November 2002

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Guest Commentary 

Linda Morrison is a policy analyst and former director of Mayor Ed Rendell's competitive contracting program. She was also policy director for Sam Katz for Mayor. Her article was published by the Philadelphia Daily News on March 6, 2002.

It's wonderful to see city leaders and the media devoting so much attention to lowering Philadelphia's crippling taxes. Everyone knows that high taxes hurt, but those responsible say we need every one of those dollars to provide vital services: "We'd love to cut taxes, but we can't."

I disagree. In the early 1990s, city government had a systematic program that significantly reduced spending while increasing the quality and quantity of dozens of services that were targeted. Hundreds of millions of dollars were saved. I know. I helped make it happen.

Let's look at the Competitive Contracting Program.

Soon after Ed Rendell took office in 1992, his administration established this program. We called it competitive contracting, not privatization, because the aim was to inject competition into city government to get the best service and best price – not just turn services over to contractors.

The Competitive Contracting Program was overseen by a high-level committee of key administration officials. I was a member of the committee and the person in charge of moving it along. The impetus behind this program and many other budget initiatives was the fiscal emergency the mayor inherited.

Initially, the framework of the program was provided by a contracting-out clause in the city's blue- and white-collar union contracts. It required that the city perform an "economic analysis" of the work and notify the union when "contemplating" contracting out. It also required that the city "meet and discuss" it with the union. I thought this clause was a real pain in the neck at first, but we had to abide by it. If we ignored the requirements, the unions could overturn our efforts in costly arbitrations.  Later, I came to believe that the clause was invaluable because of the process it made us go through.

The administration made a list of more than 30 services that were notorious for being poorly run. It was a soup-to-nuts list, from almost every department: City Hall custodial services, art museum security guards, prison food services, the nursing home, mowing grass in city parks, the city warehouse, etc. Our two principal motivations were to save money and improve service quality.

In order to see if we'd save money on a particular service, a manager has to know what it costs now. "OK," said naive me, "I'll ask the manager of each service to bring in the current cost analysis, and we'll go over it to make sure it's correct." This request was met with silence and blank stares.

There was no current cost information. There wasn't any from last year or the year before either. There never was any analysis. So, we spent weeks tracking down all the costs of each service from all corners of the budget – the first time it was ever done.

The second key part of the economic analysis was a performance standard. You can't compare the cost of the city mowing the grass once a month to a contractor mowing it three times a month.

So, I asked city managers to bring in the current performance requirements, and we could start there when writing a bid, or request for proposals. Again, there were none. So we began with a blank sheet of paper to develop standards for quantity and quality of service.

I spent my first six months working there with my mouth hanging open in disbelief. How could you run a multibillion-dollar organization and not know what you are getting and what it costs?

Even more amazing was what happened at the "meet and discuss" sessions, where the unions and the managers were presented with the in-house vs. potential contractor costs (and the potential loss of their jobs). All kinds of ideas miraculously emerged to dramatically drop in-house costs – 10 percent to 20 percent typically in one meeting - and improve service. Everyone knew where the inefficiencies were, but there was no good incentive to change and no one asked.

One of the most dramatic examples was what happened with the Water Department's sludge processing and distribution center, located near the airport. Our analysis determined that the operation cost $23.9 million and that a private operator could do better. The Competitive Contracting Committee identified several qualified private operators. Within weeks, the managers and the union at the center came up with a plan to drop costs by $8.2 million – a saving of 34 percent. This was one of the initiatives that was retained in-house.

Most of the competitive contracting initiatives on the list ended up being contracted out, as the savings were much larger than could be achieved by continuing to do the work in-house. Hundreds of millions were saved on these few targeted services since 1993. The savings ranged from 28 percent for the city's warehouse operation to 53 percent for the Philadelphia Nursing Home to 46 percent for turf maintenance in parks. In every case, service was improved.

This being an imperfect world, there were a few bumps along the way. The good news is that the few instances of poor service from a contractor could be quickly corrected. Because of the program's commitment to redeploying city workers affected by the competitive contracting process, almost none of the hundreds of city employees affected were left without a job. They were sent to other city jobs. Overall, the Competitive Contracting Program was an enormous success.

Why was the program slowed and then stopped after three years? I don't know, but here's my guess: Everyone is very comfortable with the status quo, and this kind of agenda is difficult and upsetting. Also, the contracting program was unnatural for the Democratic Party and many of its constituents. It was done only because there was a fiscal emergency. As soon as three budgets were balanced, the emergency was over.

The city government's budget emergency may be over, but the city's overall emergency is not - it continues to lose residents and jobs due to high taxes.

So what did I learn from this process?

After doing it for over two years, I learned that (in most cases) the gross inefficiencies are not the fault of stupid managers or bad employees. I also learned that you don't have to contract out everything to realize big savings. Ultimately, the systems and incentives are at fault. Here is what needs to change:

Strengthen the accounting system. Accounting can make or break an organization. Just ask Enron and Arthur Andersen. An accounting system tells you what's important and is the only way to get information about an organization. The way the city uses accounting, however, gets in the way rather than shows you the way. City managers focus on how much employees work or how many resources are used rather than whether any good has been accomplished.

Popular Budget. Publish the cost and performance by city service so that everyone knows what they're buying. Put it on the Web. This would make for much more informed budget discussions and strategic planning. The city could decide to increase funding for a popular and effective service. But there would be no place to run and no place to hide for wasteful or useless activities.

Push hard to reduce costs. The above information will allow top managers to set spending reduction goals without gutting vital services – maybe begin with an aggressive goal, say, 1 or 2 percent per year.

Why not march through the whole government, subjecting everything to competition or critical review? Revive the Competitive Contracting Program in conjunction with the reinventing government initiatives. The city doesn't have to contract out everything. It could be happy with only 20 percent savings by keeping the work in-house, instead of 40 percent savings by using a contractor.

Alter the incentives for managers and, if possible, employees. Encourage managers to respond positively to the new cost information. Generally, government managers' salaries and careers advance by how much budget they control and how many employees work for them – not how well they deliver services and how efficiently they use taxpayer money.

Civil service regulations, and salary structures should be evaluated. Employee suggestion and employee involvement programs that reward employees for good ideas have proved successful in many large organizations.

Can we make this happen now?

The Street administration can start now - and if the city government won't do it, what are the ways the state government could make it happen?

Here are some possibilities: Legally require enhanced accounting for first-class cities. Require that this information be published in a Popular Budget, easily understandable by everyone. Require PICA to conduct performance reviews of all services in all departments.

Also: Somehow mandate that departments use a combination of incentives, labor/management cooperation and competitive contracting to lower costs without sacrificing services. The controller's office has gotten involved in performance issues in the past – maybe that role should be expanded.

We can accomplish large spending reductions without gutting services. We've done it before. I saw it happen.