When City Governments Outsource, Who Wins?

When City Governments Outsource, Who Wins?

This is the first installment of Metronomics, a new column by Andrew Thompson, a Philadelphia-based writer mostly published in Philadelphia City Paper. He is fascinated by the natural economic forces that dictate our decisions and enable the creation and destruction of cities, states and people. He hates self-promotion but refers you to andrewsthompson.com anyway.

The past few months have showered us with news about cities taking hatchets to their budgets and chopping away at services. In my own Philadelphia, the plan to shutter 11 libraries was notorious enough to be reported in the Economist magazine. Unfortunately, one doesn’t have to think too hard to come up with dozens of similar instances.

What’s received less news nationally is how the scramble for funds has reopened discussions on public-private partnerships that allow companies to replace services that are currently tax funded. To shore up budget holes and get quick injections of cash, Pittsburgh is trying to sell off its parking garages, Chicago is auctioning its parking meters and its airport, and many other major cities’ five-year budget plans likely reveal similar strategies.

The dire economic situation has forced cities to re-evaluate which services really deserve to be under the public’s auspices. “It’s really pretty interesting how it’s evolving,” says Alan Wohlstetter, a public-private partnership specialist at Philadelphia law firm Fox Rothschild LLP. “There’s not enough money to pay for everything the way we used to.”

“This is looking in a sophisticated basis at what the business for historical or other reasons the government is involved in where there’s no real public policy principles that they serve,” he adds.

So far, cities seem to be going about it responsibly – no one is trying to sell police services or tax auditing. But selling something as seemingly innocuous as a parking meter can have unintended consequences. Some cities have hiked rates on their meters to deter driving and clear up congested streets and polluted air. If a city finds a sold service to be an important step in a policy goal, it may later find itself unable to address that problem until the end of a lease, which typically are between 50 and 99 years long.

These decisions also have to take into consideration how badly the revenue from the item up for sale could be needed down the road. The price of a service is calculated based on a projected discount rate – how much the value of that good will decrease over time. Calculating the discount rate is never more than scientific fortune-telling, and a turn of economic events would make a city wish it hadn’t been so quick to get rid of a money-making service for a quick, one-time shot of cash.

Orange County provides a good example of the unforeseen side-effects privatization can cause. It sold oversight of the San Joaquin Hill toll road to a private company in 1993. Less than 10 years later, Orange County decided the non-compete clause in the contract prevented the county from adding additional lanes to alleviate congested traffic. It actually had to buy the rights back early into the 75-year contract.

Of course, the financial climate has rendered these partnerships less achievable. Chicago has had trouble finding a bidder for its airport, says Wohlstetter, and there’s no telling how many other cities will have trouble closing multimillion (or billion) dollar deals when so many companies’ cash flows have dried up.

Still, I have to laud cities for getting creative. The impulse in these situations is often to hike taxes, cut services, or find a way to push debt onto future generations. As long as cities perform thorough cost-benefit analysis before they put things on the auction block and don’t unwittingly sell a service they’ll be crying for later on, these types of partnerships can be a healthy antidote to a rapidly metastasizing illness.

Tags: philadelphiachicagopittsburgh

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