An Outsourcing Tale of Two Cities


An Outsourcing Tale of Two Cities

Contrasting use of privatization in Costa Mesa, San Bernardino to address budgets, pensions

When it comes to dealing with municipal fiscal woes and rising pension costs, Costa Mesa and San Bernardino offer an interesting contrast, especially when it comes to using outsourcing as a means of lowering costs and ensuring the continued delivery of public services.

In the wake of the Great Recession, officials in then-cash-strapped Costa Mesa attempted to privatize nearly half of the city’s workforce to lower costs, but were rebuked by the courts. City officials have negotiated with unions to contract out street sweeping and jail operations in recent years, but they recently reached a legal settlement with unions that will prevent all but one future privatization effort (parks maintenance) for four years. In addition to granting a virtual moratorium on privatization, officials also granted employees a 4 percent pay increase.

One might wonder why this matters when Costa Mesa is back on seemingly sound fiscal footing today, having had five years of increasing revenue. The answer is that the city’s total pension costs are skyrocketing, increasing at about double the rate of revenue. Hence, pension costs are increasingly crowding out spending on public services, all while outsourcing, a powerful cost-cutting tool, has been largely taken off the table.

Contrast this with San Bernardino, whose bankruptcy exit plan relies heavily on outsourcing as a primary strategy for restoring fiscal solvency. In May, the City Council overwhelmingly approved a bankruptcy plan that includes large-scale proposals to contract out 15 city services, which it estimates would produce at least $9 million in annual cost savings.

Even more notable is that the proposed outsourcing list includes fire services, traditionally an area immune to competition. In fact, the bankruptcy plan relies on contracting out fire and emergency medical services to save at least $7 million a year. The San Bernardino County Fire Department and Centerra, a private company, are the two bidders currently competing for the fire contract.

The potential for significant cost savings through contracting out fire services should not be surprising. Public safety costs consume a major portion of the total city budget. Reason magazine’s Scott Shackford found the average San Bernardino firefighter currently receives well over $100,000 annually in total pay and benefits. Compare that amount to the average median household income for San Bernardino – $38,000.

Beyond contracting out fire services, the city expects millions in additional annual savings and new franchise fees from privatizing solid waste services.

Other proposed contracting initiatives include fleet maintenance, street maintenance and sweeping, engineering, inspections and information technology.

The rationale for a major outsourcing push in San Bernardino becomes clear in reading the city’s bankruptcy exit plan. It notes that labor costs are the city’s largest expenditure and that other cities operate at a lower cost with fewer employees.

Further, as in Costa Mesa, San Bernardino’s pension costs are steadily rising, making continued in-house delivery of public services “unsustainable.” In that context, shifting some workers off the payroll through outsourcing will not only lower operating costs immediately, but also reduce pension obligations down the road.

Costa Mesa ultimately abandoned its outsourcing efforts in the face of legal and political challenges. If San Bernardino can follow through on its bankruptcy plan, Costa Mesa will likely look on in envy as San Bernardino reduces the immediate and long-term costs that come with having too many city employees collecting over-the-top pay and benefits.

Leonard Gilroy is director of government reform at Reason Foundation. This article originally appeared in the Orange County Register.