☆ Is San Jose’s budget crisis really an opportunity for systemic change? (4/4)
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San Jose could use its budget crisis to consider systemic reforms. Take, for example, managed competition, in which bids for service delivery are opened up to private contractors on a rolling basis. So says Reason Foundation’s Len Gilroy in Part 4 of an Opp Now exclusive Q&A, who points out that city staff can easily get re-hired by contractors.
Opportunity Now: When looking for ways cities can cut costs while maintaining services, privatization always comes to mind. You were writing about Sandy Springs a few years ago. There was a lot of optimism at the time; didn’t they have to pull back from the privatized model?
Len Gilroy: They did bring some things inhouse, but they still outsource a lot. What it takes to get up and running as a startup city naturally evolves and changes.
ON: Do they have any pension liability?
LG: I don’t think they introduced pensions. They just did a defined contribution style plan from the very beginning, never really got into that kind of business-as-usual, autopilot thing that might eat your budget alive.
ON: So even if Sandy Springs had to pull back from almost total privatization, they still have zero liability?
LG: Zero retirement liability. They may have some general obligation borrowing or other forms of debt.
After Sandy Springs, a bunch of others started up in Georgia. They all followed a similar trajectory of non-traditional government and public private partnerships for alternative service delivery, to get cost savings, innovation, and risk transfer as key benefits.
Sandy Springs still has a small traditional workforce. They still outsource a lot.
ON: Sandy Springs was largely successful at privatizing, but it’s a smaller city, and relatively new. It’s not like San Jose, which already has a large workforce in place, and a pension system. It may have been easy for Sandy Springs to adjust and bring some services inhouse, and to find a happy public-private medium. But wouldn’t it be harder for San Jose to privatize and get to a happy medium that’s similar to where Sandy Springs is?
LG: It’s easier to sell a systematic vision of change rather than a litany of one-off decisions.
One example is managed competition. A bunch of cities and states have done this. They continually look at big services like solid waste, and open everything up to competition.
Charlotte, North Carolina has a managed competition regime. When they started, they broke up the city into zones of trash service. They do it on a rolling basis, where every year there's a zone or two up for renewal, and they bid out each zone.
Phoenix, Arizona did the same thing for many years. It’s a process, not an initiative. Where a zone was private for five years, maybe the public entity wins the bid for the next five years.
ON: San Jose is struggling with a $60 million deficit. Could a regime-change like this help them save?
LG: Rahm Emanuel, when he was Mayor of Chicago, said to never let a crisis go to waste. That's actually true in terms of government reform, but it has to be done thoughtfully, to be truly sustainable.
If somebody comes into office and says, "I'm a true believer; let’s privatize everything," that’s just an ideological motivation, privatization for privatization’s sake. There may be some good value in it, but I would argue that they're not thinking holistically or strategically.
I think it's better to put all options on the table. There can't be any sacred cows, but cities should do their best to move the current workforce rather than lay them off.
ON: So, privatizing doesn’t mean city workers have to lose their jobs?
LG: No, people think that when cities outsource or privatize something, everybody then gets fired. That never happens, or at least it’s really rare.
If a company wins a contract, they’re out there in the market the next day starting to hire people, right? Who’s the easiest to hire? The people already doing the job. So it’s literally the exact same workforce.
ON: But isn’t there then a risk of what Mark Moses calls privatization in name only, where contractors are still burdened by regulations and prevailing wages, and can’t really benefit from market efficiencies?
LG: Yeah, and I would complement that and talk about procurement.
Back in the 1990s, a colleague of mine did prison contracting evaluation in California. They were comparing costs between a private and public facility. The way they structured the contract, they copied everything down to the boots the prison guards wore, to make sure the private side matched the public exactly. And the cost savings? Barely there.
Why? Because you’re just asking somebody to replicate what you’re already doing but at a lower cost. Can they do it? Probably. But is that really the goal? Procurement should be a transformation opportunity. Instead of saying, "How do we do the same thing slightly cheaper?" it should be, "How do we rethink the whole thing?"
ON: So, a big rethink would help a privatization process save more money?
LG: Or, spend the same dollar and get additional value out of that.
Use procurement as a discovery process. Put the goals out there and get ideas for the best way to achieve them, instead of being locked into the same path-dependent thinking. Test the market, see what solutions come in. Either you get competitive bids and it works, or you don’t, and you move to Plan B.
And then you start to bolt on ideas like gain-sharing—where employees themselves suggest cost-saving ideas, and if they work, they get a piece of the savings. That happens all the time. When you think like that, reinventing government just becomes the way you operate, instead of some painful one-off process people resist.
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