League of Municipalities Testimony by
William Dressel, Executive Director; Brian Kronick, Labor Relations Counsel; and Gregory Fehrenbach, Coordinator, Interlocal Municipal Cooperation and Management Advisory Service,
Before the New Jersey Privatization Task Force
Wednesday, April 7, 2010
State House Annex
Good morning and thank you for giving us this opportunity to share our perspectives on privatization, in general, and on how it has been used by New Jersey municipalities. We will also highlight some impediments to greater use of privatization, and suggest some reforms that the State could make, to help local officials over-come those impediments.
First, we would like to point out that the general concept we will talk about today involves the decision by a municipality to engage workers, other than its own municipal employees, to perform municipal services. This can take many forms:
- Entering into a contract with a private or non-profit vendor to perform a service, such as solid waste hauler to collect municipal solid waste from residential customers and deliver the material to a landfill or incinerator.
- Entering into a contract with another municipality to perform a service in place of hiring municipal employees to do so.
- Entering into a contract with a county to perform a service in lieu of municipal employees or a private contractor, such as the Somerset County fleet maintenance program that is open to municipalities in that county.
- Contracting with a county improvement authority to perform a service such as collection and marketing of recyclables.
- Hiring an independent contractor, such as network manager, in lieu of hiring an employee with benefits to perform the service.
On the surface, it appears counterintuitive that the private sector might be able to provide a service at a lesser cost than government can. Government does not pay income or corporate business taxes and does not need to provide for profit. These items alone should permit municipal government to provide the service at least 20% less costly than a private contractor. However, there are other factors at play that periodically permit the private sector or even other governments to provide services in a more cost effective manner.
There are many ways in which municipalities can and do perform services for their constituents without hiring employees to do so. Why would a municipality chose to provide a service in this fashion rather than hire an employee to do so? There are several reasons for doing this;
- Often, the motivation is a financial analysis, which has shown that it will be more cost effective to have another party perform the service.
- Other parties can effect economies of scale that a municipal government cannot.
- Another party who has had vast experience with the service they provide therefore can achieve much greater efficiencies.
- Some private vendors have greater control over their workforces than do municipal governments
- Sometimes, the motivation is to remove difficulties that occur when hiring an employee to perform the work. Some of these difficulties include:
- Significant limitations placed on management by civil service regulations that adversely affect the ability to hold an employee accountable for their work product or the work product of their group. Private contractors have standards established in a contract and wish to have their contract renewed. These serve as significant motivators to perform well under the contract. The concept of potential lifetime employment has not had the same motivating influence.
- Concern for workers compensation claims and lost work days will at times drive up the cost of the municipally provided services. A service contract offloads this onto the contractor to manage and control.
- Benefit costs typically do not change under the contract. It is for a fixed sum for a fixed period of time. The municipality contracting for the services knows what the costs will be. The municipality does not have to worry about overtime or annual increases in health, unemployment and workers compensation insurances, pension, and other bills.
- There is no need to argue with employees about their responsibility under a labor contract and then possibly go through PERC unfair practice charge proceedings, or to mediation, fact finding or arbitration to settle the differences. Contractors can be ejected from a project if the terms and condition permit. There is usually strong accountability under a service contract.
- Sometimes, contractors are able to pay their employees market wages for work rather than the union negotiated wages with longevity and various allowances and benefits that are found in municipal collective bargaining contracts.
While the term privatization is not widely used in municipal government, other terms are. These include among others, contracting-out, interlocal agreements, shared services, and professional service agreements.
What are municipalities doing now?
Many municipalities contract with another party to provide a service or do so jointly through either a shared services agreement or a public-private partnership. These have been entered into as a result of a necessity to provide the service, lack of personnel and/or a ready supplier. Typically an opportunity and a need have to present themselves. It is quite difficult to institute a contract service when there is already a workforce in place. To provide you with a thumbnail sketch of what is taking place we will provide a brief listing:
- Municipal custodial services
- Solid waste, recycling collection, disposal and marketing services
- Landscape, parks maintenance and similar services
- Information technology and network management
- Web master and maintenance services
- Street paving and reconstruction
- Snow and ice control
- Professional services including: engineering and design, architectural, municipal attorney and other legal services including labor, tax appeal defense, COAH defense, police officer liability defense, accounting and auditing
- Water treatment and distribution
- Sewerage collection and treatment
- Purchasing of goods and services through purchasing cooperatives and under state contract
- Recreation department activities
- Payroll departments
- Fleet maintenance services
- Emergency dispatch and communications services
- Emergency medical services
- Police protection and fire prevention and suppression services
- Uniform construction code inspection services
What inhibits municipalities from doing more?
Civil Service –Civil service regulations impede civil service municipalities from expeditiously pursuing privatization, outsourcing or shared services. We support legislation that would allow municipalities to voluntarily remove themselves from the Civil Service System – a system that more properly governs state government personnel administration.
PERC – While subcontracting is a non-negotiable managerial prerogative as recognized by the courts, public employers are required to negotiate the impact of the subcontracting decision. Legislation, which would amend the employer-Employee Relation Act to permit governmental employers to utilize private and non-profit vendors to supply municipal services without the need to negotiate the impacts of these actions, would assist municipalities that are forced to negotiate the impact of the subcontracting decision.
Prevailing Wage – We would support reforms that would eliminate the artificial controls that exist on contractors who provide municipal services. Such reforms would allow market forces to determine the appropriate amount to be paid for municipal services. Prevailing wages regulations are really union wage regulations. These regulations directly and uniformly increase the cost of services and capital improvements needed to maintain the infrastructure of our municipalities. If the public is concerned about the cost of government, it is necessary to eliminate the artificial inflators that perpetuate the increased cost of governmental services.
Public Safety Services - The largest expenditure categories in almost all budgets are in the area of public safety. One reason for this is that wages and other costs of these services are typically not subject to market forces. One reason for this, among others is that municipalities are not able to contract for police or fire services from anyone other than another public agency. Where it is possible to contract for a public safety service from the private or non-profit sector is emergency medical services. Emergency medial services are not only supplied by local government in New Jersey. There can be competition. Recent events in Lakewood and Perth Amboy have shown the impact of making these salaries subject to market forces. There are reduced costs. Where market forces can be applied to the cost of labor in the provision of municipal services, there have been significant reductions in cost. Non-profit and private providers do not incur the same total personnel costs that the extant condition in government.
To effect reductions in the costs of municipal government, restrictions such as those that control the provision of police and fire services must be lifted and the dialogue needs to begin now.
Local Public Contracts Law – The Legislature created the Local Public Contracts Law for the purposes of eliminating the influence of graft and influence peddling on the awarding of contracts, for which it has been moderately successful. It has been amended and modified over the years in attempts to make it more flexible. On the other hand, the Pay to Play legislation has increased the limitations and regulations that affect public contracts. It is the battlefield of a classic push and pull: greater flexibility for purposes of efficiency versus greater controls to keep local officials more honest. All must remember that honest, efficiency-minded local officials are stymied by the limitations in this law. The law does not encourage or drive local officials to the most cost effective method of getting a job done. It severely inhibits the local official from pursuing the most efficient and effective methods. All are penalized for the sins of the few.
While it is unlikely that much of the Local Public Contracts Law will be made more flexible to encourage contracting out, it would be helpful to lessen restrictions in the law so executive decision could be made to achieve cost reductions quickly. An example of this would be to eliminate the need for the rigors of public bidding or competitive contracting for services supplied by non-profits. The law could permit the use of written quotations, which are much more easily acquired at a significantly lower processing cost.
Local Resistance - Whether the resistance comes from current individual employees, collective bargaining agents, outside forces, supportive residents or other local political efforts, it is very difficult for a local elected official to choose an alternative provider in the face of municipal employees who will lose their positions or lose their compensation package, which typically includes a generous benefits package. This is even true when the savings are significant and/or the fiscal alternatives are bleak.
Clearly, this is a locally determined judgment that a local governing body must decide as they balance the financial savings and the community’s will.
What can be done to permit municipalities to seek efficiencies wherever they might be?
- Permit municipalities to remove themselves from the jurisdiction of the Civil Service Commission.
- At the very least eliminate the pre-layoff process and shorten the time-line for layoffs to permit contracts for services to begin sooner than now permitted which requires at least 105 days following the decision to proceed.
- Eliminate the need to negotiate impacts of decisions to utilize alternative providers of municipal services
- Eliminate or modify the prevailing wage laws and allow market forces including concerns for quality, safety and efficiency to determine the real and true cost of municipal services provided by non-profit and private sector vendors.
- Eliminate binding interest arbitration
- Create opportunities for non-profit and private sector providers of police and fire suppression and prevention services
What should you worry about?
One thing we have learned from the efforts to create public-private partnerships in the past is that anticipated savings should not be utilized until they are truly realized. Savings related to long term investments, should be spread out over long periods of time. If a contract is for a period of 20 years to permit amortization of equipment and facilities, the anticipated savings should be realistically and proportionately spread over the same 20 years period.
Financial analyses should be examined by the Division of Local Government Services. These analyses should be viewed from the perspective of long term fiscal integrity and long term fiscal strength. The examination should be accompanied by strong caveats in the law that assures that the year to year perspectives of the past that have places some municipalities in current fiscal precarious positions will not occur again.