Tag Archives: Privatization

Privatizing Garbage Deserves another Look

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As city governments across the nation battle budget issues, the notion of privatizing some services is once again making its way to the fore.  Detroit, which is in bankruptcy, agreed earlier this year to contract with two private waste haulers for residential trash and recycling pickup services and is expected to save taxpayers $6 million annually.  Flint, Michigan, operating under an emergency manager, took the same path in 2013 with expected savings of around $1 million annually.  While Pittsburgh is not facing bankruptcy, it is still operating under financial distressed status, going on ten years now.  It’s time to give garbage privatization a look, or in the case of Pittsburgh, another look.

 

This is not the first time the subject of the City privatizing waste removal has been suggested.  The Allegheny Institute first wrote a full length report on the subject in 1996 (Report #96-18), and subsequently a Brief in 2007 (Policy Brief, Volume 7, Number 56), and a report in 2008 (Report #08-02).  Of course we are not the only ones to take up this mantle.  Two task forces also made the suggestion:  Competitive Pittsburgh in 1996 and Pittsburgh21 in 2002.  The Act 47 team, working with the City while in distressed status, issued a directive (PW-04) called “Managed Competition of Solid Waste Services” to have private service providers submit bids for the southern neighborhoods.

 

As we wrote 2007, “In stage one, only private haulers would be permitted to bid in order to allow for ‘an opportunity to evaluate contracted services’.  This would be followed by stage two, encompassing a larger service area, and ‘the City workforce shall be included among the bidders in competition with private contractors’.”  But the City did not let it play out that way as the City’s Department of Environmental Services (DES) won a combined bid—stage one was never launched and the public did not have a chance to see how much a private company would have charged for collection services and how it would have compared to DES.

 

In the City’s 2014 operating budget we find a breakdown of DES expenses[1]. The two largest expenses are salaries and wages, projected to be $7.88 million, and property services (disposal fees) at $3.5 million.  The remaining categories such as supplies, property, professional and technical services push the Department’s total to $11.7 million.  Keep in mind that two large expenses are not included in this total:  employee benefits and workers’ compensation costs.  We had mentioned in our 2008 report that benefit costs are roughly one-third the value of salaries.  Thirty percent of the above mentioned wages and salaries would be approximately $2.3 million.  Accounting for benefits runs the total up to $14 million.  But there is one more component to consider—to wit; workers’ compensation costs.

 

In a 2004 study performed on behalf of Pittsburgh’s other overseer, the Intergovernmental Cooperation Authority (ICA), the results found that while the DES comprised 5.8 percent of the City’s workforce, they were responsible for 52 percent of workers’ compensation claims.  Furthermore the report notes that over a third of those claims results in a change in work duty status for the claimant.  For fiscal year 2013, the amount of workers’ compensation claims for the City came in exceeding $19.3 million with claim payments of more than $22.7 million.  This amount has been fairly consistent for quite some time.  When we wrote the Brief in 2007 we noted that it was about $20 million and the 1996 report showed the amount at $18.9 million for 1995 and $20.3 million in 1994—not much has changed over the last twenty years.

 

Thus if we estimate workers’ compensation costs for DES at roughly half of the 2013 claims, we can add another $9 million to the Department’s expenditure estimate for a total of $23 million.  Broken down to a per-property served basis, for the 115,200 residential properties served (five dwelling units or less, the Housing Authority, the Borough of Wilkinsburg, and City government buildings) the per unit annual cost is just under $200.  Of course the City’s contract with the Borough of Wilkinsburg is expected to bring in $904,000, so even if that amount is removed from the gross of $23 million, it still leaves a net cost to City taxpayers of $22.1 million or a per residential property amount of $202 (removing the 6,000 residential properties in the Wilkinsburg contract).  Looking at it from a per City resident basis, with 305,700 residents the per capita amount is slightly more than $72.

 

So in a City that is looking to save every nickel it can, now is the time to give privatization a fair chance.  In addition to Detroit and Flint, Michigan, other cities are contracting with private firms to remove their refuse and recyclables.  Omaha, Nebraska, one of our four Benchmark cities, has privatized its waste collection. In Omaha, the contract with the private hauler, who services residential properties only, is worth $14 million.  Their department of public works does still engage in oversight of the program and pays landfill fees, so the total cost of waste removal is $17.5 million (conversation with Omaha finance official).  For a city with 421,500 residents this amounts to a per capita cost of roughly $41.50.

 

While we can only speculate about how much a private hauler would bid to take over the City’s garbage collection, we can use the Omaha experience as a rough guide.  If a private company can do the job for $41.50 per resident—$30 lower than the DES is currently spending—the cost to the City would be $12.7 million.  The savings would be about $9.4 million or roughly the same amount the City is paying in workers’ compensation payments attributable to DES.  Keeping in mind that the savings wouldn’t follow immediately as claims already in the system will have to be satisfied, but there would be no new claims.  Thus, over time the enormous worker compensation savings will be realized and help the City enormously. Then too, the employees would no longer be on the City payrolls reducing the buildup of pension liabilities.  Cutting the City’s employee to resident ratio to a level closer to that of well managed US cities is a probably the best way to assure Pittsburgh’s long term financial stability.

 

The benefits of outsourcing are reduced costs to City taxpayers which of course includes the corresponding reduction to workers’ compensation claims/payments.  The City should revisit the Act 47 team’s directive, mentioned above, to solicit bids for the southern neighborhoods.  When the bids come in and are compared to the DES’s costs, all DES costs should be taken into account including employee benefits and workers’ compensation. While private companies try to keep costs down to earn profits to the benefit of owners/shareholders, public sector agencies should try to keep costs down to benefit their citizens/taxpayers.

 

With the City still under financial oversight and still struggling to keep expenditures in check, no opportunity to produce savings now and into the future should be off the table.


[1] City of Pittsburgh 2014 Operating Budget, page 262.  http://apps.pittsburghpa.gov/cbo/2014_Operating_Budget.pdf

Parking Garage Economics

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Leasing or selling public parking garages to shore up finances. Readers of the Institute’s work will recall days of yore around 2009 and 2010 when the City of Pittsburgh had a plan to lease the garages and meters to put the proceeds into the pension system. That did not happen, but the details of the plan are touched upon here, here, and here.

The idea did keep traction in the capital city of Harrisburg: we wrote in June 2011 that the Act 47 recovery plan for Harrisburg mentioned the possibility. Instead of paying off pensions, the 2012 final recovery plan noted "if the parking assets are included in the debt solution, the proceeds from the parking assets transaction will first need to be applied to repay the existing debt of the Harrisburg Parking Authority. The remaining proceeds…could potentially be used to pay a portion of the incinerator debt and to contribute over time to address a portion of the City’s structural deficit".

Such deals can be quite complex and raise a lot of questions. One that was raised in a news article is whether the Harrisburg arrangement is a lease or a sale. When the arrangement involves not leasing the garages to a private interest but a state-level economic development authority who will also involve another local non-profit economic development agency and then two private interests will have a role in managing property and parking operations, things can get a bit complex.

Why the involvement of the other authority and the non-profit? Because locals were worried "…that parking rates could increase out-of-control to boost profits while the assets themselves could languish and degrade in the hands of a company with no long-term interest in the welfare of the city." Similar thoughts arose many times during the debate in Pittsburgh. Of course, it is safe to assume that policymakers in both cities did not contemplate that a private operator would have to pay property taxes (unlike a municipal or authority owner), collect parking taxes, pay expenses, and still make a profit while recognizing that simply imposing higher rates would eventually result in a drop in parking customers.

Proposed House Transportation Amendment Serious About Costs

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According to newspaper accounts, the proposed House amendment to the transportation funding legislation takes a very sensible and long overdue approach to difficult issues that have been time and time again kicked down the road. As presented earlier this week, the proposal takes on special interests and offers money saving solutions.

 

 

First, and of paramount importance, the proposed legislation would eliminate the prevailing wage requirement on some road projects. The monetary savings from elimination of the wage requirement would be substantial and, depending on the type of project, could amount to as much 20 percent of the current cost of the work.  Moreover, it frees up work to bidding by non-union contractors, a freedom enhancing move.

 

Second, the amendment would drop the $100 add on charge for traffic violations that would be used primarily for mass transit. This provision in the Senate bill has been roundly criticized as an inappropriate and problematic method to generate funding for transit. 

 

Third, the House proposal offers local communities tax options to increase the local share of transit funding.  Fare revenue, which provides about 25 percent of total funding, combined with the 15 percent local match requirement to receive state aid means the transit service area is providing far less than 50 percent of the funds needed to operate the mass transportation system. Raising an additional five percent locally seems more than fair. By putting any transit funding levy option on a referendum ballot, local voters will have a say in how much the local transit agency has to spend.

 

Fourth, the amendment calls for privatizing ten percent of bus service at the Port Authority of Allegheny County (PAT) and SEPTA. Privatization is a step that was recommended years ago by the Rendell Transportation Task Force. Privatization does not mean shutting down routes and letting private firms come in. The transit agency would put routes up for bids.  Authority funds, including state and Federal subsidies, would be used to pay a company that enters into a contract to provide service.  The idea is to get the service delivered at a lower cost than the authority can provide it. There are successful examples in Southwest Pennsylvania and Denver, Colorado.

 

To be precise and more effective, this provision should be retitled as “outsourcing” or “competitive contracting” as opposed to simply privatizing. Indeed, regional transit agencies in the PAT area should be able to bid on routes that make sense for them to incorporate into their service capabilities.  It is well known that the employee compensation costs at these agencies are well below those at PAT.

 

Finally, the House amendment greatly reduces the three year increase in funding for transit agencies, in large part due to the elimination of the $100 add on traffic violation charge. 

 

The advocates of mass transit are all up in arms over these provisions with the usual claims that the state underfunds mass transit already. Too bad the critics never bother to look at the outlandish cost structure the authorities, especially the Port Authority, face because of a long history of excessively generous labor contracts and a massive buildup of legacy costs.  Why is it so hard to understand that most taxpayers have no interest in paying more for retiree benefits at PAT that most of them can only dream about?  There are many studies that illustrate the high and unsustainable cost structure at PAT. They should be examined.

 

The objection to eliminating prevailing wage is nothing more than special pleading for union construction workers.  It is simply a mechanism to transfer wealth from taxpayers to union workers beyond what the marketplace would do through market determined wages.  The right to strike by teachers and transit workers accomplishes the same result.

 

The objection to privatizing a share of bus service at PAT and SEPTA is predictable with claims that before PAT the private bus service was a disaster.  But PAT’s outsourcing of service is not a return to the pre-public transit days. The authority would enter into contracts with providers to obtain service delivery at a lower cost than it can accomplish. It would, in effect, pass along a large share of the subsidy it receives in its payments to the private provider. There is no way a purely private bus operation can compete with a heavily subsidized public transit agency such as PAT.

 

Then too, opponents claim the House Republican transportation proposal is too ideological-which really means that it threatens to reduce union clout.  Who are the ideologues in this?  Efforts aimed at limiting the increase in taxes that would otherwise be necessary to continue on the path of funding the status quo are deemed to be ideological. Would raising taxes and rewarding past irresponsible behavior be considered non-ideological? 

 

The opposition to the proposed House transportation legislation is of a piece with resistance to meaningful state employee and teacher pension reform that is so desperately needed and the full court efforts to prevent liquor store privatization. Talk about ideological. It is all about government kowtowing to the demands of its public sector employees. This unfortunate situation is demonstrably at the heart of severe government financial problems from sea to sea shining sea.

Beer Distributors Plead for Continuing Their Special Privilege

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When someone’s ox is about to be gored, that person can be expected to protest loudly. Certainly spokespersons for Pennsylvania’s beer distributors, who have a virtual monopoly on retail sales, were in full throated condemnation of legislation that would strip them of that monopoly. Claims that thousands of people would lose their jobs were front in center of the argument-the typical, predictable assertion of almost everyone opposed to any action that promises to eliminate a government created monopoly.

Bottom line: jobs supported by monopoly power granted by the government that are over and above what the free market provision of a good or service would create must be the result of transferring income from consumers to the monopoly providers that is above what a market provided good or service would be. In other words, if the number of full time equivalent employees involved in retailing beer in the current "distributor" regime is higher than will be needed in a free market regime, their income represents an unnecessary transfer of income from consumers. Income that could be used to purchases other goods and services and create other jobs. And it is a virtual certainty that the non-money value of convenience for retail consumers who will be able to buy beer while shopping for groceries or for convenience store items will be enormous. Not to mention the time and gasoline saved not having to make a special trip to a "distributor" store.

Finally, the claim that consumers will have fewer choices of product is laughable. A visit to a major super market chain store in states where beer is sold in grocery stores will reveal a mind numbing array of beers, ales, and other low alcohol beverages available in six packs, quart bottles, in single bottle sales and so on. The variety and choice argument is another indication of just how deeply ingrained the anti-free market mentality has become in Pennsylvania, even among people who are engaged in business activities.

Tough Sledding for Lift Proposal

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As part of the drive to find efficiencies in County government and determine the proper functions of County government the Parks Department and Council’s Parks Committee might test the slopes to see if there is a private interest out there who might want to take over the skiing and snowboarding functions at Boyce Park. We have written previously about the County’s efforts (here, here, and here) which go back to a 2007 study on identifying revenue sources in the park system. The County put out a request for proposals for the Boyce Park facilities but it was not successful in drawing interest.

The Executive, sounding a bit like the Governor when discussing the liquor store privatization plan, stated "We’re going to take a look at, say, our ski slopes, (and ask) is that a business we should be in. I don’t know that it is."

That’s the perspective the County needs to take as part of its next Sunset Review and not be dismissive of getting the report done and being serious about it. The 2003 Review raised the issue of looking for alternative revenue sources for the parks,

Advocates Miss the Bus

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Proponents of funding public transit rallied at the City-County building this week calling for dedicated funding from the state for the Port Authority, one speaker noting that there is still a "transit crisis" that they hope will be ended when the Governor unveils his transportation plan for roads, bridges, and transit (that is now supposed to come at the budget address next month rather than today). The speaker used the opportunity to state opposition to "privatizing" transit since that "spells disaster … With privatized transit, fares go up while quality, safety and wages go down". Why even mention it? Because the speaker had heard the Governor make mention of it at a speech at the University of Pittsburgh.

Does the speaker realize that several small transit companies in western Pennsylvania, even some that drive buses into Allegheny County on a daily basis, contract with outside companies to run their bus service? Based on our 2011 survey, some even paid higher wages than those that kept their operations "in house". Of course, none could touch the wage of an average PAT driver ($25.48 to $15.23). Or that the Port Authority contracts with a company to provide ACCESS service? The previous Governor’s transportation commission in 2006 gave that portion of PAT’s operations very high marks. Know what else that Governor’s commission did? It directed PAT and other transit agencies around the state to evaluate competitive contracting opportunities, adjust service to meet market demand, reduce labor and management costs, and tie bus fares to inflation. Sounds quite business-like.

The speaker’s worst nightmare might be riding a bus in Denver, Colorado. A 1988 state law directed Denver’s Regional Transportation District to contract out a portion of service, which now stands at 50% of "rubber tire" service. As of 2011 the RTD had 1,093 contracted fixed route drivers working alongside 1,826 represented employees; 537 buses were RTD owned and operated, 457 RTD owned and leased to private carriers. A customer can’t pick and choose whether an RTD driver or a contractor is going to pick them up on a bus trip. And who knows if the quality of the buses under the direction of lessees is compared to the in-house driven ones. Has that uncertainty scared off bus riders? According to statistics from the National Transit Database since 1996 (the farthest back the data goes) unlinked bus trips are up 16%; PAT’s are down that rate over the same time frame.

Savings to be Found at the Jail?

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The Allegheny County Jail has a prominent place in the Pittsburgh visage (being situated on the banks of the Monongahela River and next to the Liberty Bridge) but a relatively small place in the overall County budget. In 2011, the Jail totaled $55 million in expenditures, about 7% of the $767 million operating budget. There are ways to save money on its operations, however, and County Council is going to look at how to get that done.

An article today raised issues related to electronic monitoring and prisoner work detail in order to control the institution’s costs. The 2010 sunset review said that the Jail should "…manage inmate population growth, continue development of alternative incarceration programs". The report pointed out that the County does contract out a portion of the Jail’s operations: a non-profit provides medical services, a for-profit provides food service; laundry and halfway house programs are handled by contract. The sunset review also said that "the County could contract additional functions to make the jail a private facility".

The Jail’s most recent annual report for 2009 shows that most of the people that did end up there stayed for two weeks or less and that over the five year period through 2009 admissions decreased.

Allegheny County Airport Authority Involved in Privatization Effort

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The recent news that the Allegheny County Airport Authority is supporting privatization came as a bit of a surprise given the longstanding strenuous anti-privatization stance taken by the current and most recent Allegheny County Chief Executive.  But there it is–news that the Authority is engaging in a privatization effort but not of any operations at Pittsburgh International (PIT). The twist is that the Authority is part of a consortium that has placed a bid to take over the San Juan Marin International Airport in Puerto Rico.  While all the specifics of the request for bids and the bid submitted have not been divulged, the issue certainly raises many questions–and eyebrows.

 

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The Drip, Drip, Drip of Water Rates

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City taxpayers will be paying a higher City property tax rate (as a result of the library referendum), a higher County property tax rate (as a result of County Council’s 1 mill increase) and now higher water rates based on the vote of the board of the Water and Sewer Authority. Based on a typical residential customer (use of 4,500 gallons per month) the increase will tack on $2.57 per month to the typical $47.12 bill, which itself was boosted to that amount by a 7.7% increase in 2010.

According to the City CAFR (the page titled "Revenue Bond Coverage") the PWSA’s gross revenues increased 231% from 2001 to 2010 ($60.4 million to $139.7 million) while operating expenses grew 242% over that same time frame ($38 million to $93.1 million). In 2010 the net revenue (gross revenue – operating expense) was $46.5 million, while debt service was $55.6 million. That means net revenue cover 84% of the annual debt service. The debt-which in total is $662 .7 million-is not a direct obligation of the City of Pittsburgh government.

After envisioning the PWSA as an agency that would be interested in purchasing other small municipal systems after it did so in 2009 when it bought Millvale’s system (the authority’s head at the time said the "city authority is considering buying other water systems in surrounding communities") the discussion recently turned to privatization as a possibility. The Mayor mentioned that "We remain open-minded to doing what’s best for the city of Pittsburgh."

Pittsburgh: A Competitive City?

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"The residents and taxpayers in the City deserve excellence in City government. The City must be able to provide quality services at the lowest practical cost. City resources must be used to meet the needs of the residents, visitors, and businesses in the City".

Fifteen years ago this month the Competitive Pittsburgh Task Force released "Establishing a Culture of Excellence", a report that was prompted by a structural deficit in the City’s budget. Years before Act 47, the ICA, new business taxes, and long-term leases for parking spaces were in the public consciousness of the region, the Task Force attempted to "identify opportunities for cost-saving through the introduction of market discipline, and develop strategies for increased competitiveness and cost savings". No doubt spurred on by cities like Indianapolis, which used the "yellow pages test" to determine what municipal services the private sector could provide by contract, the report focused heavily on benchmarking and the private sector to identify $44 million in annual and one-time savings for the City.

At 37 pages, the Task Force report covered public works, public safety, and general services and also pointed out the "ticking time bomb" posed by the pension plans. On that last point, the report recommended selling pension bonds-an action taken soon after which did not prove fortuitous-but also advocated using any immediate savings from the bonds to reduce future pension obligations. The City is still wrestling with pension issues in spite of the actions taken this past December.

How much was implemented? The Task Force did recommend bidding out many non-safety functions like garbage collection, animal control, street sweeping, basin cleaning, cable, and fleet management. The message across departments and functions was clear: get non-safety costs to private sector levels or get out of the business. Today, the City still collects its own garbage and that of neighboring Wilkinsburg: there was a "managed competition" bid in 2007 which the City won, but our work showed that some of the costs may have been understated. Animal Control has its own bureau. Fleet management is privately contracted.

On safety services like police, fire, and EMS some initiatives discussed by the Task Force are still being discussed today: introducing civilians into police administration, getting the hospitals to partner/absorb EMS functions, reducing police overtime, etc. Privatization of the tow pound-recommended by the Task Force-was accomplished in 2009. The headcount and number of fire stations, which the report pointed out was far out of line with comparable cities, have come down largely over the years of Act 47 and changes to post-retirement health care in collective bargaining agreements.

The Task Force also recommended the City and Allegheny County "eliminate all duplicate services", a recommendation repeated in the 2008 proposal to merge the two governments and has not acted upon to any great degree as of today.

"Big picture" wise, the City had 370,000 people in 1996; it spent $442 million across all funds that year (audited amount from general, special revenue, debt service, and capital) for a per capita amount of $1,197. Per capita net bonded debt was $1,507. With a January 1996 payroll of 4,217 employees, the City had 11.4 employees per 1,000 people.

In 2010, population had fallen 17% to 306,000; audited total City spending was $589 million, resulting in a per capita amount of $1,924. Per capita net bonded debt rose 30% to $2,058. Employee headcount per 1,000 fell slightly to 10.3.

Spending is up, the per resident share of debt is up, and headcount is down slightly: what would the Task Force have to say for the success of their recommendations?