Should Public Employees Fear Privatization and PPPs?

No, explains privatization guru E.S. Savas in this excellent article written for the International Public Management Association for Human Resources. Here’s an excerpt:

Enlightened public officials recognize the value of good employee morale and want to gain workers’ support, both to win their votes in the next election and to satisfy the public demand for less costly government. Therefore, public officials use numerous methods to limit job losses among public employees. When outsourcing, it is commonplace for government agencies to guarantee that no current employees will lose their jobs. This is achieved in one or a combination of five ways:

1. Requiring the winning contractor to hire the employees he needs by first offering jobs to affected public employees and giving them the right of first refusal. 2. Requiring the contractor to hire all the affected public employees. To satisfy this requirement, a contractor may have to charge a higher price to perform the work at the beginning of the contract period and then lower the price as the contract remains in place and normal attrition reduces head count to the number of employees sufficient to do the work. 3. Planning ahead and setting asideââ?¬â??”banking” or “freezing”ââ?¬â??openings as they develop in other agencies, filling those openings with temporary employees, and then filling them with the redundant employees who are not needed by the contractor when the transition takes place. Note that this does not involve creating new positions. 4. Offering early retirement to eligible employees. 5. Giving laid-off employees first choice to fill new government openings as they occur.

Attrition can solve the problem of public employee overstaffing if outsourcing is partial instead of total. This is true of bus services, for example, where a few routes at a time can be outsourced. By contracting out some routes each year, natural attrition creates openings for the remaining workers, who can be reassigned to the remaining routes. This approach is applicable to a wide array of services. “Leasing” employees is another option. Leased workers remain on the government payroll as employees but work for the private firm, which reimburses the agency for the leased employees’ salaries and fringe benefits. This approach might be utilized for older workers who are close to retirement and might otherwise lose their pension benefits, but proper supervision of leased employees may become a problem. Pensions have also been preserved another way: For the sake of continuity, a private contractor wanted current employees to stay when it took over a prison for Washington, D.C., but prison employees who had 18 years of service were within two years of retirement and did not want to leave city employment because they would qualify shortly for a significantly increased pension upon retirement. The contractor hired and purchased annuities for each of these workers so that, together with the pension represented by their vested rights, the workers were guaranteed pensions equivalent to those they would have gotten had they remained city employees. Hiring with a “put” option is yet another means to protect public employees. A private firm in New Jersey agreed to hire water department workers for six months, but at the end of that period, the firm had the right to return selected employees to the government agency. By that time, some attrition had occurred, and openings were available for the workers returning to the agency without the government having to create jobs. Based on expertise, ability, education, and ambition, retraining programs have been used to prepare redundant government workers for new job opportunities. The workers can look forward to continued employment and better prospects in a different area. A social safety net lump-sum severance pay, early retirement benefits and unemployment insurance can be provided to workers who depart voluntarily. Lesser amounts can be given to those who do not accept the initial offer but are subsequently laid off. Outplacement assistance in the form of retraining, information about job openings, and assistance in job searches, resume writing, and information on benefits can be required and provided either by the government or by the Contractor. Placing this responsibility on the private firm, however, makes the contracting opportunity less attractive to the firm. Better job opportunities are possible for workers who choose to leave the security of a government job and go to work for the private contractor after privatization. This is evident in water and wastewater PPPs where a municipal employee is generally stuck in a backwater department and has little opportunity to advance to a better job; private firms in this business have more plants and offer many more opportunities for career advancement than even the largest city. Research shows that outsourced public technology workers end up on better career paths, make more money, and are happier in their private sector jobs.

So often, we hear the tired, old mantra that “privatization costs public sector jobs,” when in fact, the reality is: (a) policymakers have a wide range of options at their disposal to address concerns over what happens to current public employees; (b) most public employees either get hired by the private contractor, are reassigned to other government jobs or take early retirement; and (c) privatization often creates new career opportunities for current public employees. Viewed from this perspective, the perpetual public employee union push to oppose privatization at all costs would seem to be at odds with the best interests of their members. That’s who the unions are trying to protect, right? Seems to me that they may just be “protecting” their members from better paying jobs, better benefits and better career opportunities. Reason’s Annual Privatization Report 2008 Reason’s Privatization Research and Commentary

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.