Municipal employees work to repair Gordon Street in downtown Midland.
Just 10 years ago, the word "privatization" had not yet found its way into
the American lexicon. Today, it’s almost a household word. Privatization is helping
municipal officials and governments across the state of Michigan and the nation.
In 1996, Saginaw city officials handed control of the city’s zoo to a private,
non-profit organization and began phasing out its subsidies. Since then the zoo has seen
its budget increase from $231,651 to $600,000; its patronage climb; its collection of
animals increase by 80%, and its staff more than double.
In 1997, the city of Portage hired Earth Tech, a private, for-profit firm, to manage
its water and sewer treatment plant. At the end of the contract’s first year the city
reported savings of $785,000, more than 31% higher than the city’s goal of $600,000.
Earth Tech is reported to have improved services, too, by more than doubling the miles of
street curbs swept of refuse that might otherwise end up in the city sewer system.
In 1993, Pontiac converted its public hospital into a private nonprofit. The conversion
has resulted in an expansion of health-care services and an annual payment to the city
from the hospital of $1 million plus $50,000 for lease of the land on which the hospital
The bedroom community of Pleasant Ridge (population 2,700) contracted with City
Municipal Services (CMS) to handle duties previously performed by city public works
employees. Between July 1996 and the fall of 1997 CMS was able to save Pleasant Ridge 22%
over its previous budget. CMS also purchased some of the city’s Department of Public
Works equipment for $120,000.
Taxpayers in Indianapolis, Indiana, have saved over $550 million since 1991, when local
officials began encouraging city employees to bid against private firms to win the right
to provide services to city residents.
These are just a few examples. There are countless others.
Privatization presents a golden opportunity to improve a municipality’s services
and reduce costs. But it shouldn’t be employed only when a unit of government’s
fiscal back is up against the proverbial wall–as it often is. Privatizing some asset
or service out of desperation for revenue or savings is dangerous because it is difficult
to handle complex privatization transactions at a harried pace. Mistakes can be made when
changes get rushed.
The time to privatize is when the good times roll. That time is now. After all,
recessions happen. There have been nine of them since World War II. The best way to ease
the pinch of the next one is to plan accordingly. Privatization may help reduce the cost
of operating your unit and help avoid a tax increase to cover a revenue loss resulting
from a recession.
Transitioning into a new, private-sector job from the public sector is easier for
employees if there are plenty of jobs around. Michigan’s seasonally adjusted
unemployment rate stood at a mere 4.0% in February. Private-sector employers are screaming
for good workers and would gladly hire those municipal employees who may be displaced by
The most successful privatization occurs when its political champions–at any level
of government–do their homework. Careful planning takes time. Right now, tax revenue
is high because the economy is good. But what happens when the economy heads south? Paying
the bills of local govRRnment gets harder because revenue drops. That makes now the
perfect time to begin examining privatization opportunities.
Local government privatization is as important–perhaps more so–than
privatization at the state level. Why? There are 83 counties, 273 cities, 1,242 townships,
and 273 villages in the state of Michigan. According to 1995 census figures, these units
of government operate with revenue exceeding $26 billion annually. Savings of just 10%
across-the-board could effectively mean either a) $2.6 billion in local tax cuts or b)
$2.6 billion that need not be taken from the taxpayers to cover revenue shortfalls when
the economy slips into recession.
To put things in a financial perspective, the 1999 value of John Engler’s 25 tax
cuts (put in place over eight-plus years), is $2.35 billion. This figure does not include
offsetting gas tax and fee increases. In 1999, the Engler gas tax hike is expected to
raise $191 million.
For those forward-looking local leaders concerned about the fiscal health of their
respective communities–during recessions and boom times alike –privatization
offers an incredible opportunity.
It is to privatization done right– privatization that saves money and improves
services–that this issue of Michigan Privatization Report is dedicated.
Michigan Privatization Report