Fewer cities increase outsourced services

As costs for employee health benefits and wages grow, some cities are turning to contractors to relieve pressure on their budgets. However, many others are more reluctant than ever to contract more services, opting for in-house control.

The Washington-based National League of Cities’ 2005 annual survey of city fiscal conditions found that the percentage of municipalities that have increased the amount of contracted services has declined steadily, from nearly 29 percent in 1999 to 4.4 percent in 2005. “Risks appear to outweigh rewards when it comes to outsourcing,” says Jim Leidgen, city clerk and director of finance for Jeffersontown, Ky.

With a $16 million budget and a population of 28,000, Jeffersontown has not increased outsourcing over the last few years because of a deep-rooted tradition of using city workforces, maintaining existing relationships with local vendors and the desire for convenience and control. “Contracting, or outsourcing, can be tricky and also causes dependence on others for services,” Leidgen says.

Other city leaders give similar arguments against outsourcing. “It gets into an issue of control,” says Palm Bay, Fla., City Manager Lee Feldman. Palm Bay contracts out only a few minor services. By keeping matters in-house, Feldman can talk directly to an employee if a job is not completed adequately. “I don’t have to negotiate with [a city employee],” he says.

Also, an increasingly tough financial climate is causing fewer cities to augment any services, therefore, reducing demand for contract work. Feldman says most cities already made their outsourcing choices 10 to 15 years ago when privatization first started gaining attention, and there is no reason to contract more services unless there is a plan to expand on the scope of work to be done.

Other cities have found different ways to save money while keeping services in-house. “We’ve never done a huge amount of contracting out, and there’s been very little change here,” says Iowa City, Iowa, Councilor Dee Vanderhoef. “Our [city] employees are well-trained, long-term and move up the ladder through attrition.” Vanderhoef says the city saves money by creating collaborative, mutual-aid relationships with neighboring towns, particularly for police and fire services where benefit packages mandated by the Iowa State legislature can be expensive. The Olympia, Wash.-based Association of Washington Cities has been emphasizing the economic benefits of intergovernmental and public-private partnerships, says Executive Director Stan Finkelstein. “[This] has resonated well with our smaller cities who don’t benefit from economies of scale,” he says.

Outsourcing, however, plays a larger hand in newly incorporated cities that do not have years to start up operations. When residents of Sandy Springs, Ga., voted in June 2005 to secede from Fulton County, they needed to have a government in place by Dec. 1 of that year. City officials turned to Denver, Colo.-based CH2M Hill-OMI to provide a number of city services, including accounting, purchasing, administration, tax collection, management, and parks and recreation programs. “This was a clean sheet of paper with no governmental processes in place,” says Rick Hirsekorn, director of CH2M’s Sandy Springs Service Team. The advantage for Sandy Springs, Hirsekorn says, is that the company must provide exemplary customer service and responsive, efficient and effective government services or risk non-renewal of the contract. The city has only four employees on the payroll.

Two other start-up cities in Fulton County, John’s Creek and Milton, voted to incorporate in July 2006 and will need to establish a government by Dec. 1. “We’re looking at Sandy Springs as a benchmark, but we want to do more of a hybrid-model, keeping some services in-house,” says Greg Mishkin, communications chairman for the City of Milton Committee. An advantage to beginning with a heavily outsourced government, he says, is that a city can keep its options open and learn about its core competencies. They can always go in-house later. “To go from outsourcing [services] to in-house is not nearly as stressful and politically dangerous as it is to do it the other way around,” Mishkin says.

Annie Gentile is a Vernon, Conn.-based freelance writer.

The percentage of cities that have increased their use of contracted services each year from 1999 to 2005.