New Hope for Cities

Cities throughout the nation are facing a challenge, and Indianapolis is no exception.

My office is on the twenty-fifth floor of our City/County building, and if I look out on a clear day I can see dollar bills float across the city line.  Those dollars land in the more affluent suburbs, where the taxes are lower, the schools are better and there is less crime.

At the same time, many of us have concluded that big systems don’t work; they’re too remote, and, therefore, too inefficient.

It’s clear that if our cities are to survive, we must figure out a way to provide better services at a lower cost to the taxpayer.  But how?

In Indianapolis, our answer has been to break up the monopoly of municipal government.  We have introduced a system of marketplace competition in which private businesses—as well as public employees—can bid for the work which the government wants done.  The result?  We have been able to cut our costs substantially on a whole range of services; the cost of waste water treatment has gone down 44 percent, the cost of garbage collection is down 61 percent, and our airport costs are down 40 percent.  We have also reduced our non-public safety workforce by 40 percent.  Altogether we have saved about $250 million, which we have used to capitalize a $550 million Building Better Neighborhoods initiative concentrating on the most depressed, most neglected urban neighborhoods.

When I was elected, my legislative body didn’t share my enthusiasm for introducing competition.  And so they commissioned a number of studies to prove how efficient we already were.  One major accounting firm said we had the most efficient waste water treatment plant in the country. Another said our airport was the lowest cost, highest quality airport in the country.

But the point is that comparing one government monopoly to another is irrelevant.  The fact that we were the most efficient government monopoly in the country is really not particularly significant, if when we throw it open to the private marketplace we reduce the cost an average of 35-40 percent.  And that’s happened across the board.

At the same time as we have been reducing costs we have improved the quality of our service.  After all, simply saving money isn’t that hard.  You can clean the water half as well.  You can fill the potholes with half as much asphalt.  You can even save money with your own employees if you don’t care about the quality of their work product.  Our goal is to reduce cost and increase quality simultaneously.

We have discovered that there is a way to do this; it involves focusing on outcomes rather than inputs.  If we specify clearly what we want, and then the contract manager does his or her job well, we can invariably drive up quality while we drive down price.

It’s not that city employees are bad.  But they have historically been trapped working for monopolies.  If they are to do a job well they need to be liberated through competition.  We have to create systems that reward outputs and encourage employees to pay attention to their customers.

It’s not simple to do, however; a number of obstacles stand in the way, including laws passed by Congress and other legislative bodies.  There is a federal law, for example, that says all public transportation systems that receive federal contributions are public monopolies.  Of course, that virtually insures that the service is run inefficiently.  In Indianapolis we had 15 years in which fares went up, property taxes subsidizing the transit system went up, and ridership went down.

So I decided to conduct an experiment.  With some effort I was able to retrieve the local and state dollars that went into the transit system, and we created a competing system.  We told the members of the transit union that if they wanted to keep the work then they would have to bid on the new routes.

As you might imagine, this caused an enormous controversy.  But in the end fares went down, property tax subsidies stayed the same, and the number of rides was expanded by half a million.  It’s true that the bus drivers had to work harder, but they didn’t have to take a pay cut.

In addition, allowing competition to work in this area has meant that we now have businesses owned by women, minorities, and other small entrepreneurial groups represented among those providing bus service.  The unionized employees are still working, the market has expanded and the customers are better off, particularly poor customers, since wealthy people generally don’t take the bus.

Our overriding philosophy is fairly simple.  We believe that if there are roughly three companies listed in the Yellow Pages that offer the same service that the government is providing, chances are it’s possible to save some money by allowing competitors to bid for the work.

The municipal unions were originally against what we were trying to do, but now we have a very good relationship.  I started by telling union members that you can either compete to keep your jobs, or we’ll privatize the service you’re performing.  And they believed me, as they should have, because I was serious about it.  That meant that I merely had to then convince them that I was going to be fair, allowing them to compete on a level playing field.

It helped our credibility that patronage workers got displaced much more quickly than the union workers.  That happened because, as it turned out, we had a bloated managerial level.  But we never froze the wages of our workers.  Instead we paid them on the basis of performance-based contracts rather than salaries.

Let me note that I really don’t think privatization is particularly valuable as an end in itself.  That’s why in Indianapolis we prefer to say we’ve introduced competition rather than privatization.  The object is to create a higher quality of life for residents of the community.

Generalizing, I would say that introducing competition has allowed the government to do three important things:  First, it has freed us to focus on our core services, such as providing public safety and keeping the infrastructure in good repair.  Second, it has allowed us to focus on outputs and quality rather than on inputs and how much money we spend.

Third, and I think most fundamentally, it has forced us to think about the best way to provide services to the individual.  After all, public servants have a responsibility not to the existing systems, but to the citizens of our community.

And as we look at the arguments that are going on now about public housing, public health or public schools, I would submit that those of us who believe in competition and privatization are much more populist and much more respectful of the rights of our citizens, particularly our poor citizens, than proponents of traditional big government responses.

Perhaps the most important aspect of these reforms is that they keep reminding us who we’re here to serve.