THE NEW MAYOR AND THE CHALLENGE : Privatization: Be Very Careful How You Use It : Mayor-elect is exploring promising, but also worrisome, route to savings

Mayor-elect Richard Riordan stopped in Indianapolis last week en route to his meeting with President Clinton in Washington to learn firsthand about the privatization of municipal services. Indianapolis Mayor Stephen Goldsmith made privatization--the turning over to private firms of government programs, assets and functions--a priority when he took office 18 months ago. Riordan made his interest in privatization clear in his mayoral campaign. But after huddling with Goldsmith and his aides for much of a day, Riordan emerged a bit humbled, acknowledging that the matter is more complicated than he had thought and that he has much to learn.

That Riordan is taking the measure of privatization attempts elsewhere--he plans trips to Houston and Phoenix as well--is a good sign indeed. And, during this process, effort, it is hardly surprising that the mayor-elect’s faith in this approach to streamlining government may waver a bit.

Rising deficits in state and local budgets in recent years, along with continued gloomy economic forecasts, have renewed interest in privatization.

Proponents claim that contracting out will generate enormous savings for pinched governments. One estimate pegs the savings from contracting just four Los Angeles city services at $69 million yearly. Those who urge that states or localities sell off large public facilities such as airports, ports or highways contend that doing so will generate new revenue for public coffers.

SUCCESS STORIES: Indeed, there are many privatization success stories. Los Angeles County has contracted out a variety of services, including street resurfacing, building security and records storage. In Indianapolis, private firms now handle sewer billing, microfilming, public golf courses, transit for the disabled and private building inspections.

Competing against private operators to provide a public service has made other local agencies more efficient. In the late 1970s, Phoenix officials allowed private companies to bid against the city for garbage collection. The city’s public service department lost the right to serve two of three city trash collection districts--but the competition forced the department to revamp its operations, enabling it eventually to win back the service.

CAUTION SIGNS: By contrast, the experience in other localities has been sobering. Far from producing dramatic savings, critics contend, contracting out can push costs higher. Government must develop the bids, write the contracts and then monitor them, all of which may require additional staff. Moreover, projected savings can evaporate when contractors “low-ball” their estimates in order to get jobs, then extract higher rates from government once the opportunity to switch contractors has passed.

In many instances, more creative public financing of essential services--or forcing public agencies to compete against private contractors--may make more sense than insisting on private operation or ownership. Trash collection in Los Angeles is often regarded as a target for privatization; other cities have maintained public operation while imposing user fees that both cover costs and encourage recycling--perhaps a better option than just contracting out.

The criticism most often leveled at privatization is that it replaces civil service jobs carrying decent pay and benefits with part-time positions that carry lower wages and fewer benefits. Some employees displaced in changeovers have been forced to turn to public assistance. Moreover, for some one-of-a-kind municipal facilities such as a major airport or port, a sale or lease raises concerns about the gauging of prices, potential corruption and lack of accountability. Riordan rightly wants the city to benefit from Los Angeles International Airport’s profits, but we think restructured public ownership is a much wiser course than that which Riordan has endorsed, private lease or sale.

The lesson of privatization is that, as in most promising notions, success is in the details. As Riordan wisely continues his tutorial in the perils and prospects of privatization, he should move cautiously and be flexible. Privatization is not a “one size fits all” solution, nor is it a substitute for common sense and a hard look at the numbers.