AN ALTERNATIVE TO TAX AND SPEND GOVERNMENT

by Oregon Senator Doug Whitsett, District 28 8/2/10

Practically everyone agrees that the costs of delivering government services are too expensive. Simple mathematics tells us that our current and future budgets are unsustainable. We know that the 46 % growth in state government spending during the past four years has far exceeded the rate of growth of government revenue. We are aware that state government has hired more than 4,000 new state employees during the same period of time that private sector Oregonians have lost more than 150,000 jobs. It is clear that a nearly thirty percent underemployed private sector workforce cannot afford this unrestrained growth in government costs.

In my opinion, the primary cause of those high and unsustainable service costs is that our government maintains a monopoly on those service deliveries.

 Virtually all monopolies engage in certain characteristics. Their lack of accountability results in an oversized and inefficient work force. This in turn causes a lack of productivity resulting in unsustainably high cost for services. They are permitted to perpetuate, and to be satisfied with the status quo, because they have no competition; therefore, they have no incentive for innovation. Finally, they tenaciously resist competition in order to maintain that status quo.

Most reports that extol the economic virtues of public service monopolies are created by those same monopolies. The studies are usually models, carefully designed and calibrated to discredit any form of competition. For instance, the public education monopoly viciously attacks any alternative to traditional public education. They even attack optional public schools including charter schools, alternative schools, virtual schools and school vouchers that would allow parents to choose the public school that their child should attend. Their report models either do not include, or carefully understate, the fact that these optional public schools have uniformly better education outcomes than the traditional public schools.

It has become painfully obvious that we can no longer afford to deliver current service levels at existing and predicted future costs. Either the cost of service delivery must be reduced, or the services themselves must be eliminated.

Government services can be divided into two categories.

The first is classified as inherently governmental services, such as police and judicial activities. The core functions of these inherent services should always be supplied by public employees.

The second category is classified as commercial activities that can be obtained from private businesses or nonprofit organizations. If the service can be found in the yellow pages of a phone book it is a commercial service. Services such as accounting, vehicle maintenance, tire repair, truck washing and painting are always available in the private sector. Moreover, many of the jobs that support the core government services are also commercial services.

The most successful way to reduce the cost of government services
is through privatization of these commercial activities. That means shifting some or all of the aspects of commercial service delivery from the government to private sector providers.

Privatization of commercial services almost always saves taxpayers’ dollars
 for a number of reasons.

Competitive bidding for government contracts brings out the best
possible combination of price and service quality. Private companies must trim labor costs, find the least cost suppliers for quality materials and create project efficiencies in order to beat their rival bidders.
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The cost of risk management is reduced because the private contractor is
responsible for cost overruns and delays in completion. Timely completion of projects is imperative for private contractors because time is money in the private sector. Those contractors who are not able to efficiently complete projects on time will fall by the wayside, because the cost overruns inherent in time overruns would be borne by the private contractor. Moreover, the cost of liability issues must be borne by the contractor and be included in the cost of the bid.

Competition always fosters innovation that both reduces costs and improves
quality. Innovation occurs wherever competition exists to build it better, faster and cheaper, or where quality services must be provided for the least cost. The private sector is where that competition resides.

The cost of providing commercial services can be reduced significantly by allowing the private sector to provide the needed equipment and manpower for peak-demand periods. Rather than purchasing the necessary equipment, and hiring the needed manpower, to stand-by for peak periods of need such as winter snow removal, government agencies can rely on the private sector to provide those peak period services.

Privatization can occur in several different ways.

The most simple and common method is for governments to issue a competitive request for proposals for private sector providers to deliver public services for a fee. Examples could include a contract for building a public street or maintaining a fleet of vehicles.

Governments may also award an exclusive contract to a franchisee to provide  public services or to operate a publicly owned asset. Examples could include the operation of a county owned sanitary landfill,  or for the operation and maintenance of wastewater treatment facilities.

Governments may issue consumers vouchers to purchase public
services in lieu of actually providing the services to the consumers. The most common example is a voucher issued to parents to allow them the choice of schools to educate their children.

  Finally, government may choose to simultaneously stop providing a service as well as stop collecting any inherent fee or charge for the service. If that service is truly needed by the people, the private sector can provide the benefit for a fair and competitive fee.

Privatization of commercial government services is a win-win effort. By privatizing public services, the cost of those services can be significantly reduced, the quality of those services can be significantly improved, and much needed private sector jobs can be created.

AN EXAMPLE OF HOW IT WORKS

During his two terms as mayor of Indianapolis, Indiana, Stephen Goldsmith was able to accomplish what so many of us talk about, but never seem to achieve. The Mayor took the control of that city’s government away from the public employee unions and other special interest groups.

He reduced the city’s public employee workforce by nearly forty percent. He privatized more than fifty percent of the city’s government services. He returned much of the social infrastructure to families, to churches and to local community groups. And while achieving these goals, Mayor Goldsmith reduced city taxes four times in eight years.

He was so successful that New York City Mayor Michael Blumberg has recently hired him as deputy mayor for operations of New York City. His current challenge is to do for New York City what he did for Indianapolis.

The Indianapolis Mayor understood that municipal government had to find a way to reduce costs and to encourage the growth of private sector wealth creation.

  Goldsmith addressed his plan of action in a workman-like manner.

        First, he identified and dismissed obstructionist political appointees. It didn’t matter which political party they were affiliated with. He simply refused to listen to how it couldn’t be done, or how it had never been done before, or how rules and employment contracts prohibited his intended actions.

      He then separated city services into core and commercial benefits.

      Core functions, such as police, fire fighters and municipal judges, were maintained as city- employee -provided benefits. Much of the support service to these core functions were identified as commercial activities and put out for public bid. These, and more than fifty other commercial services, that were formerly provided by the city, were shifted to the private marketplace.

The result was a more than forty percent reduction in the number of city
public employees. Most of the public employee job loss was in middle level managers rather than blue collar workers. The much leaner private sector providers were able to provide improved services without the layers of bureaucratic mangers.

    Cost savings to the city taxpayers were remarkable.

    The Mayor was able to reduce city taxes four times in eight years.

During the same period, the quality of city public services improved dramatically as the private sector competed to provide the best service at the lowest cost.

 Both the taxpayers and labor profited.

The Mayor was able to use some of the savings to invest well more than one billion dollars into public-private partnerships to build infrastructure. The private sector jobs created provided taxable employee earnings that improved city revenue at the same time that taxes were being reduced.

 Overpriced government services, and a stagnating economy, always hurts those in the most neglected neighborhoods the worst. The Mayor was able to replace high cost direct government services with city tax-dollar-leveraged private sector partnerships that provided more and better services for less tax dollars. He found by returning power and resources to the neighborhoods that families, churches and community groups were able to deliver needed services much more efficiently and more cost effectively.

 Our federal, state and local governments have lost their way.

Mayor Goldsmith has demonstrated a winning pathway out of the tax and
spend morass. His methods were successful in Indianapolis, a city of nearly 800,000 people. His current attempt will apply that pathway to New York City’s more than eight million people.

 Let’s hope that a new Oregon Governor can learn from the Indianapolis Mayor’s example.

Best regards,
Doug