Myths and Realities about Senate Bill 1322

Municipal Managed Competition Reform

(Printable PDF version)

AFP-Arizona thanks the members of the SB 1322 team for their input in the preparation of this document, including multiple Arizona Legislators and members of Legislative Council, Phoenix City Councilman Sal DiCiccio, Steve Voeller of the Arizona Free Enterprise Club, Nick Dranias, Clint Bolick, and Byron Schlomach of the Goldwater Institute, Wes Harris of the Original North Phoenix Tea Party, Len Gilroy of the Reason Foundation, and many others, including the signers of our stakeholder letter. Our apologies to anyone we forgot to include on this short list! Any errors – please bring them to our attention at tjenney@afphq.org – are solely those of AFP-Arizona.

Be sure to refer to the Senate version of SB 1322

False Claim by Opponents #1: The bill won’t really save much money.

Reality #1: SB 1322 was modeled on the most successful privatization programs from around the country, and by conservative estimates will save Phoenix and Tucson an average of ten percent on the annual cost of city services. For Phoenix and Tucson, the total cost savings could soon be $500 million per year.

For documentation of the success of privatization efforts around the country—and beyond—here are some web links from the Reason Foundation:

• Recent Reason op-ed in the NYT on privatization

• Local Government Privatization 101

• Ten Principles of Privatization

• REPORT: Streamlining San Diego: Achieving Taxpayer Savings and Government Reforms Through Managed Competition

Closer to home, Phoenix saved over $30 million on a $228 million project through the Lake Pleasant Water Treatment Plant bid. Karen Peters, the lobbyist for the City of Phoenix, has argued recently that the costs of procurement for that bid were too high, because they totaled over one million dollars (the bid was especially complicated and required teams of expensive consultants and experts). One million dollars does seem like a lot of money--until you compare it with $30 million in savings! And that savings doesn’t include the ongoing difference in operational costs realized by running the plant without using highly expensive public-sector employees. Since our team pointed out those savings to Ms. Peters, the project has not been cited again in opposition to SB 1322. For more about this project, read the Phoenix Business Journal story from April, 2008. Note also that Councilman Claude Mattox explains that this method puts the contractor, not the city, at risk for the project.

For most of the interest groups opposing the bill, the main concern is that the bill will save money for city governments. Government-worker unions oppose competitive bidding because they do not want to compete on a level playing field (in terms of their salary-and-benefit packages) with private enterprise to provide city services. In Fiscal Year 2010, the City of Phoenix paid its average worker a salary, benefit, and overhead package of $97,707. That was up from $83,231 in FY 2007—a 17-percent increase in just three short years, at a time when private-sector workers were suffering pay cuts and layoffs in the worst recession since the 1930s. Private-sector workers in Phoenix are lucky to have salary-and-benefit packages in the range of $50,000. Be sure to review the table from the City of Phoenix showing recent compensation increases for city workers.

Further, there is the problem of businesses that have sweetheart contracts with city governments and other governments that were not awarded under a truly open, competitive bidding process. If SB 1322 passes, “crony capitalists” in Phoenix and Tucson will not be able to rely on cozy political relationships and campaign contributions to win contracts. To quote the actual language of SB 1322, the crony capitalists will be forced to compete to provide services at the “highest quality, lowest cost and most reliable performance.”

False Claim by Opponents #2: The $75,000 threshold is too low.

Reality #2: The SB 1322 team is open to a House floor amendment on this question, to raise the threshold from $75,000 to $250,000. But practically speaking, there is no point to changing the threshold. The overwhelming majority of bids produced by city managers and city councils under SB 1322 will be for much larger amounts of money, as the cities bundle services into bidding units that take advantage of economies of scale. Taking at face value the city lobby’s estimate of a $20,000 to $40,000 cost of procurement (under SB 1322, the cities will become much more efficient with regard to procuring bids), the average package would have to be somewhere between $200,000 and $400,000 for the cities to break even, assuming an average savings of 10 percent through contracting out.

The SB 1322 team set the threshold at $50,000 (moved to $75,000 in the Senate) because:

1) We wanted to create more opportunities for small businesses, including independent contractors, to bid on city service contracts. SB 1322 will help to inject hundreds of millions of dollars a year into the local economies in Phoenix and Tucson. By requiring those cities to bid out services costing above $50,000/$75,000, SB 1322 would create opportunities for dozens of small businesses to win contracts to perform city services.

2) The original $50,000 and $75,000 thresholds were low enough to prevent unscrupulous city managers and/or council members in the future from creating individual-specific statements of work that would allow them to award individual political allies with city sinecures disguised as contracts.

Moving the threshold to $250,000 would water down those provisions somewhat, but again, moving the threshold in that range will have no effect on the vast majority of bids.

False Claim by Opponents #3: The tax-exempt status of city bonds would somehow be affected, and we need to specifically provide for an IRS-required ten-percent ROI limit.

Reality #3: SB 1322 specifically states (in Section 9-1002 E) that “This chapter does not apply… if compliance would violate any applicable federal law or regulation.” SB 1322 also gives cities the ability to “reasonably tailor” bids to meet their needs and to make subjective choices about what kind of bids will work best for those cities (SB 1322, Senate version, Section 9-1004, penultimate sentence). That means that under the current version of SB 1322, cities are completely free to specify ROI limits so as to comply with IRS mandates. Further, as provided in Section 2, existing contractual arrangements are grandfathered, because SB 1322 would “not apply to existing vested contractual or intergovernmental agreements for the furnishing of municipal services that have been entered into before the effective date of this act.”

In short, this claim is a red herring. That said, the SB 1322 team is entirely open to a House floor amendment that would explicitly spell out the freedom cities will have in specifying ROI limits in bids so as to comply with IRS mandates applying to municipal assets that have been or will be financed by tax-free bonds.

False Claim by Opponents #4: There could be a problem with private contractor companies under the bill going bankrupt and leaving cities and city taxpayers in a lurch (an argument echoed in the comments of Rep. Cecil Ash and others in caucus).

Reality #4: SB 1322 specifically addresses bidders’ requirement to hold the city harmless by requiring surety bonds equal to 100 percent of the value of the contract to adequately protect the city. (See section 9-1005. Minimum contract standards.) SB 1322 also contains multiple other requirements on bidders involving, safety, liability insurance, background checks and more. (Please read Section 9-1005 thoroughly.) Also, note that the current mode of operating city services often leaves city taxpayers in a lurch—that’s why the cities keep raising taxes and fees!

False Claim by Opponents #5: The city services excluded from the bill seem arbitrary.

Reality #5: With the exception of firefighters, all of the excluded services (9-1002 E) have one of two characteristics:

1) they are directly related to law enforcement (sworn police officers, judges, 911 operators)--and prosecutors will be added under the proposed House floor amendment; or,

2) the services in question relate to the financial management of the city government (tax collection, audit enforcement, and the city manager’s office, which will directly oversee the bidding and procurement process).

The one service that stands out is firefighters, who are not part of law enforcement or financial management, but who in the case of Phoenix are sheltered from private competition due to provisions in the city charter.

False Claim by Opponents #6: RFPs (requests for proposals) will cost small businesses too much money.

Reality #6: No business anywhere, at any time, would be “forced” (the word used by Sen. Rich Crandall of Mesa) by SB 1322 to respond to RFPs from local governments. Businesses do not have to respond to RFPs, period, unless they want to bid for city service contracts. Further, widespread experience shows that RFPs cannot be too expensive: there are literally thousands of small businesses all around the country that bid for a wide variety of government contracts at all levels of government. The only businesses that might see any losses from SB 1322 are any businesses in Phoenix and Tucson that have been awarded lucrative sweetheart contracts by their friends on city council—naturally, those vendors do not wish to have to enter into an open and transparent competitive bidding process. For more, read our exchange with Sen. Crandall.

False Claim by Opponents #7: The bill forces cities to accept the lowest bid, thus jeopardizing quality services.

Reality #7: Please read the bill, and especially these provisions:

9-1004. Open and competitive bidding of services
The competitive service city shall reasonably tailor the scale and complexity of operations to be performed under a municipal service contract offered for competitive bidding to generate competitive bids from the private sector that offer the highest quality, lowest cost and most reliable performance.

9-1005. Minimum contract standards
A. The city manager of a competitive service city shall award contracts pursuant to this chapter to the bidder who is able to provide reasonable assurance of fulfilling the competitive service city’s contract standards at the lowest cost to the city.

False Claim by Opponents #8: The bill is against the principle of local control.

Reality #8: Under the Arizona Constitution, the State is sovereign over political subdivisions (and cities are not mentioned in the U.S. Constitution.) Many Legislators, including many well-meaning conservative Legislators, pay lip service to the concept of local control. But in actual practice, Arizona’s Legislators routinely exercise the sovereign power of the State over political subdivisions in multiple policy areas, including gun rights/self-defense, criminal law, law enforcement, border security (think SB 1070), taxation (think revenue-sharing), health care and education. If Legislators are serious about turning the concept of local control into a meaningful principle, we can convene a large stakeholder group one of these summers and craft some kind of omnibus local control reform, in which Republican and Democratic Legislators and a wide variety of spending lobbies and pro-taxpayer interests jointly agree to stand down, carve out wide areas of local control, and arrive at a mutual agreement to stop using State power to enforce their legislative agendas. Until that happens, the concept of local control will remain little more than an arbitrary excuse deployed when voting against conservative reforms.

That said, in a certain sense, SB 1322 actually would create more local control—more control for local taxpayers over their own wallets and bank accounts. By taking some power away from the union machines that tend to dominate City Hall, and by reducing city spending, the SB 1322 reform will actually empower city taxpayers against the local governments that are continually forcing tax hikes and fee increases on them.

False Claim by Opponents #9: The bill violates current contracts.

Reality #9: As provided in Section 2, SB 1322 would “not apply to existing vested contractual or intergovernmental agreements for the furnishing of municipal services that have been entered into before the effective date of this act.”

False Claim by Opponents #10: We should wait until next year (or later) and craft a bill that also mandates the bidding out of state government and school district services.

Reality #10: That is mainly stalling tactic used by opponents of the bill (though for some well-meaning conservatives, it might be an example of the perfect being the enemy of the good, or choosing to starve, rather than take half a loaf). Political reality dictates that we need a pilot project for privatization. Once we have demonstrated significant savings in Phoenix and Tucson, we can begin seriously exploring the expansion of the concept to other levels of government. To do that, future bills would have to be drafted very differently to account for the different political mechanisms at work in school districts and in state government. That said, many non-municipal governments in Arizona do already contract out. ADOT is already under a mandate to explore public-private partnerships for the provision of new road capacity, and Governor Jan Brewer has created the executive Council on Privatization and Efficiency (COPE) to work on contracting out state services to private enterprise.

False Claim by Opponents #11: Although the bill is currently limited to Phoenix and Tucson, it will immediately lead to similar competitive systems in other cities.

Reality #11: As written, SB 1322 would introduce competition into the governments of Phoenix and Tucson (any city with a population above 500,000). AFP-Arizona and several other stakeholders would very much like to extend the bill to other large Arizona cities (the original version had a population threshold of 200,000). But political reality dictates that SB 1322 will function as a pilot project. Once we have ample evidence of substantial cost savings in Phoenix and Tucson, AFP-Arizona will push to expand the program to other cities. (Who in the world would not be interested in bringing the program to their own cities, other than entrenched political interest groups that want to be shielded from competition?) But it will take over a year for Phoenix and Tucson to engage in the first round of bidding, and although the cities will conduct annual performance audits on the contracted services (9-1006 B), the first independent audits will not take place until the sixth year after passage of the bill--in the year 2017.

False Claim by Opponents #12: The bill doesn’t allow for input by city council members.

Reality #12: Actually, city council members will have a great deal of flexibility in designing statements of work and the resulting bids. SB 1322 gives city councils opportunities to disapprove statements of work presented to those councils by city managers (9-1003 B), and allows city councils to award longer-term contracts to independent contractors and public-private contractors that provide significant capital investments to the cities (9-1005 A). Be sure to look at our simple flow chart showing the city decision-making process as it will be under SB 1322.

In fact, because SB 1322 gives such wide latitude to city councils and city managers in designing service contracts, the drafters of the bill included a taxpayer standing clause to allow taxpayers residing in the affected cities to bring special actions in court to enforce the protections afforded in the legislation—in case of egregious violations of transparency or anti-competitive practices.

False Claim by Opponents #13: The bill would somehow destroy jobs.

Reality #13: Just the opposite. SB 1322 will create jobs in cities. By requiring an open and competitive bidding process, the reform will allow private businesses, public-private partnerships, and city employees to compete to provide services to city residents at the lowest prices compatible with the highest quality and most reliable performance. Competitive bidding will help to moderate the costs of all productive factors, including labor, thus allowing thousands of new workers to be hired. In FY 2010, the City of Phoenix paid its average worker a salary, benefit, and overhead package of $97,707. Even if we take out police officers and firefighters—who would be exempt from SB 1322—competitive labor costs could allow the City of Phoenix to indirectly employ (via contractors) approximately one and a half times the current number of city workers, at the average private-sector salary-and-benefit level for citizens of Phoenix.

False Claim by Opponents #14: The bill is unnecessary. Cities are already contracting out.

Reality #14: In a certain sense, cities do contract out a lot of services. At some point, the costs of doing some things in-house are so obvious and so costly as to be prohibitive. (To cite an extreme example, no Arizona cities use city workers to manufacture city-made police cars to be used by police officers, or use city workers to manufacture city-made computers to put on the desks of city workers.) But given the wide range of city services that could potentially and efficiently be bid out competitively, cities in Arizona do a poor job of seizing opportunities. Back in the 1990s, Phoenix was recognized nationwide as a leader (bear in mind, that’s a relative distinction) in contracting-out. But those efforts have slowed down considerably in recent years. By getting the city managers of Phoenix and Tucson into a consistent habit of creating statements of work for city services, SB 1322 will help city councils become much more creative in re-engineering city functions. In many cases, by combining existing city services with the creation of new city assets, long-term private or public-private concessions will create much more value for citizens, while saving taxpayers even more money.

False Claim by Opponents #15: The bill doesn’t contain enough protections for taxpayers.

Reality #15: The overriding purpose of SB 1322 is to save money for taxpayers while ensuring the provision of high-quality public services. SB 1322 includes multiple strong protections for taxpayers and several provisions designed to ensure that contractors serve as faithful stewards of public resources:

• Transparency in bidding and performance. SB 1322 (9-1006 A) stipulates that all bid-related communications and supporting materials submitted for consideration by the affected cities shall be public records, and mandates (9-1006 B) that the city managers and all city departments of affected cities shall conduct annual performance audits for contracted services, the cost of which must be accounted for and incorporated into all bids. SB 1322 requires city managers of affected cities to seek independent performance audits every five years to evaluate the accuracy and completeness of the municipalities’ performance audits, and stipulates that all performance audits shall be public records.

• Protection of city resources. SB 1322 requires (9-1005 B) that all bidders, public or private, must be able to provide bonding or other forms of security to adequately protect cities, and requires that all bidders maintain an adequate level of liability insurance consistent with the city risk management requirements.

• Public safety provisions. SB 1322 requires (9-1005 B) that independent contractors have appropriate safety policies and procedures in place to protect the public and its employees, and requires that independent contractors perform background checks on employees performing any service for which the affected cities require background checks of municipal employees.

• Breach-of-contract protections. SB 1322 mandates (9-1005 B) that independent contractors acknowledge that the affected cities may rightfully terminate and rescind contracts awarded to independent contractors in the event of material breaches of those contracts.

• Term limits for service contracts. SB 1322 provides (9-1005 A) that service contracts may not have terms longer than five years, with three one-year renewals, before the related services must be submitted again to open and competitive bidding.

• Term limits for capitalization projects. SB 1322 (9-1005 A) allows for longer terms to be awarded for contracts with independent contractors or public-private partnerships that involve significant capital investments, but it also limits the terms of those contracts to the length of the amortization schedules prevailing in those industries.

Contact Info:

Tom Jenney
Arizona Director
Americans for Prosperity
http://www.aztaxpayers.org
tjenney@afphq.org
(602) 478-0146