The Yin and Yang of economic crises:

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Yet once again - during times of crisis - democratic electorates demonstrated their ability to inspire and support high quality leadership capable of undertaking previously unthinkable initiatives where previously incompetence and inertia ruled.

  There are both Democrats and Republicans in this mix - and seventeen of them tell some of their stories in a series of short essays in a marvelous little book, "Making Government Work: Lessons from America's Governors and Mayors."
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  The Governors are George Allen (VA), Terry Branstad (IA) Jeb Bush (FL), Arne Carlson (MN), John Engler (MI), Zell Miller (GA) Thomas Ridge (PA), and William D. Schaefer (MD). The Mayors are Dennis W. Archer (Detroit), Bill Campbell (Atlanta), Richard M. Daley (Chicago), Rudolph W. Jiuliani (NYC), Susan Golding (Indianapolis), Patrick McCrory (Charlotte), Marc H. Morial (New Orleans), and Edward G. Rendell (Philadelphia).
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  Change, innovation, and entrepreneurial spirit was remarkably brought to their states and cities by these political leaders. They recognized what had always been obvious - that command and control hierarchical bureaucracy inhibits change and stifles innovation. They recognized that flatter chains of command and the proper  use of competitive practices creates appropriate incentives and permits organizations to provide lower level management with the maximum amount of discretion while providing a mechanism for prevention of abuses of discretion.
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  They recognized that frontline employees know their individual operations best and are the most likely to know how to improve them. By opening up the process to employees, private sector business, and the public - and facilitating employee and business generated innovation - significant governance improvements are possible.

  Now, if we could only figure out how to get such high levels of leadership before crises arise - and maintain it after crises pass.
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  Unfortunately, such efforts are not typical. These leaders are not typical. Figures show that state and local payrolls continued to expand rapidly during the 1990s. Health care, corrections, education, and public welfare programs show the most growth. Federal government influences have been strong factors in this growth - either by mandates or financial incentives or simply by example. Population growth has also of course been a major factor.
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  There is currently a shortfall in state and local government budgets well in excess of $50 billion. However, about half of that is in California and New York State and New York City, with California in the worst shape. In New York, it is once again being demonstrated - for those so dense as to need more proof - that modern liberalism must fail regardless of party affiliation. Elsewhere, most state and local governments are not in such critical shape, and an economic recovery accompanied by a rising stock market should bring some unexpected good news on the revenue side in 2003.
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  Figures showing a decline in federal payrolls during the 1990s cannot be taken at face value because the substantial declines were almost entirely concentrated in post Cold War military and defense programs. Parkinson's Law still rules, and the era of big government continues inexorably.

Reform techniques:

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Cities - unlike businesses - do not compete for customers who can "vote with their pocketbooks." However - over time - cities do compete for residents and businesses that can - and do - vote with their feet.

  Privatization of functions  - where implemented - was most frequently used for garbage collection, building maintenance, street paving and repair, data processing, and health and medical services. Government agencies most frequently contract out to obtain administrative and support services and professional services (architectural, legal, tax collection, custodial services, printing, information technology).

  "The private sector can often deliver better service at lower costs, even where it must comply with public sector policies and procedures and use the same state-required systems -- through better management and greater economies of scale."

  Mayor Rendell of Philadelphia explained that "civil service protection and union work rules too often [shape] an incentiveless environment for government workers." Cities - unlike businesses - do not compete for customers who can "vote with their pocketbooks." However - over time - cities do compete for residents and businesses that can - and do - vote with their feet. 
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   The type of work considered suitable for contracting out was listed by Mayor Morial of New Orleans.

• Services that have few performance uncertainties so that a clear statement of work can be written.

• New services that can be contracted out without layoffs of city workers.

• Services requiring specialized skills or equipment - especially important for small cities.

• Services requiring skills that are highly valued in the private sector making recruitment and retention difficult.

• Services involving large numbers of unskilled workers.

• Seasonal tasks.

 Contracting out may be especially effective for seasonal needs like snow and leaf removal. The private sector also frequently has essential skills unavailable to state and local governments.
  Mayor Giuliani used private contractors for New York City's parks maintenance, homeless shelter management, school janitors, job placement, security guards, vehicle maintenance, data entry, tax billing, medical labs, roadwork, office supply delivery, mailroom, and printing.
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  Large amounts of capital for needed facilities can also be provided by privatization. Mayor Bill Campbell relates how Atlanta obtained billions of dollars to reconstruct crumbling antiquated water facilities by means of a long term management contract. IRS rules now permit municipal bond financing for such contracts as long as 20 years.
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  After an extensive competitive negotiations process, Atlanta entered into a 20 year full operations and maintenance contract for $21 million per year - almost half the city's operating budget - covering all water system operations and one wastewater plant. The contractor undertook substantial reconstruction of the system. The city retained ownership. Operating costs were cut almost in half, and the city calculates savings of about $400 million over the term of the contract. Contracting out was also being contemplated for the remaining wastewater plants.
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Flatter chains of command eliminate the inefficiency of multiple levels of approvals and enable increased flexibility and responsiveness.

Increased levels of discretion are extended to lower level management, "with decision-making ability and authority pushed down throughout the organization."

  Restructuring techniques copy methods used by private business. They generally involve adoption of more focused and flatter hierarchies. Centralizing techniques improve planning and accountability and eliminate the inefficiency of diffuse responsibilities and overlapping jurisdictions. Flatter chains of command eliminate the inefficiency of multiple levels of approvals and enable increased flexibility and responsiveness.
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  Generally, the techniques applied are designed to enhance the accountability and control of key officials, while opening up the decisionmaking process to employees, lower level management, and "customers."
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  Overlapping agency jurisdictions are eliminated by grouping them on broad functional bases. Single lines of authority to the top are delineated. Departments are administered by single heads. The "cabinet" model of agencies headed by appointees of the governor is increasingly used. Each department includes its own administrative overhead (human resources, budget, finance, purchasing) for autonomous operation on a businesslike basis.
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  Increased levels of discretion are extended to lower level management, "with decision-making ability and authority pushed down throughout the organization." Information technology is incorporated into state functions. Teamwork - customer defined quality - and continuous efforts at improvement - are stressed.
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Competition also concentrates minds and quickly leads to the identification and elimination of unneeded costs. Private sector participation frequently generates innovative ways to improve services and/or reduce costs.

"Competition is the primary force that keeps private business efficient and focused on customer needs."

  Competition with private sector businesses for contracts has frequently resulted in major restructuring efforts rather than privatization. It has been employed as a major incentive for restructuring and a useful method for providing lower level management appropriate incentives and the maximum amount of discretion - and for preventing abuses of discretion.
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  To facilitate their participation in competitive procurements, government workers have to be freed from as many bureaucratic impediments as possible. They must be given the flexibility to "reengineer their unit, operations, and budget." Competition also concentrates minds and quickly leads to the identification and elimination of unneeded costs. Private sector participation frequently generates innovative ways to improve services and/or reduce costs.
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  Mayor Patrick McCrory of Charlotte, North Carolina, reports that 24 of the first 34 contracts put out for bidding were retained by city employees. "Competition is the primary force that keeps private business efficient and focused on customer needs. The City should have to compete and perform in the same manner."
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Only employees know where the slack, inefficiencies and redundancy is in each operation.

Agencies must be accountable for results rather than just for administering expenses.

  Finding ways to improve the efficiency and quality of governance is not difficult. Policies, rules, procedures, training, rewards, information and financial systems - all include multitudes of obstacles that block improved performance. These are all ripe for change. It is in overcoming political and bureaucratic inertia that the difficulty lies - and where the advent of crises provides broad opportunities. Budgetary crises and dysfunctional programs create political pressures that permit aggressive, capable political leaders to improve services while eliminating obsolete statutes, regulations and functions and much of the pervasive bureaucratic fat.

• Leadership is essential. Nothing can be accomplished without the commitment and active involvement of the governor or mayor.

• However, "successful change efforts of this kind are employee driven." Only employees know where the slack, inefficiencies and redundancy is in each operation. They must be encouraged to participate and their recommendations must be acted upon. Teamwork and participation by employee associations and unions are critical.

• Also, citizen input is crucial. This provides needed expertise - knowledge of individual shortcomings - feedback on the effectiveness of changes - and diverse viewpoints. It also critically enhances the legitimacy of the process.

• Chains of command must be shortened (horizontal hierarchies) so that paperwork can be minimized and responsiveness increased. "Decentralized, cross-agency and cross-functional thinking is critical."

• Results - rather than processes and inputs - must be stressed - in budgeting procedures as well as in performance evaluation. Agencies must be accountable for results rather than just for administering expenses.

• "Customer satisfaction" is the most important factor. "State agencies should function as efficient and effective entities that are responsive to their customers," whether those are other government agencies or the general public. Resistance from agency executives, mid-level managers and employee organizations must be overcome.

  Obviously, it has proven impossible to overcome such resistance in many poverty area school districts. The interests of administrators and teachers still all too frequently come ahead of the interests of students.

  The ability to sustain restructuring efforts is likely to be a problem. The attitudes of political leaders and the higher levels of management will remain critical.

  As the crises of the 1980s and early 1990s fade into the past, and new administrations succeed the reforming administrations, politics and corruption may undermine much of these laudable results. It was, after all, political considerations and efforts to forestall scandals that led to much of the hierarchical structures and bureaucratic red tape in the first place. As the inertia of normalcy is restored and inevitable instances of corruption and abuse of discretion arise at lower levels, political considerations can again rise to the fore and lead to restoration of hierarchical controls.

Privatization:

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Competition is unlikely to work for services involving the exercise of considerable policy discretion - or where there is no competitive market for the service in the private sector.

  There are some government owned economic facilities in the United States - like some electric utilities, and bridges, ports, toll roads, and other transportation infrastructure facilities - but the United States fortunately did not succumb to the socialist lunacy that afflicted much of Europe and the rest of the world. Thus, sales of assets are a minor factor in privatization efforts in the United States.

  Nevertheless, Georgia reports sale or lease of state owned resort parks, lodges, and golf courses. Private management of state resorts resulted in considerable improvements to the facilities and for the first time provided millions in income for the treasury. New York City sold two radio stations, one television station, a luxury hotel, and several parking garages. These facilities thus provided tax revenues and private sector jobs.
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The profit motive drives innovation and problem solving, and the greater flexibility of private businesses facilitates innovation and problem solving, while competition promotes cost effective operations and drives innovation.

  Advocates of privatization cite cost savings - increases in operational speed, innovation and responsiveness - high-quality services - the availability of expertise - the elimination of government monopolies - a slowing of the growth of government - and the myriad benefits of competition. The profit motive drives innovation and problem solving, and the greater flexibility of private businesses facilitates innovation and problem solving, while competition promotes cost effective operations and drives innovation. If contracts are properly drawn and limited to responsible contractors - and performance is properly monitored - societal policies can be accommodated and accountability assures quality.
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  Maximizing value and being responsive to customer preferences are difficult for government monopolies - which have no market signals to direct them.
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Privatization programs require effective decision making procedures, functional cost analyses, the consideration of constitutional and legal barriers, and the satisfying of government employee concerns. Competition must be assured, risks must be realistically evaluated, cost overrun problems must be considered, and performance must be evaluated.

  Opponents of privatization challenge the extent of cost savings - warn of dependence on private monopolies - fear private corruption and the profit driven cutting of corners - dislike loss of political control and diminution of the accountability of government officials - claim greater benefits by means of restructuring - and fear loss of morale by state and city employees. They do not want to surrender levers of economic power that can be available for other purposes - like providing employment for constituents - or directing business into areas of poverty.
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  Also, there are inevitable litigation costs and delays from bid protests and contract disputes. Inevitably, there will be efforts to politicize the competitive process. Small cities may lack resources needed for effective contract administration. There are certain functions where grants to nonprofits may be more appropriate.
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  These are not unreasonable objections. It is clear that privatization programs do not eliminate the need for good government management and careful planning. Privatization programs require effective decision making procedures - functional cost analyses - the consideration of constitutional and legal barriers - and the satisfying of government employee concerns. Competition must be assured - risks must be realistically evaluated - cost overrun problems must be considered - and performance must be evaluated.
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Corruption of the competitive process or the evaluation of performance, service interruption, mismanagement, and unfair labor practices are among the primary risks.

Many of the objections to contracting out can be overcome by suitable contract provisions and the careful elimination of contractors that are not financially and technically responsible.

  For the process to succeed, the government agency doing the contracting must fully support the analytical and implementation efforts. The job - the "Statement of Work" - must be fully delineated. The agency's accounting system must be reconfigured to show the full costs of performance. Agency competence remains a vital component for managing the competitive bidding and performance evaluation processes. Long term contracts (3 to 5 years) indexed for inflation have to be offered where needed to justify bidding and startup costs.
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  Overcoming resistance by government employees and adequately mitigating the impact on them is frequently the most critical requirement. Corruption of the competitive process or the evaluation of performance - service interruption - mismanagement - and unfair labor practices are among the primary risks.

  "Privatization does not mean the delegation of state authority or responsibility. Policy makers are ultimately responsible to clients and tax payers for privatization services"

  Many of the objections to contracting out can be overcome by suitable contract provisions and the careful elimination of contractors that are not financially and technically responsible. For example, where private sector competition is thin, states and larger cities can divide suitable contracts - such as garbage collection or school maintenance - along geographic or other lines so that several contractors can be employed and can sustain the ability to compete with each other - and provide available alternatives if one of them defaults. Adequate oversight and inflation adjustments can be provided. The cost of layoffs can be included as an adjustment to encourage contractors to employ affected city workers. Provisions can be included for suitable response in case of emergencies.
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  In Atlanta, contracts included requirements for support of such societal goals as investments in empowerment zones, minority hiring, and a grant to a local black college. A "no layoff" clause protected city workers who went with the contractor.
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Competition:

Competition breaks government systems "which stifle initiative, efficiency, creativity, and productivity."

   Subjecting government agencies to competitive forces achieves a multitude of objectives. It breaks up the government monopoly on public services. As Gov. Branstad of Iowa points out, competition breaks government systems "which stifle initiative, efficiency, creativity, and productivity." 

   "Every morning, businesses wake up to the reality check of the marketplace. All day they respond and consumers benefit."

In the absence of competition, government agencies and employees have no reason to question the status quo or to take risks. There are no incentives to look for ways to become more efficient - and there are strong incentives to spend all sums budgeted so that more can be requested for the next budget.

  The same forces can impact government service where competition can be imposed. Indeed, just the threat of privatization motivated Flint, Michigan, garbage collection employees to improve efficiency enough to reduce costs about 20%. New York City Dep't. of Transportation workers increased productivity by 50%, saved $1 million annually, and kept their traffic sign program jobs.

• Organizations that must compete for funds - whether government agencies or private contractors - will keep their costs down, respond flexibly to changing conditions, and strive to satisfy customers.

• Overhead costs of both the competing agency and the state or city government are questioned and quickly decline.

• Unnecessary and over burdensome regulatory and administrative procedures become targets for elimination.

• Competitive contracting provides a rich source for realistic costing data.

• Customer satisfaction becomes the primary objective.

• A work ethic of service over self interest becomes essential.

• The value of employee inputs increases.

• A merit pay system can be substituted for the usual civil service step pay system.

• Merit pay facilitates recruiting and retention of needed skills.

• Merit pay makes skills training more meaningful.

  Clearly, it is competition that provides most of the advantage - not the distinction between public or private providers. Monopolies - whether public or private - never provide best services and best prices.

  In the absence of competition, government agencies and employees have no reason to question the status quo or to take risks. There are no incentives to look for ways to become more efficient - and there are strong incentives to spend all sums budgeted so that more can be requested for the next budget.
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Managed competition:

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  When government agencies are subjected to competition from private contractors, an extensive effort is required to level the playing field and improve the competitiveness of the government workers. Best practices must be researched and methods must be reengineered. The real cost structure for the work must be established, their operations must be streamlined on a businesslike basis, and they must be given professional assistance in the preparation of their bids. They must be given the flexibility to "reengineer their unit, operations, and budget."
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  The government workers will enjoy two cost advantages. They do not have to make a profit and their agency doesn't have to pay taxes. (Among other things, privatization enlarges the tax base.)
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  To properly conduct competitive processes, extensive cost-benefit analyses are required. Performance measures against which performance can be judged must be established. Regulations governing the competitive process must be promulgated after required public input and comment. These regulations must be clearly written and easily understandable, require adoption of the least costly alternatives offered by qualified bidders, and provide for the periodic review of outcomes. The duration of each contract must be carefully calculated to justify the costs of the bidding process and the initiation of performance while providing for the renewal of competition at a reasonable point in the future. Also essential are programs to reduce impacts on agency employees.
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  To encourage participation by additional competitors - especially by small businesses - competent support staff must be made available to assist bidders.
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Businesses must know individual items of costs. Governments typically know only total expenditures. They can't tell how much it actually costs to fix a pothole - pave a street - plant a tree - or pick up a ton of trash.

  Accounting changes are especially important. Mayor Stephen Goldsmith of Indianapolis relates some of the many problems with typical municipal budgeting and accounting procedures.
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  Businesses must know individual items of costs, Goldsmith points out. Governments typically know only total expenditures. They can't tell how much it actually costs to fix a pothole - pave a street - plant a tree - or pick up a ton of trash. To subject such activities to competition, these costs must be known.
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  Indianapolis commissioned an audit by a big five accounting firm. They found wide variances in similar costs for different departments. Snow plowing costs, for example, ranged from about $117 per mile to about $40 per mile, with labor costs varying from about $13 per mile to about $40 per mile. Even adjusting for differing conditions, there was no justification for such variances.

  "Using private sector rules for our accounting allowed City workers and managers to prepare legitimate internal bids and provided - - - a meaningful standard against which to compare private proposals."

  It also greatly improved management of services not contracted out.
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  The process, among other things, must:

• Assure competition for the contract.

• Assure the continued availability of alternative sources after the contract is awarded..

• Provide a clear statement of work.

• Provide valid benchmarks to evaluate performance.

• Determine if cost savings are more important than political control and accountability.

• Determine if default will jeopardize public safety or be otherwise intolerable.

• Determine if liability and risk can be transferred to the private sector.

• Determine whether the private sector can reduce delivery times.

• Make sure that the contracting agency possesses the skills needed to administer the contract.

• Determine whether privatization is legal.

• Assure political support for privatization.

• Adequately respond to employee, citizen, and other reactions.

  Because of the arcane skills needed for all of this, it is recommended that a specific agency be charged with overseeing all privatization efforts. The agency should include knowledgeable business and public members, and must regularly solicit public inputs.
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It is essential to initially focus on services where competition can demonstrate dramatic results - to develop performance measures and valid cost accounting systems - to emphasize competition and assure that the first winning contractor will not thereby become a monopoly provider.

   A chart of government competitive bidding or competitive negotiating procedures is provided by Gov. George Allen (VA). It runs from the planning stage to contracting stages to performance and to evaluation.

  It is clear that this is at best still a far more time consuming and expensive process than occurs in private commerce.

  The politics of establishing competitive procedures must be taken into account. It is essential to initially focus on services where competition can demonstrate dramatic results. It is essential to develop performance measures and valid cost accounting systems - and to emphasize competition and assure that the first winning contractor will not thereby become a monopoly provider.
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  In Georgia, child support caseloads were divided between private contractors and the state agency. They were involved in establishing paternity, obtaining support orders, and collections. During an initial 18 month period, private collections cost 63% less, and achieved successful results  about 15% more often. Also, Veterans Home expenses were cut about 50%, and prisons built by the private sector cost about 25% less. In New York City, scandal plagued school janitorial services were privatized at a saving of $700,000 per year with vast improvements in janitorial services.
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Restructuring government:

  Privatization in Detroit has been generally confined to special projects - tasks not performed by city employees - and for meeting peak needs (snow removal). Contracts were also used for societal purposes - supporting local minority owned businesses and nonprofits and engaging in public-private partnerships. Also valued above any savings obtainable by competitive contracting was the ability to provide a source of employment for city workers - especially minorities.
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  With this attitude, it is not surprising that Detroit found very little cost savings or improved efficiency in contracting out. Instead, they proceeded by aggressively removing impediments to the efficient provision of services by city employees. This involved extensive administrative procedures.
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  The primary goals were safety - the efficient, user friendly provision of city services - the encouragement of business expansion and growth - and budgetary solvency.
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  The restructuring process included: Quarterly reports from all departments -- the organization of teams and committees for particular purposes and to review city processes and recommend improvements -- and research into methods used by other cities. Budgetary controls were reviewed to remove impediments to efficient operations. Employee and public inputs were encouraged. Archer provides two lengthy appendixes that provide some sense of the scope of modern city services and the complexity of their administration.
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  Some of the results include:

• The establishment of "one stop" licensing and permitting centers where previously there had been as many as 14 for a particular activity.

• The development of up-to-date computerized financial management.

• Millions of dollars in cost reductions and revenue collection increases.

• Business tax reductions.

• Increasing success in attracting new businesses.

• Substantial improvements in city services and public safety.

• Sharply higher property values.

Inmates were prevented from receiving welfare.

  A wide variety of restructuring has been undertaken with laudable results in other states and cities.
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  In Georgia, all new state workers are hired on an "employment at will" basis. This will transform the state's civil service at a rate of about 15% per year, and greatly speeds up the hiring process. A review of the state budget resulted in a shifting of about $627 million from low priority programs to higher priority programs like education and crime prevention.
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  Some accomplishments of Pennsylvania's restructuring program are explained by Gov. Ridge.

• "One stop centers" for local services were established.

• The Dep't. of Agriculture consolidated three previously separate inspections - for produce preparation, worker safety, and environmental clean water practices - into one.

• 27 professional licensing authorities now share one legal department.

• A single form was created for all financial assistance purposes.

• A single toll free number was established for all parks events and camp site reservations.

• Related contracts were consolidated.

• Inmates were employed in park maintenance.

• Inmates were prevented from receiving welfare.

• Online availability of reports, vital statistics and data, and processing of taxes, permits, and licenses, was established.

• 1300 sections of regulations and 1700 pages of policies were eliminated.

  All of which raises the obvious question: Why wasn't much of this done long ago?

  Maryland's use of "public-private partnerships" to redevelop Baltimore's waterfront, provide telecommunications for the deaf, and manage various custodial institutions, is explained by Gov. Schaefer. This involved determining what the private sector was willing to do and what government should be doing to facilitate desired results.
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  Typically, citizens and businesses were used for capital investment and flexible performance. The government facilitated private efforts to acquire property, get variances and other permits, and assure political backing for desired projects and programs. Everybody was allowed to do what they do best.
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  In other essays, Gov Bush explains Florida's education plan, Gov. Carlson explains Minnesota's welfare reform, Mayors Daley and Giuliani explain the crime reduction programs of Chicago and New York City and New York City's "Workfare" welfare program, and Mayor Goldsmith explains how San Diego's "Multiple Species Conservation Program" met the city's environmental obligations and simplified previously paralyzing development regulations and permitting processes.

  In the mid 1990s, the economy boomed and funds poured into government coffers. All levels of government once again proceeded on spending binges - undertaking commitments that quickly absorbed all funds available. They predictably left themselves well short of the reserve funds needed to tide them over even the short and mild recession that has recently ended. Once again, the nation's governors and mayors are being challenged by budget deficits. It's good to know that there are ways to deal with such problems.