Cost Accounting in Local Government

Planning for the Future without Contracting

There has been a groundswell of California local governments contracting out the delivery of services that formerly were provided by employees.  The latest was the decision by the City of Newport Beach to contract out lifeguard services at one of their popular beaches. The rationale was bluntly stated in words to the effect that the lifeguards cost the City too much money. This comment made me realize that contracting is not a “new” management concept as much as it is an interim measure taken until employee salaries are restored to their economic worth.

When I started in local government, city salaries were below the salaries of equivalent employees in the private sector. We were told that “you will be paid poorly but have job security and a great retirement.” Since that time, public employees have bargained for “equivalent salaries” without diminishing their “great retirement” benefits. California public employees still have a “defined benefit” retirement program while most, if not every, private sector firm with a “defined benefit” retirement plan has switched to a “defined contribution” retirement plan. Often the private sector switch was taken as part of a reorganization plan in bankruptcy to eliminate the retirement liability.

Contracting out services is a convenient interim measure to reduce the cost of retirement benefits. However, I predict that there is an “unintended consequence” from the use of contracting as contractors have little or no loyalty to the businesses that contract for their services. When contract staff do show loyalty, it is often repaid with a policy of “it’s time to change contractors.” This unintended consequence is already noticed by cities that are considering restoring police or fire services that were contracted out. The loyalty of city employees will finally trump the savings from contract staff.

However, before cities rehire employees, it is important that there be an economic model for a position’s economic worth. In the past, cities provided employees with their total compensation cost. I haven’t seen one of these reports in a long time, probably because it would be hard to justify public sector compensation to private sector taxpayers.

There is a salary amount at which Newport Beach could hire lifeguards. But, will the prospective employees take the job at a low salary to have the current retirement benefits? If the goal is to restore total compensation to a position’s economic worth then an employee can’t have both high salary and high benefits.

I predict that California will continue to muddle around with the retirement system until there are so many contract positions that it reaches a tipping point. Every new contract employee moves a voter from the “in” group to the “out” group. When the “out” group is large enough, the voters will decide by initiative what the legislature should have fixed. The result could be ugly.

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One thought on “Planning for the Future without Contracting

  • Paul Abelson says:

    Hi Rick,

    Interesting viewpoint on contracting, and the balance may be changing faster than you think! With the confluence of both the economic recovery and the new PEPRA laws effective last January, the scales are changing. With the improving economy, contractors are again seeking price increases; while pension costs for new Agency hires in the new PEPRA programs are less than for the legacy pension programs. So, it’s possible where once contracting looked obviously advantageous, bringing it in-house with new staff may now look more attractive. The devil’s in the implementation details, the service being discussed, and how the new PEPRA laws affect each agency’s individual situation, since existing contracts could have an effect. And don’t forget, this isn’t an “either/or” choice…..there’s a third common choice that I think will get increasing attention – a hybrid approach – bringing in-house the personnel to provide a core level of service, and contracting for additional services/staff as circumstances indicate. True, this won’t build loyalty from the contractor, as they’ll likely experience greater ups and downs in business, but they’ll adjust their business model accordingly; and for the agencies, it will likely help better manage costs through the changes necessary to respond to the business cycle and the ever changing priorities of our governing boards.

    Hope you and everyone at RCS had a warm and wonderful Holiday Season, and that the new year brings enjoyable new challenges!