Tuesday, March 24, 2009

Marketization: A new approach to government services

In our agenda this week, we approved a contract to have the YMCA staff the Hunter pool for the summer. That got me thinking about other creative ways we can provide city services….

The City of Pensacola performs a large range of services: fighting fires to servicing cars, running a library to sweeping streets. Some, like police and fire, are unique to the city. In other cases, by opening the service up to competition, we can improve the efficiency of the overall services of the city and improve our bottom line.

I would like to see us open up more city functions to competition, but with a particular twist—city departments get to bid, too. This is not “privatization” but “marketization.”

What might happen?
  • City workers will demonstrate that they can provide services more efficiently and at a lower cost than the private sector.
  • In other cases, we may discover that the private sector is more efficient, and in those cases we will save money.

Indianapolis experience
Steven Goldsmith, the former mayor of Indianapolis, is a major proponent of the idea of opening up certain city services to competition. In Indianapolis, city workers compete with the private sector. During the course of marketizing of city services, the city discovered that it is not the city workers who make for inefficiencies in government. Rather, the bureaucracy of the government itself often limits the creativity and initiative of the employees. If the systems are changed and the workers are liberated from bureaucratic constraints and have a vested interest in the success of their small corner of the city, they can compete against private-sector service providers, and often win.

Yellow Pages test
A concern with privatizing services is sometimes that we would get a private company to do a task and then would no longer have in-house skills. Subsequently we could be at the whim of the private company who could raise our rates. The key for avoiding this is to marketize only areas where there is sufficient competition in the community to ensure that we continue to get a competitive rate. A very simple test for this is the Yellow Pages test. If there are three or more companies listed in the yellow pages who perform a service the city currently performs, then that service can be opened up for competition. It is the kind of free market capitalism that built our country

Competition empowers employees
Since I’ve been on council, I’ve met many city employees, and I’ve discovered this: our employees have better ideas on how to run this city (or at least their slice of it) than I do. Unfortunately, we often trap them in “a system that punishes initiative, ignores efficiency, and rewards big spenders.” [Much of my information on the Indianapolis experience and this quote come from The Twenty-First Century City by Stephen Goldsmith. Indianapolis has been a leader in marketization and reviewing their experiences can help guide us. I am not advocating adopting all of Goldsmith’s inititiatives. Instead, we can pick the best of his ideas and adapt this process to suit our unique needs.]

By letting the employees function more like those in the private sector, we can unleash their creativity, likely finding many cost savings. Additionally, in Indianapolis the city employees who started bidding in competition with the private sector soon started demanding a reduction in overhead to increase their competitiveness. Morale increased which also resulted in increased productivity. In Indianapolis, city workers win about 25 percent of the bids. In addition, they have become so effiencent that they actually win bids for contracts with other local governments.

Government workers have advantages
In some ways, we should expect that government would provide services for a lower price than the private sector. The city doesn’t pay property taxes, we don’t have to make a profit, and we get financial deals like lower utility and borrowing costs. Therefore, it is logical that city employees, when empowered to think creatively about their jobs, could compete successfully with the private sector.

Support for local small businesses
One of the biggest issues that keeps cropping up on council is supporting local, small businesses. Many of the types of things that the city could open to competition are the things that local, small businesses do. If the private sector wins a contract, then the money we spend will, in many cases, stay in our community and strengthen our businesses.

Sometimes the winners won't even be businesses at all. For instance, in Indianapolis some of the park maintenance is performed by churches in the neighborhood. Who would care more about maintaining a neighborhood park than the neighbors?

How to get started
At our committee meeting yesterday, I raised this issue. Council supported me in asking staff to identify a targeted group of services where they think that our employees could clearly compete with the private sector and provide a plan for moving forward on marketization of those services. Again, keep in mind that the services targeted will be ones not unique to the government; more likely they will be the support services that underlie many business functions.

By the way, I want to stress that this is not a criticism of our employees. I know there is anxiety among employees about their job security in this economic climate, but this kind of shift would allow them to have a degree of control that they don’t currently enjoy.

We sometimes hear about the Creative Class. The Creative Class, importantly, is not just scientists and artists, it is anyone who uses creativity in their work. I think that we can use this structure to help all our employees, whatever their role, become creative problem solvers. Workers who are creative, who know that they have say in their job, tend to have higher morale. And, in the end, they do a better job for our citizens.

This is truly a paradigm shift on the way we do government business.

For more information, I recommend this website which has a number of resources about the tenure of Goldsmith or the book by Mayor Goldsmith, The Twenty-First Century City. Of course, there is lots of information out there, and a simple search will turn up lots of links.

Sunday, March 22, 2009

City Pensions

The city pension systems continue to be a hot topic in council meetings and the press, as well they should. While I believe that the city must continue offering retirement benefits in order to attract the best workers, we must ensure that the benefits meet our goals without bankrupting the city. The issue is complex—a puzzle with many pieces, not a problem with one key to solving it.

While the unfunded liability and, hence, the city's annual payments to the funds are very large, we are currently limited to acting only on a small sliver of the pension pie. We cannot touch the benefits promised to retirees; we are obligated to keep the prior commitments made to existing employees (as we should be); and any changes in a large chunk of our benefit packages are subject to union negotiations.

Our options are limited in other ways as well, sometimes by state law. In particular, state law makes converting new police and fire hires to the Florida Retirement System fiscally unattractive. However, in digging into this problem, I have learned of an opportunity for opening this option for us. But if we are to have this option, we need to act quickly.

First, some background

The city has three separate pensions: general, police, and fire. A few years ago, the city’s general pension was closed to new hires. Existing employees could elect to continue with the general pension or be transferred to FRS (Florida Retirement System). All new general hires are now enrolled in FRS.

This change was desirable for the City and employees for many reasons, most notably the differences in benefits between FRS and the city general pension, the ability to spread risks state-wide, and the options available to participants (defined benefit and defined contribution).

Police and Firefighter Pensions

It seems logical that the City might have moved police and firefighters to the FRS when the change was made for general employees. Both the City and these employees would have accrued the same benefits from this plan that general employees reaped. However, action was postponed on the city police and fire pensions because state law makes this a risky move for the city. Here’s why.

Problem#1: A $1.4 M unfunded liability passed on to the City.

The State of Florida charges an excise tax on casualty insurance. This money is distributed to municipalities for their fire and police pension plans. Currently the state provides the city with about $800,000 for fire and $600,000 for police for their unfunded liability (roughly the difference between employee contributions and what we will need to pay out to retirees).

What this money is and how it is distributed is complex (and this whole thing is complex enough), so suffice it to say that we get the money, which means we have to follow state law that regulates whether we get it, how we spend it, and what happens if we don’t get it any more.

If the city chooses to close the police or fire pensions and require new hires to enter FRS, this will trigger a change with respect to the casualty insurance—the most obvious being that the city will no longer receive $1.4 million from the state. If we do not receive this money, we will need to make up the difference out of city coffers.

However, there is another problem that also crops up with possible major (much more than $1.4M) financial implications

Problem #2: A mandated reorganization by the pension board.

If the city begins letting new hires go into FRS, it would trigger (per state law) a reorganization of the pension by the pension board. The board could do one of three things.
  1. It could continue to operate the existing pension investments and the subsequent contributions from the grandfathered employees as it had before the change, with some adjustments based on the actuarial rules.
  2. It could terminate the pension and pay cash to the participants, sufficient to fund their retirements, again based on actuarial calculations.
  3. It could invest the money in annuities at a level sufficient to pay retirement benefits.
The last two options are scary for the city. Both require the pension board to demand a large lump sum from the city, money we don’t have. It is unclear which option the board would choose, and they do not have to make their decision before we vote to close the funds! By closing the fire and police pensions to new hires, we could be on the hook immediately for large sums (tens of millions of dollars at minimum). This conundrum is dictated by state law.

What can we do? (I’m finally getting to that.)

There is currently a bill before the House Governmental Affairs Policy Committee, HB 673, that would give cities the option to enter new police and fire employees in FRS while letting existing employees continue in the current plan without triggering the loss of the state money or the restructuring.

I urge the city to support this bill which will give us the flexibility we need to address this weighty problem. A companion bill, SB 1572, has been filed in the Senate and is currently in the Governmental Oversight and Accountability Committee.

Bills in the legislature routinely die before the end of session. I do not want to see the legislature end their session without giving us one of the tools we will need to address one of the biggest financial challenges before this city, not to mention other Florida cities in our same circumstances.

Do note that one of our local representatives, Dave Murzin, is in the council over the committee where the House bill currently is. Along with other legislators, he needs to be made aware of how important this bill is to our community and asked to help expedite its passage before the end of session. Please contact him and any other legislators you know and let them know your concerns.

Sunday, March 15, 2009

Maritime Park moving forward

Moving the Maritime Park from referendum to reality has been quite a saga for this community. However, the end—or perhaps the real beginning—is finally in sight.

On Friday, March 13th, the Maritime Park Board met. We had quite an agenda. First up was the master developer agreement. Negotiations between the city, maritime park board, and the master developers on that agreement were completed during the first week of March. The developers took a stab at putting the points that were negotiated into the contract and handed us a copy at the meeting on Friday, still warm from the copier.

In addition to the master developer agreement, we discussed the many other contracts the board will be signing. These include the lease agreements with the Pelicans, Studer Group, UWF (for the conference center, maritime museum, and other UWF components), and the Contractors' Academy. As you can imagine, these are all complex agreements, and our discussions at the meeting went on over 4 hours.

The rough timetable on the agreements presented on Friday is:
    March 31: a final copy of the master developer agreement, reviewed for accuracy and consistency, will be posted online for the board, city council, and citizens.

    April 3: Maritime Park Board will vote on the master developer agreement as well as the other agreements we discussed Friday

    April 6: Presentation to city council during committee meeting by city consultant (Barry Abramson) about the agreement. City council action on agreement (pending park board approval of contract).

    April 9: Final approval of contract by city council.

Of course, none of this is a done deal, and this schedule is subject to change. However, this is the expected course of events. Scott Davidson, the point man of the developers, suggested during the meeting that once the agreement is signed, we can expect action at the site within 60-90 days. (If you haven't been that way recently, there is already some action--dirt from digging the new sewage line is being put on site to provide some of the necessary fill.)

If you want to see the current version of the master developer agreement or the other documents, visit the Maritime Park page on the city website. None of these agreements are final, so please let me know if you have any comments on them.