UC Irvine Professor Warns of Pitfalls of Efforts

One of the proposals to help resolve Orange County’s financial crisis is to seek private contractors to take over many of the jobs now done by government workers and to sell public buildings such as libraries.

Peter Navarro, a professor at UC Irvine’s Graduate School of Management, has written four books and scores of articles that deal with public policy and government regulation and deregulation.

Privatization can work well, Navarro said, if it is approached properly. But it also can backfire, he said, if approached from a purely business standpoint, with little or no consideration of government’s role in ensuring the public good.

Orange County’s new chief executive officer, William J. Popejoy, introduced a plan last week to save money by laying off 1,040 county employees and raising more than $100 million by selling county-owned properties. That proposal was applauded by local business and political figures who long have believed that less government is better government.

In an interview with The Times Orange County, Navarro discussed the implications of such a move.

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Q: The county is in bankruptcy and, we’re told, must slash a considerable amount of money from its operating budget to avoid defaulting on its debts. Is selling real estate and seeking private contractors to do jobs once done in-house an appropriate thing to do?

A: It certainly can be. There are two reasons that government intervenes in the free market at the local level: to minimize costs and disruptions by imposing economies of scale--such as when government issues trash collection franchises instead of letting eight different companies run their trucks up and down the same streets--and in cases of providing public goods.

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Q: What do you mean by public goods?

A: Yes, goods, but different than goods like hamburgers or new cars. Police and fire protection are public goods. If I buy and consume a hamburger, I benefit and you don’t. But if I am protected by the police, you also benefit because they are protecting you too.

In cases of economies of scale, it generally is cheaper for a city or county to put the functions--like trash collection, or transcribing the coroner’s autopsy reports (one of Popejoy’s suggestions) out to bid and let private contractors handle them under a franchise agreement.

But the public goods are more difficult to privatize. My instinct is that it would be possible to privatize functional areas. Police paperwork like transcribing arrest and crime scene reports and even deputy sheriffs’ field reports could be jobbed out. It would seem to make the Sheriff’s Department more cost efficient if you could free that $45,000-a-year deputy from paperwork and keep him in the field more and let a clerical person who makes 30% less do the paperwork. You certainly wouldn’t want to privatize the police, though.

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Q: How about the libraries? Popejoy has said that nine county libraries could be sold over the next few years, along with a juvenile detention facility.

A: If it is a sale-leaseback arrangement, it would not be a problem. But if the plan is to get rid of the libraries altogether, then it raises one of those public policy questions. The burden of a divestiture would fall overwhelmingly on the middle- and lower-income groups. The folks who can afford to do so already go to bookstores to buy the latest bestsellers.

Libraries fit that profile of a public good. They provide an educational asset and are an investment in what economists call human capital. They are goods that not only provide satisfaction to the direct user but also help others.

In San Diego the city has privatized paramedics, and what has happened illustrates how privatization does not always work for the best. The city recently granted the contract to a new bidder who came in and underbid the old paramedic provider. But what wasn’t understood was that the low bid was based on setting up a two-tier fee schedule. They have one price for those who can afford paramedics, people who have insurance or Medicare or private wealth, and another for those who can’t. There has been a huge increase in defaults from those who can’t pay, so the people who can are paying even more now to subsidize those who can’t. Rates have gone up 40%. The city didn’t retain proper oversight of the program.

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Q: And how do you accomplish that?

A: You remember to write it into the contract. It is of critical importance when you sell off or privatize a function that you not just take low bid but that you do so subject to quality constraints. It is not just that the workers you are turning over to the private operation probably will fare less well. That’s a given. But also that the equipment would not be taken care of or that the level of service could fall or the price of the service could rise more than is really acceptable. The government entity has to continue to exercise oversight.

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Q: You say it is a given that workers who transfer from government to private employers will suffer?

A: The privatization trend in recent years has been a pernicious one because it has neglected the welfare of blue-collar workers. The cost savings associated with privatization often result from taking government workers with nice wage and fringe benefit packages and tossing them out into a world in which they tend to earn the same or less wage but almost always are stripped of most or all of their benefits.

This is a short-sighted action because it also is true these people who work in the government sector are people who, in ordinary circumstances, would buy homes and spend money in the community and who can’t do that once they are laid off or have their pay and benefits cut.

And some of these people will end up with so few benefits that they ultimately will start using social services that they never would have used before--public health, for instance. So you get a gain for the political entity, but for the social fabric as a whole, if you don’t privatize with compassion and thoughtfulness, then the whole of society suffers.

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Q: Speaking of selling functions, there is a proposal to sell county office buildings, courthouses, even a juvenile detention facility, all of which the county apparently would then lease back from the new owners.

A: Sometimes sale-leaseback arrangements make sense. A lot of businesses do them. But if there is value there so they can sell a building at a profit and then lease it back, perhaps the county also could keep the properties and use them as collateral for borrowing money. You always have to ask if you are selling (properties with great future value) to pay off your current short-term debts.

As Orange County looks at privatization, it should look at consolidation too. The two can go hand in glove. There is probably not a fire department in the nation, for instance, that would not benefit from consolidation with departments in surrounding cities. Improvements in building codes and fire safety regulations mean that the number of structural fires has declined significantly over the years, and there is a lot of duplication in having all the individual fire departments that we have.

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Q: That raises another issue--the politics of privatization.

A: Sure. The biggest constraint to successful privatization and consolidation of services is the special interests that will be affected. Some unions, for example, are more powerful than others. Police and fire unions generally have a lot more clout than clerical unions, and that’s because the public places cops and firefighters much higher in esteem. They are revered figures and at the top of everyone’s list of what we need more of. So I suspect that, as Orange County moves deeper into this, we will see a lot of maneuvering around constraints. And the politicians, instead of looking for the most relevant things to do, will be looking for the most expedient. That’s the general rule.

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Q: I guess it boils down to asking whether you can run government like a business, or whether there are special circumstances that keep that from happening successfully.

A: And the answer is yes and no. Business people don’t always understand the concepts of public good and economies of scale that make government intervention necessary. But it is true that business people understand the need to minimize costs. So if we are talking about operations like research and accounting and record-keeping and building and equipment maintenance, then, yes, business has a lot to offer government.

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Q: I sense a “but” in there somewhere.

A: But if we start cutting costs at the expense of safety, or streamlining regulations to let special interests get off easy--I can just see someone coming in and suggesting that getting rid of a lot of development regulation and oversight would be a great way of cutting county expenses--then you don’t have business helping, you have a bunch of jackals surrounding the county with an eye to getting the choice bits at fire sale prices. That’s what you have to guard against. Are we really talking about privatizing and reinventing government, or about dismantling it?

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Q: How should we be guarding against that?

A: If you really want to reinvent government, then I think you would want to put in place a plan to do it over a period of several years to ensure that it is all done with forethought and care. I’d suggest putting together a task force of business, government, academic and private citizen representatives rather than just a business advisory council. And then they should devise a 20-year cost-savings plan that would have a capitalized value that the county could borrow against.

It seems to me that we are talking about a county that, even with all that is happening, is a good long-term credit risk. This is one of the richest counties in the country, not some broken-down municipality, and it ought to be able to avoid Draconian cuts by getting down to some hard negotiations and planning.