Conversion Costs and Benefits

The conversion of the DPW operations and similar services to private firms did not come without a price. One-time and necessary conversion costs were incurred. However, many incidental benefits were also obtained, beyond the improvement of services to the public and reductions in overall costs.

The following costs resulted from the conversion:

Vested Vacation and Sick Pay. In connection with the elimination of the DPW, the City paid former DPW employees vested sick and vacation pay in the approximate amount of $150,000. While the amount was not paid until July, 1988, it was included in 1988 operations and reflected as DPW salaries and fringe benefits in the accompanying Schedule of Department of Public Works Costs.

This payment resulted in the acceleration of amounts that were already due to DPW employees and should not be considered an incremental cost of the decision to privatize the DPW. However, cash was required to fund this obligation in 1988, whereas such costs would have originally not required payment until the DPW employee retired or died. No attempts have been made to quantify the effect on the costs of conversion related to the acceleration of cash payments (time value of money).

Severance Pay. In accordance with the agreement to eliminate the DPW, two weeks' severance was paid to terminated employees amounting to $21,812 The severance costs were included in the 1988 fiscal year operations and reflected as salaries and fringe benefits in the accompanying Schedule of Department of Public Works Costs.

Workers' Compensation. The following is the detail of workers' compensation costs, which are not included in the accompanying Schedule of Department of Public Works Costs, to the extent that the information is available:


Not available


Not available









Discussions with City personnel and the above information indicate that there has been no increase in workers' compensation claims as a result of the employee terminations. Over the long-term, however, the aggregate workers' compensation costs is expected to decline as a result of the elimination of the DPW. No estimate of the effects on the workers' compensation claims in years beyond 1988, if any, was performed for this Report.

Unemployment Costs. The following are the unemployment compensation costs (excluded from the accompanying Schedule of Department of Public Works Costs) paid prior to and after the conversion date of June 30, 1988:

Quarter Ended


March 31, 1988


June 30, 1988


September 30, 1988


December 31, 1988


March 31, 1989


Period from April 1,1989

   to December 31, 1989


At the time of the conversion, terminated City employees were entitled to 26 weeks of unemployment compensation in accordance with the State regulations in effect. The costs incurred by the City for the period from July 1, 1988 through January, 1989 resulted in a cost of $86,000. No attempts have been made to identify any potential non-DPW costs for this period, although it is dear that some level of costs were incurred in the two quarters preceding the conversion. In all likelihood, substantially all of these costs were directly related to the DPW employee terminations.

Retiree Health and Life Insurance. As with most municipalities and commercial entities, the City funds health and life insurance benefits of its retirees on a "pay-as-you-go" basis. No funds had been set aside for the payment of these benefits.

Health insurance was acquired on the basis of paid premiums through an insurance company. The City was self-insured for life insurance provided in the event of death. Active employees' and retirees' beneficiaries received $15,000 and $5,000, respectively, in the event of death. Most of the costs reflected below, which are not included in the Schedule of Department of Public Works Costs, represent retiree health costs (rather than life insurance payments):













Several DPW workers retired at the time of the conversion. As a result, the City began to incur costs in providing health insurance to these retirees. In the three years prior to the conversion, the City paid an average of $322,000 per year for retiree benefits. However, in the 1989, 1990 and 1991 fiscal years, the costs increased significantly.

The increases in the three years after the conversion, however, cannot be attributed solely to the conversion. The cost of health care services for all employers have increased significantly in the past three years. The City's accounting records do not readily permit the analysis of the effect of the retirement of DPW workers on the increased health care costs, if any.

Finally, the retirement of DPW personnel at the time of the conversion increased the cost of retiree benefits, such health insurance benefits were previously being incurred from an active employee status. Thus, the overall costs of providing the health insurance benefits for these individuals was merely transferred from active to the retiree category and remained unchanged as a result of the conversion. Because of these retirements, the City has reduced its exposure for death benefits from $15,000 to $5,000 per incident. As noted previously, however, the costs associated with this benefit were not significant.

To determine the savings for health insurance premiums, the overall reduction in the active DPW employee costs must be offset against the increase in the retiree health insurance. Actual cost savings would result for premiums paid to terminated DPW personnel not eligible to receive retirement benefits and retired. DPW personnel upon death.

Consequently, the ability to reconstruct the health and life insurance cost savings is difficult. However, for purposes of the cost analysis, this report has assumed 80 percent of the increase in retiree health and life insurance costs between the 1988 and 1989 fiscal years of $129,000 (or $100,000) was incurred beginning in 1989 related to terminated DPW personnel who retired.

The following benefits resulted from the conversion:

Longevity Costs. Employees were entitled to longevity payments based upon length of service with the City. The annual longevity payments averaged $52,700 for the three years just prior to the conversion and $26,000 for the three years thereafter. A substantial portion of this decline is attributable to the reduction in the DPW staff.

Sale of DPW Facilities and Equipment. Shortly after the conversion, the City sold the DP'W facilities and equipment. Certain of the equipment was being purchased through leasing transactions. Prior to providing clear title to the equipment, the City was required to pay the remaining principal amounts then due under the equipment lease. The following is the net benefit derived from the sale of the facilities and equipment:

Proceeds derived from the sale of the DPW facilities and equipment, net of auction and related fees




Less: amounts relating to the final payoff of the equipment capital lease






Once the facilities were sold, they were placed on the City's tax rolls. The City's tax rolls reflect a State Equalized Value for the facilities of approximately $93,000. Accordingly, the City is deriving annual property tax revenues of approximately $2,450.

Other Costs and Benefits. It is not presently possible to determine with precision all the efficiencies gained from the conversion of the DPW services themselves. It is worthy of note that the private contractor, unlike the city in pre-privatization days, is not encumbered by any of the old AFSCME work rules and staffing requirements which adversely affected the DPW operation. Furthermore, the contractor knows that he must keep his costs under control and perform functions well or the contract might go to another bidder when it comes up for renewal. The market-based power of competition is now at work, replacing the inherent inefficiencies of an unresponsive, often unaccountable, public sector bureaucracy.

The evidence suggests that a variety of administrative costs have, in effect, been reduced aspart of the delivery of services once provided by the city's DPW. Those costs are associated with purchasing, preparation of payrolls, and accounting. There has also been some reduction in costs for utilities and insurance.