“Horror Stories” Show How Privatization Loots Taxpayers

Dave Johnson

A new report from In the Public Interest (ITPI) highlights some of the horror stories that happen when local and state governments “outsource” or “privatize” public functions to private companies, and offers recommendations to prevent similar disasters.

“Government Is Bad, Business Is Good”

Every day you hear again and again that government doesn’t work and costs too much, while business is always more efficient and more effective. You hear that public employees don’t work hard and get huge pay and pensions, but private sector workers know what they are doing and you get more for your money. You hear horror stories about government waste; maybe they throw in the “crushing” cost of “lavish” public-employee pensions, and then for good measure they repeat and repeat and repeat that private business is always more efficient and less expensive than government.

Then after sufficient (and sufficiently funded) corporate PR gets the public all stirred up (“preparing the ground”), along comes a proposal to turn some public function over to a company. (Of course the proposal is usually tailored toward a specific company and of course this will be the company behind the PR campaign.)

The public function is turned over to a private company. The contract negotiations are obscure, the contract is not transparent and many of the terms might even be “proprietary.” The taxpayers are locked in for long terms. (The negotiators can then leave government for high-paying jobs with the company.)

The Results

Finally, too late for taxpayers to do anything about it, the results: Public services are cut, wages are lowered — often forcing the employees to turn to people assistance (paid by the taxpayers who thought they were “saving money,”) the local tax base is lowered as those wages are cut, and huge profits go out of the area to people who don’t pay local taxes and avoid taxes in general.

In other words, the taxpayers are looted. But, of course, a few people got rich – often really, really rich.

Example, Outsourcing Trash Collection

For example, what happens when a community privatizes – outsources – its trash collection to a private company? Instead of the community owning and maintaining the equipment, employing the people and providing the service to residents, the community instead contracts with a private company to do these things. (What is the process by which the community chooses a company to replace the government function? Is it open and transparent or does the contract go to the mayor’s brother-in law — or future employer? Can the contract be cancelled? Does the community guarantee a profit and/or limit how much profit can be made?)

A contract is awarded to a private, supposedly at a lower “cost” to the community.

So how does the company “save money” to enable a low enough bid to get the contract? (And of course the company expects to make a profit so they have to find extra money beyond those savings.) The answer is that the company cuts “costs.” The public workers are laid off. New employees (or the old employees) are brought in at very low wages, possibly even as “contractors” rather than employees. Worker safety standards fall. The equipment suffers deferring maintenance. And one way or another the company cuts the services provided and/or increases various fees charged to residents.

Ignored is the public cost to these “savings” that are not included in the privatization considerations. Because the public employees were laid off, unemployment assistance is paid by the taxpayers, houses are foreclosed, local businesses and landlords lose the business of these employees. Because the replacement employees are paid low wages, they likely qualify for food stamps, Medicaid, etc. – paid by the taxpayers. These low-wage employees can’t afford to buy houses or pay rent, can’t afford to shop at local retailers, etc. so the local economy is hit. The local tax base is reduced.

So the community actually does not benefit from “lower costs” from privatization.

Horror Stories

The report from In the Public Interest (ITPI) takes a look at this wave of privatization and outsourcing and examines the results. The report, titled, “Out of Control: The Coast-to-Coast Failures of Outsourcing Public Services to For-Profit Corporations,” begins,

Eager for quick cash, state and local governments across America have for decades handed over control of critical public services and assets to corporations that promise to handle them better, faster and cheaper. Unfortunately for taxpayers, not only has outsourcing these services failed to keep this promise, but too often it undermines transparency, accountability, shared prosperity and competition – the underpinnings of democracy itself.

Some of the examples from the report include:

  • A major U.S. city experienced a 1,000 percent cost overrun when it outsourced tracking city workers’ time keeping.
  • A West Coast county continued to annually renew a foster placement contract even after multiple reports surfaced of children placed in homes where they experienced severe abuse.
  • A nun suffering from cancer was one of thousands of low-income residents wrongly dumped from food stamps and other vital assistance after one Midwestern state outsourced its Medicaid eligibility determination.
  • A Southern state signed a contract to build and operate toll lanes on a major highway that forces taxpayers to pay the company if too many carpoolers use the high occupancy lanes because it would adversely affect the contractor’s revenues.

At Naked Capitalism, Yves Smith writes, “Quelle Surprise! New Report Show How Outsourcing State and Local Government Services is About Looting“:

The blandly titled “Accountability” section is more accurately titled “Companies take money and don’t deliver anything approaching the stipulated level of services.” The report also reveals that one of the ways these contractors meet their targets is by effectively fobbing costs back on the state, by paying working low wages force them to rely on public services. in 2008, 80% of the employees working on Federal service contracts made less than a living wage; the level is likely to be similar for state and local contracts. And of course, this means that local governments, perversely, are sabotaging their economies by driving wages and hence demand and eventually their tax bases down.

Note that beyond this report, David Cay Johnston writes about how the problem also hits us at the federal level, in “Your Tax Dollars At Work – Expensively“:

Last year, contractors were allowed to charge the government as much as $762,029 per worker.

Under the new budget deal, there was a small effort to reform this spendthrift system. The top contractor salary that can be charged to taxpayers is expected to fall to $487,000, a bit more than President Obama’s $400,000 salary.

Recommendations

At Daily Kos Laura Clawson writes about this in “Parking meters and prisons: Top six privatization horror stories,” and notes some of the report’s recommendations:

Strikingly, some cities and states have put privatization up to actual competitive bidding—and found that proposals from their own workers brought the best service and biggest savings. That’s why transparency, oversight, and accountability are among In the Public Interest’s top recommendations to “promote responsible contracting.” Taxpayers should know how much is being spent on contracts with private companies, know how much money the parking meters and roads being contracted out are worth, be allowed to look at the records of companies running public services just as they can look at government records, and have confidence that if the contract turns out not to be in the taxpayers’ best interests, it can be canceled.

What To Do

If you don’t like this, here is what you should do. Send a link to this report to your mayor, city manager, members of your city council, county commissioners, state legislators and members of Congress. Let them know you oppose privatization and they should look closely at the real costs. Even better, print out a copy of this report and drop it off at their offices.

But don’t stop there. Get your neighbors and family and others to also send this report to your elected officials. If you are on the Nextdoor.com neighborhood social media platform, put up a note about this report. (You can include a link to this article.)

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