Annual Privatization Report

Emanuel Administration Embracing Private Sector Competition in Chicago

New $7 billion infrastructure trust developing alongside initiatives in recycling, water and elsewhere

After Mayor Richard Daley left office, the future of privatization in Chicago was uncertain at best. Under Daley’s tenure, dozens of city services were privatized and his administration tapped over $3 billion from long-term leases of city assets (notably parking) during his six-term, two-decade tenure. For an update on Chicago’s parking meter privatization, see Annual Privatization Report 2011: Local Government (Part 2: Parking Privatization Blossoming in 2011.) One of Daley’s final moves was privatizing management of the McCormick Place Convention Center. McCormick Place is now managed by the Pennsylvania-based SMG Management Inc., which already operates Soldier Field.

Daley also relied heavily on one-time infusions of revenue from asset leases to balance the budget.The Chicago-based Civic Federation published a report entitled Financial Challenges for the New Mayor of Chicago, which found that by the end of 2011, only $576 million in revenues will be left from the almost $3 billion generated by leases—in other words, nearly 80% of the money was spent in 6 years.[1] The report also noted that Daley only leveraged $96.9 million, or 14.8%, in spending cuts to balance the budget.

Chicago’s new mayor, and President Barack Obama’s former White House Chief of Staff, Rahm Emanuel took office with a FY 2011 budget shortfall, another $635 million budget deficit looming in FY 2012, and a structural deficit of over $1 billion.

While he hit the ground running, Mayor Emanuel's most significant strides came in the last few weeks. He recently launched an ambitious $7 billion infrastructure program to “rebuild Chicago” by constructing two new runways at O’Hare, replacing 900 miles of water pipes and 750 miles of the sewer system, creating the city’s first bus rapid transit route, modernizing schools, transit stations and city buildings, and building 12 new parks and 20 playgrounds.  The plan would largely be paid for via public-private partnerships.

“This model of private financing for public infrastructure is happening all over the world, but not here in America,” Emanuel said. “I can’t get from here to there on the old model – it’s broken.” The new infrastructure initiative is the latest of a series of moves that started after he took office.

First he established a new Mayor’s Economic, Budgetary and Business Development Council, primarily composed of members with private sector expertise in privatization, mergers and acquisitions, and cost-savings. Members of Emanuel’s cabinet include: Deputy Mayor Mark Angelson, Chief Financial Officer Lois Scott, Budget Director Alexandra Holt, City Comptroller Amer Ahmad, and Chief Technology Officer John Tolva. He cut the city’s budget by $75 million and eliminated a $30 million furlough program that failed to deliver projected cost-savings to balance the FY 2011 budget.

A second study by Civic Federation entitled Recommendations for a Financially Sustainable City of Chicago provided a range of proposals to fix the city’s fiscal malaise.[2] Among the recommendations, the study calls for privatizing the city’s water system, garbage collection, curbside recycling, building management and 3-1-1 non-emergency call center. Emanuel has few illusions of the challenges ahead saying, “You can no longer avoid some of the choices we have to make,” according to the Chicago Sun-Times.[3]

One of Emanuel’s first major moves was taking on the Blue Cart recycling program by implementing managed competition—allowing public employees to compete with private firms to test the market and compare the cost of public and private service delivery in real time. In July Emanuel split the city into six service areas, with four managed by private companies and two managed by city employees.

Specifically, Waste Management will provide recycling pickup in three service areas, while Metal Management Midwest will provide services in one service area on the South Side. The city’s two service areas on the North and Southwest sides serve 114,000 households. According to the mayor’s office, the seven-year contracts to privatize curbside recycling for 240,000 Chicagoans reduce costs from $13.8 million per year down to $6.6 million per year, providing cost-savings exceeding 50%.[4]

The move received the support of former Indianapolis Mayor Stephen Goldsmith, who told the Chicago Tribune in September, “I think (Emanuel’s timeline is) ambitiously realistic. The longer he waits, the less likely it is to occur.”[5] Currently only 40% of Chicago households have city recycling, however Emanuel noted in a press conference that by expanding the role of the private sector he would expand service to more Chicago residents. For example 22,000 new households in Wicker Park, Bucktown and Logan Square now receive recycling service with more expected next year.

Emanuel took another decisive step in merging Chicago’s Departments of Fleet Management and General Services and appointing David Reynolds to lead the new agency. Commissioner Reynolds oversees management of all government property, from facilities and leases to the vehicle fleet. Reynolds has extensive private sector experience and will focus on improving the energy efficiency of city buildings and vehicles. According to the Chicago Sun-Times, Emanuel promised on the campaign trail to reduce Chicago’s vehicle fleet, encourage car-sharing and public transit, and purchase more fuel-efficient vehicles.[6] At this point, Reynolds appears unlikely to implement privatization in his new role.

Meanwhile, solving the $635.7 million 2012 budget deficit is proving complex. Emanuel’s proposed budget comprises mostly of spending cuts, including controversially closing three police stations that could save $80 million. He also proposed a wide range of fee and fine increases that some critics have derided as tax increases.

For example, Emanuel’s budget would nearly double water and wastewater fees over the next four years and does not include privatization, though he did begin privatizing the city’s water bill call center this summer. Emanuel is allowing households to mitigate rate hikes, but only if they install free meters to measure water use. Rate hikes would go toward upgrading the city’s antiquated water and wastewater infrastructure. Other proposed revenue increases would come from hotels, parking, neighborhood safety violations, a special SUV sticker fee and more.

Emanuel proposed cutting the Chicago Fire Department’s operations budget by 20%, and in response Alderman Ed Burke proposed partnering with the private sector to save money and reduce the need for that cut. According to a September article in the Chicago Sun-Times, Burke wants to privatize the collection of city ambulance fees in hopes of improving the current 37.5% collection rate that leaves $50 million in unpaid bills each year.[7]

Source of Ambulance Fee Payments in Chicago

Source of Ambulance Fee Payments in Chicago

Source: Fran Spielman, “Burke: Privatize ambulance fees to cut $50 million in unpaid bills annually,” Chicago Sun-Times, September 23, 2011.

Early successes aside, battles over the budget and new infrastructure trust should be a revealing indicator of the relationship between Mayor Emanuel and the city council.

Harris Kenny is a policy analyst at Reason Foundation. A modified version of this article was published in Reason Foundation's Annual Privatization Report 2011: Local Government report.


Notes

[1] Financial Challenges for the New Mayor of Chicago: Analysis and Recommendations (Chicago: The Civic Federation, February 14, 2011).

[2] Recommendations for a Financially Sustainable City of Chicago (Chicago: The Civic Federation, June 30, 2011).

[3] Fran Spielman, “Rahm Emanuel borrows presidential approach to tackle budget mess,” Chicago Sun-Times, April 20, 2011.

[4] “Mayor Emanuel Announces Plans To Make Recycling In Chicago More Cost Effective With Long Term Goal of Providing To Chicagoans Across the City,” City of Chicago, Illinois, July 18, 2011.

[5] Kristen Mack, “Emanuel’s ‘managed competition’ push goes into full swing on recycling pickups,” Chicago Tribune, September 30, 2011.

[6] Fran Spielman, “Rahm Emanuel to put all city assets under one department,” Chicago Sun-Times, April 22, 2011.

[7] Fran Spielman, “Burke: Privatize ambulance fees to cut $50 million in unpaid bills annually,” Chicago Sun-Times, September 23, 2011.

Harris Kenny is Policy Analyst





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