service provider has achieved economies of scale, increased efficiency, and reduced costs with the per household fee reduced from $11.00 to $6.50. Table 1. Services Provided by Municipality by Private For-Profit Employees Population by Size Less than 1,000-5,000 or All 1,000 4,999 Greater Municipalities Services Provided* Percent (n) Percent (n) Percent (n) Percent (n) Public Works/Transportation Residential Solid Waste Collection Commercial Solid Waste Collection Solid Waste Disposal Recycling Yard Waste Collection Public Utilities Electricity Gas Hazardous Materials Disposal Street Light Operation Public Safety Vehicle Towing and Storage Health and Human Services Insect/Rodent Control Day Care Facility Operation Hospital Operation/Management Support Functions Legal Services Food Services * Information is reported for services which are being contracted by one-third or more of the municipalities responding. Percentages are based on municipalities that provide the service. Source: IIRA Municipal Privatization Questionnaire, Savas, E.S Privatization: The Key to Better Government. Chatham, NJ: Chatham House. 2

3 Contracting for solid waste collection and management has also been a success in Vandalia (pop. 6,100). The mayor reports that privatization of the service eliminated legal liability concerns, lowered rates, alleviated operational and maintenance expenses, and removed a potential environmental hazard. In Mount Carmel (pop. 8,300), privatization of garbage collection and disposal reduced operational costs, increased operating efficiency, and removed municipal liability for providing the service. Some small towns contract with a single source private firm for all public works functions. Pecatonica (pop. 1,800) became the first town in Illinois to do so in 1994 and others have since followed. The functions contracted in Pecatonica include purification and distribution of drinking water, wastewater collection/treatment, and repair/maintenance of streets and alleys. Additional contracted services include a water rate study and increased purchases of safety equipment. At the end of the first two years of the contract, more services were being provided by the private firm at less cost to taxpayers. Utilities are also often provided by private for-profit agencies, rather than by city government, as reported by 87.3 percent of the municipalities in the case of gas and 86.2 percent for electricity. The fact that private entities provide utilities most often is no surprise since these activities are not often considered traditional city services. Street light operation (61.0 percent) and hazardous materials disposal (50.0 percent) were also commonly provided by for-profit groups. Tree trimming/planting is contracted with private businesses, mainly because of the specialized expertise required and relative infrequency of the need for this service. Even with these services, however, only 24.9 percent contract with private firms. Glen Ellyn (pop. 26,000) officials report that contracting for tree trimming allows public works staff to concentrate on other municipal services. Although few Illinois municipalities report contracting for wastewater collection (3.0 percent) and treatment (6.5 percent), the number will probably increase in the future. In fact, the hottest market in the privatization industry nationwide is wastewater treatment plants for several reasons. Almost all local governments own wastewater treatment plants as compared with other utility functions such as electric power plants. Water and wastewater services are the largest expenditures of local governments, according the U.S. In Illinois, contracting is fairly widespread with almost every municipality reporting contracting for at least one service... Conference of Mayors. 3 Many facilities were built with federal funds more than 20 years ago and are becoming obsolete due to federal environmental mandates. With rising operational costs, reduced levels of federal assistance, and a reluctance by local governments to seek tax increases, privatization has become an attractive solution. Small and medium-size communities, especially, may be forced to consider contracting for these services in the future. Other services most often contracted with private for-profit agencies include vehicle towing and storage (76.2 percent), day care for the elderly (53.4 percent), legal services (67.6 percent), and food services (45.1 percent). In most instances, these are specialized services with limited demand in the city so it makes sense to contract for them, rather than attempting to provide them on a full-time basis with city employees. Somewhat unexpected is that janitorial services were not contracted by many cities (27.1 percent). Larger cities tend to contract janitorial services much more than smaller cities do. Addison (pop. 32,000), for example, reports first-year savings of approximately $100,000 and virtually no employee displacement from privatizing janitorial services. Even heavy equipment services or vehicle maintenance are not provided by the private sector in many cases (16.2 percent and 10.6 percent). Some differences are found by city size, however, with smaller cities more often reporting contracts. The explanation is that these cities cannot afford, and often do not need, full-time services. Cost-sharing through contracting offers an attractive alternative. Financial pressures and concerns about service quality prompt many local municipalities to consider the private sector for public safety services such as ambulance and emergency medical service (EMS). In Illinois, survey results show that 23.5 percent of cities had private ambulance services and 11.5 percent have private EMS. Herrin (pop. 11,000) privatized its ambulance service in early 1995 due to financial concerns. The municipal ambulance service was losing money, causing the city to subsidize operations at approximately $5,000 per month. The mayor reports that the city saved on subsidization costs in addition to general operating costs; they also raised funds through the sale of ambulance equipment to the private firm that won the contract. 3 Holusha, John. 1996, May 5. In Latest Cost-Cutting Trend, Cities Turn to Private Sector for Waste-Water Treatment, New York Times, p

4 Overall, most municipalities have found privatization successful. Most cities (65.3 percent) report privatization to be a success in most cases and 15.1 percent report success in at least a few instances. Only 1.3 percent view privatization as a failure in most cases. Quality of work was the main reason for satisfaction in towns with populations of less than 5,000, while financial considerations was rated highest in cities with populations of more than 5,000. Overall, cities that have privatized services are also satisfied with the delivery method. So far as we can determine, the current survey is one of the first systematic attempts to assess not only the types of services that have been privatized but also to discern the level of satisfaction with these efforts. A fivepoint scale was used to measure satisfaction with 1 depicting highly satisfied and 5 depicting not satisfied (Table 2). Table 2. Level of Satisfaction with Contracted Services Service* Mean** (n) Public Works/Transportation Residential Solid Waste Collection Commercial Solid Waste Collection Solid Waste Disposal Recycling Yard Waste Collection Public Utilities Electricity Gas Street Light Operation Public Safety Vehicle Towing and Storage Support Functions Legal Services * Information is reported for services which are being contracted and for which satisfaction is reported by one-third or more of the municipalities responding. ** 1=highly satisfied; 5=not satisfied Source: IIRA Municipal Privatization Questionnaire, 1995 Among public works/transportation services, the highest rated are solid waste collection, recycling, and snow plowing/ sanding. Tree trimming and planting also rated high. A Privatization Successes In general... respondents reported high levels of satisfaction with virtually all privatization arrangements. limitation of these data is the inability to differentiate between the success of the contracting arrangement and satisfaction with the provider. In other words, a contractual arrangement may be effective but the service provided is not satisfactory, or vice-versa. These numbers should be interpreted with care because, in some services, relatively few cities reported. In general, however, respondents reported high levels of satisfaction with virtually all privatization arrangements. Contracting Trends. Respondents were asked about trends in contracting between 1990 and Slightly more than one-quarter (28.7 percent) of respondents reported that the number of contracts had increased during the five-year period. More than one-half (56.8 percent) reported the same number of contracts and only 2 percent reported a decline. This indicates that city officials have found the contractual arrangements beneficial. Most new contracts were for existing, rather than new services. Contracting for existing services can be more difficult because public employees currently provide the service and are likely to fear losing their jobs. New services do not have current employees, making contracts more easily created. Additional insight into the overall successes of these arrangements is obtained by asking respondents whether they intend to increase privatization efforts in the future. Statewide, almost one in five (18.3 percent) reported intending to increase contracts and 51.6 percent reported that privatization arrangements are likely to remain the same. Only.6 percent reported expected decreases. Larger cities (5,000 and over) are much more likely to expand privatization efforts and 42.1 percent reported this intent, compared with 2.2 percent of cities smaller than 1,000. The logical explanation is that larger cities can benefit more from contracting. Services for which cities will most likely contract in the future include street repair and maintenance, water treatment/ distribution, and sewage collection/treatment. Also listed were tree trimming/planting and building and grounds maintenance. While many of these services would seem suitable for privatization or contracting, the number of cities reporting intentions to pursue the option in the immediate future is relatively small. 4

5 Contracting Procedures Cities differ in arrangements for contracting or privatization of services. A common criticism is that not enough local contractors bid on the service. Another issue is the loss of jobs by city employees and a resulting resistance by public employee groups. Each of these issues is addressed below. The vast majority (89.3 percent) of municipal contracts are competitively bid. In most instances, this may be a statutory requirement, especially if the contract is above a certain dollar amount. Small cities (less than 1,000) were less likely to report competitive bids, yet more than four-fifths (83.6 percent) reported bidding. The limited number of bidders in small communities may hamper the bidding process. Relatively few cities allow municipal employees or departments to bid on projects. Competitive contracting, as it is called, offers several advantages, including the fact that innovations designed to reduce costs can be incorporated into existing city departments when they can bid on projects. Statewide, though, only 14.4 percent of responding cities reported that municipal employees or departments can bid. For whatever reason, cities between 1,000 and 4,999 were much less likely (9.8 percent) to report this option. Allowing municipal employees or departments to bid does not always bring success. Statewide, 58.9 percent of cities reported that municipal employees/departments had succeeded a few times and 16.1 percent reported that they succeeded very often. However, 25 percent reported that municipal employees had never been successful in bidding for a contract. The number of cities responding to this question was small and makes generalization of these findings difficult.... it appears that at least one justification for contracting cost-savings is being met. By and large, there seems to have been a sufficient number of private contractors in the community to make contracts feasible. In fact, statewide, 77.5 percent of the cities reported a sufficient number of contractors. As one might expect, small cities (less than 1,000) were less likely (71.3 percent) to report this situation. However, number of contractors does not seem to be a significant problem for many cities interested in contracting. Cities that engage in privatization efforts have compared costs and, in general, think that cost-savings have resulted. Statewide, 69.2 percent of the cities reported cost comparisons between the services provided by public and private agencies. Substantial differences are found by size of city, with small cities (60.1 percent) less likely to make these comparisons than cities of 5,000 or larger (80.1 percent). A reasonable explanation is that large cities have more staff. Cities differ in experiences with cost-savings. Statewide, almost one city in five (17.9 percent) reported that costsavings from privatization occurred in all instances. Another 56.4 percent reported cost-savings in some instances. Only 25.7 percent reported that cost-savings had not occurred. Thus, it appears that at least one justification for contracting cost-savings is being met. Most municipalities (82.1 percent) report a system in place to monitor contractor compliance. A monitoring and reporting system is key to the overall success of the privatization process. It is necessary to spell out clearly the roles and expectations of the two sides and have assurances that the contractor will properly deliver the service and handle public complaints. Employee Reductions City services are typically labor-intensive and personnel costs often represent as much as two-thirds of city expenditures. Therefore, it only makes sense that serious cost-savings must, in some way, affect personnel costs. The fear of municipal employees is that privatization will result in a reduction in number of jobs or will hurt salary levels. The experiences reported by cities differ, however; only a small number (3.0 percent) reported that employees were laid-off as a result of contracting or privatization efforts. More likely, city employees were transferred to other divisions in the city (10.8 percent) or they went to work for the private contractor (5.4 percent). About one in ten cities (9.8 percent) report a combination of strategies. Nearly two-thirds (64.9 percent) of municipalities reported no effect on employees from privatizing services. In cases where city workers who are affected are unionized, some officials (41.7 percent) report the private firm recognized the union representing the employees. 5

6 City officials responding to the survey did not always know about wages paid in the private sector but 17.7 percent reported that the private contractor paid higher wages than employees had received from the city and an additional 18.8 percent reported that private contractors paid the same as the city. There is some evidence, however, that the employee benefits paid by private contractors were lower than those which the city employees had received previously. Only 7.4 percent of responding municipal officials reported higher employee benefits paid by private contractors and 10.7 percent reported that benefits were about the same as paid by cities. Statewide, 12.9 percent reported lower benefits in... only a small number reported that employees were laid-off as a result of contracting... the private sector and this is of concern primarily in larger cities where 18.2 percent reported lower private sector benefits. Also of interest is that 69.0 percent of responding municipal officials were not sure of the differences. Thus, while municipal employees do not seem to be displaced in large numbers by contracting, there may be differences in employee benefits. This makes sense given that cost-savings are a significant motivation for contracting or privatization and reductions in personnel costs are likely to represent a significant opportunity to achieve these cost reductions. Conclusions Pressures to lower taxes and reduce the size of government will cause privatization efforts in the public sector to continue in the foreseeable future. Based on the survey responses reported, city officials are pleased with the privatization efforts and think that they have reduced costs. While city employees have not been replaced in most instances, there is some evidence to suggest that employee benefits may be somewhat lower in private firms that gain municipal contracts. The wages, however, seem to be relatively comparable, based on survey responses. Cities may also benefit from privatization in another way, namely, innovations and productivity advances introduced Pressures to lower taxes and reduce government will cause privatization efforts in the public sector to continue in the foreseeable future. by private firms can also be adopted by city departments and, in this way, lower costs. The process of allowing city departments to bid on projects may require them to rethink the ways in which services are provided and will hopefully generate cost savings in the process. Privatization and contracting with private agencies to provide services that formerly were provided completely by cities is likely to continue. Cities that are able to effectively implement this strategy are likely to benefit from cost-efficiencies and, ultimately, a high-quality of public service with lower taxes. 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 peer-reviewed and distributed to public officials, libraries, and professional associations involved with specific policy issues. Printed on recycled paper