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If you could cut the cost of your city's services
by 25 percent without hurting service quality, would you do it?
The city of Indianapolis has done it with dozens
of services -- everything from managing its airports to treating its waste
water. Savings will exceed $200 million over a seven year period.
What's the secret? Indianapolis requires many city
agencies to compete with private companies for the right to deliver services.
Phoenix pioneered public-private competition almost
20 years ago, when it began letting private companies bid for the right
to pick up its garbage. The strategy cut the cost of pickup so fast that
Phoenix applied it to several other services in the Department of Public
Works as well.
But Indianapolis Mayor Steve Goldsmith has used
it citywide. Though he campaigned in 1991 on a theme of privatization, he
quickly realized that private ownership was not the key to success: Competition
was.
That view was confirmed when Goldsmith decided
to contract out the task of sending out sewer bills. When he asked the private
water utility how much it could do the job for -- since it already sent
monthly bills to the same people -- it bid 5 percent less than it was already
costing the city. Unimpressed, Goldsmith turned to other private bidders.
Faced with competition, the water company bid 70 percent below the
city's cost.
Since 1992, Goldsmith has required competitive
bidding for garbage collection, microfilm services, street repairs and several
dozen other services -- some of them more than once. City agencies have
not always chosen to bid, but when they have, savings have averaged 25 percent.
Of the first 64 bids, public employees won 16 and split 13 others with private
contractors.
The biggest and most controversial city competition
was for management of the waste water treatment system. The local union,
the American Federation of State, County and Municipal Employees (AFSCME),
objected bitterly. Plant managers complained that such a radical move was
not only unnecessary but risky, because the plants were already award winners.
Even Goldsmith's own consultants, Ernst & Young, projected that competitive
bidding would save only 5 percent.
But Goldsmith was by now a true believer in the
power of competition. And he was not disappointed. The winner, a partnership
between the company that provided Indianapolis's drinking water and a huge
French waste water treatment firm, offered a 29.5 percent reduction in costs
-- a savings of $65 million over five years.
In the company's first three years, it has performed
better than its public predecessor. Its employees have done better also.
"The majority [of former city workers] would say they don't want to
come back," says local AFSCME President Steve Fantauzzo.
Part of the reason competition has worked in Indianapolis
is that Fantauzzo and Goldsmith have negotiated a method that is fair to
union members, who make up 20 percent of the workforce. Goldsmith required
the waste water contractor to recognize AFSCME as the bargaining unit for
city employees it hired, and he adopted an unwritten no-layoff policy for
union members. When union members lose their jobs through competition, they
are either hired by the private contractor, placed in another city job or
retrained and placed in a private sector job.
By the end of 1995, the mayor had eliminated more
than 1,025 of the 4,416 city jobs that existed when he took office. He exempted
the police and fire departments from competitive bidding, but the rest of
the city work force had shrunk by more than 40 percent. Deputy Mayor Skip
Stitt says that about 20 percent of the 1,025 were laid off (none of them
union members). The rest went to work for private contractors, were moved
into other city jobs, were placed in private sector jobs or took early-retirement
packages.
Once they had to compete, workers began negotiating
for a share of the savings they produced. Typically, they now collect 10
to 25 percent of savings when they drive their costs below their bid price.
The first year the trash collectors negotiated such a "gainsharing"
payment, they each took home an extra $1,750.
Some units are beginning to compete for contracts
let by other, nearby governments. And the combination of competition, a
no-layoff policy for union members and gainsharing has turned union behavior
upside down. Union members now suggest outsourcing when it will save
money.
"The outsourcing issue used to be a big fight with the administration,"
says Stitt. "But now it's not."
Fantauzzo agrees. "Those employees and their
managers are determining what they do best, their core activities."
In fleet services, for example, "we don't do body work best, so let's
get out of the body work business."
"Look what happens in the 11th month of a
budget in traditional government," he adds. "Everyone is looking
to spend the last dime to justify that plus more next year. Here, people
are looking to save every dime because they figure a piece of the pie is
going into their pocket."
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