In the public square, and now at the ballot box, San Diegans have resoundingly rebuked their political leadership for its mismanagement of the budget and city services. If San Diego is to escape its fiscal quagmire, it must use this momentum to push for reforms long ignored and resisted by city leaders and the public employee unions to which they are beholden.
In order to improve its long-term fiscal health and pay off an unfunded pension liability currently estimated at $3.5 billion, the city will ultimately need to reform its public employee pension and retiree benefits system. It can improve its more immediate budgetary woes, however, by adopting another reform that for years has been stymied by public employee unions and abandoned by the city’s political leadership: introducing private-sector competition for providing city services.
This is hardly a new concept. Numerous cities such as Phoenix, Charlotte and Indianapolis, run by Democrats and Republicans alike, have outsourced a wide variety of services for decades. Even closer to home, San Diego County has enacted a number of successful outsourcing initiatives since the late 1990s, resulting in millions of dollars of savings for services such as vehicle fleet maintenance, workers’ compensation claims administration and correctional facilities medical services.
The city of San Diego, however, had an unusual provision in the City Charter that strictly limited its ability to contract with private-sector providers for city services. To remedy this, voters overwhelmingly passed a “managed competition” measure (Proposition C) in 2006.
The following year, I co-authored a study for the Reason Foundation and the San Diego Institute for Policy Research on managed competition opportunities for the city. After analyzing the city’s budget and conducting an extensive review of case studies and other research on state and local privatization efforts, we concluded that the city was ripe for competition in 11 service areas: water/wastewater treatment, environmental services (including trash and recycling collection and landfills), fleet maintenance, street maintenance, parks and recreation, golf courses, libraries, permitting, facilities management, information technology and printing/copying.
Using a rather conservative cost savings range of 10%-25%, we estimated that contracting all these services would save the city between $80 million and $200 million per year (roughly $130 million to $320 million per year in today’s dollars).
The idea behind managed competition was that, rather than simply outsourcing services to the private sector, the city would allow government agencies to bid alongside private-sector providers for services contracts. It would not really matter who ultimately won the contracts, since the mere introduction of competition would force city employees and private companies alike to reduce costs and improve the quality of services.
This was predicated on the rather important assumption, however, that the public- and private-sector bidders would be evaluated on equal footing. But the city employee labor unions fought the initiative tooth and nail from the start.
As a result, it took nearly four years for the city to establish its Managed Competition Guide, which outlined the rules for the contracting process. The resulting labyrinthine, bureaucratic, 22-step process was so slanted in favor of government agencies that few private companies bothered to submit bids.
For example, some city pension costs were not included in the cost of government agency bids and private providers would not even be considered unless they were at least 10% less than the city agency’s bid, even if they offered other benefits such as higher-quality service levels, access to expertise and innovations not available in-house, greater staffing flexibility or the opportunity to shift risk from the city to contractors.
Competitive bidding is not a panacea and contracts must be structured properly, with appropriate and clearly-defined performance measures, financial rewards for exceptional performance and penalties for failing to meet minimum standards. If the city does happen to get a bad contractor, it can always fire them and get a better one. That is not an option with a government monopoly.
Managed competition was a noble effort, but the city’s employee unions have proven that they are unable or unwilling to play fair, so now San Diego must go to a standard outsourcing model and compare private bids against existing city services, including a full accounting of city employee benefits costs. The amount of money the city could have saved over the last 20 years — not to mention service quality improvements and other benefits — is staggering. Maintaining the status quo, punishing residents with endless tax and fee hikes and service cuts, and remaining a hostage to the public labor unions simply isn’t a viable option.
Summers is a columnist, economist, and public policy analyst, and a former editorial writer for the Orange County Register / Southern California News Group. He is also editor and coauthor of “Beyond Homeless: Good Intentions, Bad Outcomes, Transformative Solutions.”