Upon Closer Review: Privatizing City Government

Friday, July 15, 2005 | The push to open city services up to bidding from the private sector stands at the center of discussion in a mayor’s race this election, nudged to the middle by the city’s pension crisis.

A number of the more conservative candidates hang a healthy portion of their fiscal reform plans for the future of San Diego on the concept – one that currently isn’t even permitted by a prevailing interpretation of the City Charter.

So that likely means it’s right back to the ballot box if one of them is elected either July 26 or in a runoff Nov. 8 if no candidate wins a majority. A charter amendment will most likely be necessary to allow city services to be bid on by private companies.

But the functionality, not just the legality of competitive bidding, is also an obstacle. For all the attention the option receives on the campaign trail from the anti-tax activist Richard Rider, two of the business owner candidates – Steve Francis and Myke Shelby – and to a lesser degree former police chief Jerry Sanders, resounding questions remain surrounding its efficacy and greater social implications.

“The fallacy is that there is an enduring myth in this country that anything that the government does is inefficient and anything that the private sector does is efficient,” said Dipak Gupta, a political scientist at San Diego State University who studied public administration for 25 years.

“There is no data, no study that shows that to be the case,” he added.

Still, four of the major candidates believe that competitive bidding holds a strong enough promise to be a key factor in the city’s financial recovery.

The pension scandal that has gripped the city – and in no small part caused the resignation of Mayor Dick Murphy – fuels the debate, as San Diego grapples with the question of whether or not their municipal workers are over compensated.

Shelby’s privatization plan would shave 3,000 of the city’s estimated 11,000 jobs from the scrolls. Competitive bidding, a process in which city departments would compete against the private sector for contracts, is the foundation of Rider’s plan. He claims he can knock an estimated 8,000 jobs out of City Hall if need be.

Sanders has said that competitive bidding is not a “panacea,” but can be applied as one tool to exact fiscal reform in City Hall.

Likewise, Francis employs competitive bidding – as well as outright downsizing – as part of his pledge to trim the city workforce by between 8 percent and 10 percent.

“With fewer employees, government is going to change the actuarial assumptions, which is also going to reduce that pension obligation,” Francis said.

This hope is false, say two people intimately familiar with the pension system. Pension board member Bill Sheffler, an actuary, and April Boling, former chairwoman of the Pension Reform Committee, said that the stated unfunded pension liability – which is at least $1.37 billion – is calculated only on work already completed.

“Laying people off will not affect that,” Sheffler said.

Such a cut would reduce labor costs and, in effect, pension costs at some point down the road, but wouldn’t have an impact on the immediate multibillion deficit that bogs down the city budget.

What supporters also say it will do is force competition. And competition, they say, will bring about leaner operations – whether that contract goes to the private sector or to a city department that has trimmed operations.

The idea has caught great steam at a time when employee compensation is being blamed for the city’s problems. Labor costs account for 78 percent of the city’s general fund budget, which covers day-to-day expenses, and the candidates believe that a business model of competition and free market forces will be at least part of the reform equation in city government.

Indeed, the city has its own program in three departments in which it solicits bids from the private sector and mandates that its department meet the private sector bid. City officials say the program has saved $77 million since 1998 in the Metropolitan Wastewater Department alone, in part by eliminating positions.

But the city isn’t used much as a model of how things are done right nowadays on the campaign trail; candidates often cite work done at the county as a model for the competitive bidding and privatization processes.

Walt Ekard, the county’s chief administrative officer, said the county has reaped many benefits over the years, in either privatizing services or putting them out to bid to the private sector. In many cases, he said, county departments have shed staff in order to win contracts.

There are many ways in which a government can’t be run like a business, he said, because of the necessity of openness, the use of public money and the existence of taxpayers as the customer.

“But operating on a business model and adjusting that business model to accomplish good government can be done,” Ekard said.

Savings on the front end of competitive bidding lead to lower wages and further stress on the middle class, some say.

“Basically, it’s a mix here. You could probably get the services done a bit cheaper if you do put it out in a competitive bid, but it does put more downward pressure on wages locally,” said Alan Gin, an economic professor at the University of San Diego who studies the local economy.

San Diego risks creating an economy of low-wage jobs, he said, illustrated by the fact that 70 percent of the jobs created in 2004 in the region are considered low-paying.

“Government is one area where benefits are good. Because of the good wages and good benefits, a lot of people then move up into the middle class,” Gin said.

Those good benefits are very much the issue in this race, as the pension system deficit stands at the center of the city’s raft of problems today. For nearly a decade, the pension board allowed the city to pay less than annually required into the pension system as the city continued to grant benefit increases.

The results have threatened the city’s financial stability and attracted investigators from the Securities and Exchange Commission, FBI, U.S. Attorney’s Office and District Attorney’s Office. The total cost of employee benefits has doubled in the last six years, according to pension figures.

Every candidate has a plan that involves some legal challenge to the benefit increases negotiated in 1996 and 2002. In varying degrees, four other candidates attach themselves to the competitive bidding idea.

But Ekard warned that it isn’t the entire solution.

“Competition has been important to the turnaround of the county, but it’s not fundamentally why things have turned around,” he said. “It’s a tool, that’s all it is. There’s certain things that government employees must do, should do, and frankly can do better.”

For Rider, a Libertarian, it is the entire foundation of his union-battling campaign. For Shelby, it’s a highlight. Sanders mentions it in passing. And competitive bidding is one of the components that Francis uses as an example of the business-like approach that the CEO says he will bring to City Hall.

Whatever the case, Gupta, the political scientist, warned that business principles aren’t always compatible with the government world.

“You as a CEO respond to the strongest of market forces, but that is not always the case at the government,” he said. “… A government that only listens to only the powerful would be a bad government.”

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