Surviving and Thriving in an Irrational World – part two

Last year I spoke to the Alberta Union of Municipal Associations (AUMA) in Red Deer on the theme of “Surviving and Thriving in an Irrational World”. My talk met with such an enthusiastic reaction that David Barber of the Cordillera Institute (a think tank that focuses on excellence in local government), asked me for permission to reproduce the talk for their readership. They published it in two parts. Here is the second one, including an introduction by David Barber. By the way, if you are interested in local government issues, I strongly recommend that you get in touch with the folks at Cordillera and subscribe to their regular e-mail publications.

Surviving and Thriving in an Irrational World (part 2):  Where Should Local Government Be Headed?

Advantages of Decentralizing Local Government
In the previous commentary, I remarked on some of the advantages of local government, and in particular the fact that it is the level of government most able to be relatively aware of the real concrete circumstances of its people, and most able to see and correct the damaging and undesirable consequences of its policies.  But the small scale of local governments, and having several of them, has other advantages.

Taming the Special Interests
For example, organized special interests and pressure groups benefit from centralized political power because that means that they can concentrate their lobbying power on a central point of authority.  When power is widely dispersed to many small units of government, it reduces their lobbying power because it is spread so thinly.  Amalgamation in a large urban area, however, exaggerates the bargaining power of the special interests in local government affairs.  This is crucial to understanding why amalgamation drives up costs when previously different units, which specialized in different services to please their local population, are suddenly put together.

More Wisdom from Professor Husock
“When amalgamation occurs, all the various services and amenities packages of the many individual jurisdictions get put together …  As a matter of political reality, no municipality can long provide certain services only to one area.  All the jogging enthusiasts who’d previously been outnumbered in Jurisdiction A, suddenly can turn to the new Mega-City and demand that, because there are great jogging trails in what used to be Jurisdiction B, they, too, deserve such amenities.  In other words, rather than being reduced, service provision inevitably rises to meet the many tastes that had previously been separate.  Cost increases, as facilities such as basketball courts are built in areas which previously had made them a lower priority.  Public employment must necessarily increase, not decrease.“

In the same vein, decentralization reduces significantly the ability of voters to pass the costs of local decisions along to larger communities, which forces voters to be more fiscally responsible.  When governments cover relatively small geographical areas, it reduces significantly the cost of ‘voting with your feet’.  It is much cheaper to move from one town or suburb to the one next door than it is to move to another state, province, or country.

“Government, in amalgamated cities, inevitably becomes more distant from the individual voter.  It is harder for any one voter, or group of voters, to influence policy.  This situation works to the advantage of well-organized interest groups, with the resources to employ staff to influence policy on their behalf.  Even the most zealous unpaid neighborhood activist is little match for the full-time paid staffs of public sector labor unions, for instance, who know local officials, help elect them, and understand how the system works.  Inevitably, unions will, in representing the interests of their members, resist cutbacks in municipal employment.  They will insist that the efficiency gains of smaller municipalities be eliminated.  Thus, for instance, if Jurisdiction A formerly paid its recreation workers less than those in Jurisdiction B, where recreation was not as important to voters, we can expect that the new amalgamated city will have just one pay scale — at the higher rate.“

More Successful Experiments
The third consequence of the existence of a large number of local government units is that it allows the benefits of successful experiments to be copied by other local and even more senior governments.  Decentralization, when linked to a high degree of competition between localities, increases the likelihood of spreading local policies and practices when these are successful, and getting rid of them when they are not.  Imitation is a powerful force.  The London Borough of Wandsworth, to pick just one example, pioneered in the 1970s many of the innovations that later became the backbone of Thatcherism, including the hugely successful idea of selling council flats (publicly-owned housing) to the tenants for almost nothing, which overnight transformed for the better many public housing developments.

Competition Is Vital
But none of these positive effects can or will be realized without the vital element of competition.  Because municipal officials may not know that much about what their local population wants, about the true costs of various services, and about the potential of new methods to deliver efficiencies and improved service levels, we need a framework for local government that spurs competition, and ends rigid monopolies in the supply of local government services.

Competition is how we find out what works.  Only people who do not understand how to satisfy consumer tastes and preferences would look at the existence of Wal-Mart and Target and Costco and say, “Look at all the wasteful duplication of services, capital facilities, management, inventory, etc.  Let’s have a single giant store to service everyone.”  This is the Soviet model of consumer choice.  Inevitably such a system is run in the interests of management, not customers.

Internal Competition
At the local level, competition takes place on two dimensions.  First, there is competition within municipalities.  By this I mean that the most successful municipalities, places like Charlotte (North Carolina), Phoenix (Arizona), and Indianapolis (Indiana), are more and more getting out of the game of directly supplying traditional local government services where local government employees under a rigid contract supply individual services, such as garbage collection or sewer and water services, to the residents of an entire city as a typical public sector monopoly.  There is now an association of so-called ‘contract cities’ in the United States where municipalities provide almost no services in-house, and act instead as a purchaser of services from many competing suppliers on behalf of their populations.  A former local government minister in the U.K. once famously remarked that his ideal local council would meet only once a year to approve contracts with suppliers of services for the coming year.

The Managed-Competition Model
So the model that is emerging is of a much smaller local government that acts as a kind of buyer’s co-op on behalf of the residents of the locality, an experience that dovetails nicely with the pioneer history of reliance on co-ops throughout rural areas.  Service standards are set, and contracts are let on the basis of those standards, to competitive bidders.  The winning bidder is then held accountable for his success or failure in reaching the agreed standards.  The question of whether the service is provided by public sector or private sector workers and managers is actually becoming irrelevant.

Naturally the monopolists are the ones who resist the most, and especially large centralized service provision bureaucracies and their associated public sector unions, but the benefits are so great from contracting out and privatization — as Jim McDavid at the University of Victoria’s Local Government Institute has been instrumental in documenting with respect, for example, to garbage collection — that the momentum is clearly with the reformers.

External Competition
The other kind of competition that it is vital to preserve is that between municipalities on the local level.  One of the things that drives local government toward reform is the ease with which people vote with their feet.  One strategy for frustrating this crucial means of disciplining and controlling the quality of local policy and holding local officials accountable, is to expand the boundaries of local government to such an extent that the costs of getting away from bad government become prohibitive.

Misplaced Opposition
This movement toward what we call municipal amalgamation is driven, ironically in many cases, by the business community, who believe that we have ‘too many governments’, resulting in ‘overlap and duplication’.  Surely, it stands to reason that having only one mayor, one council, one city hall, and one public works department would save money and promote efficiency.  But as the evidence I’ve outlined here clearly shows, being big in itself is no guarantee of anything and, as I have already remarked, research in local government leads us to think that at least 80% of municipal activities offer little prospect of economies of scale (i.e. saving money because you are bigger).

Overlooking the Evidence
In fact, there are good reasons for thinking that bigger government will be less efficient and responsive, not more.  Certainly in the private sector thinking is running the other way, as the break up of business giants releases hidden value in their assets.  We have seen this, for example, in the decision of companies like Telus [a major Alberta-based firm] to sell many of its large office buildings, because they argue that they are in the telecommunications business, not the property management business.  Almost all conglomerates trade at a discount to the value of their component parts, which has driven many of them to break themselves up in one way or another.  And of course in the municipal world we know now that the experience of amalgamation has been to drive costs up to the highest level, rather than down to the lowest.

The Role of Senior Government
So if amalgamation isn’t the answer, what is?  Our senior governments can usefully play the role of stimulator of competition between local governments, as we see in Australia, New Zealand, and the U.K.  There, local governments undergo regular audits, where service levels and taxation levels are compared, permitting the publication of league tables and other instruments of accountability that grant to local voters much greater insight into the performance of their local government and hence more means to hold them accountable.  Research indicates that people and businesses that move from one municipality to another are actually quite knowledgeable about the conditions in both their old and new municipalities.

Reporting Municipal Performance
AIMS (the Atlantic Institute for Market Studies) has released its own performance report for municipalities in the provinces of Nova Scotia and New Brunswick, and has prepared one for Maclean’s magazine on the 30 largest municipalities in Canada.  Our hope is to introduce and stimulate exactly this kind of competition between municipalities by increasing the knowledge of voters and taxpayers about what they are getting for their money.

Comparing Performance Improves Survival Odds
It is important here to signal that it is not only senior government officials who act irrationally.  Many angry municipal officials are outraged and resentful that anyone would dare to gather information and report on their performance.  My advice to them is, “Get over it.”  In fact, if your future is threatened by politicians at the senior level who hold the power of life or death over you, you shouldn’t wait to fight a rearguard action against policies they’ve already decided.  Take the initiative.  Tell them and your own residents and voters that you take performance seriously and that you intend to be measured against the highest, most stringent levels of public performance.  Don’t resist the drive to open up local government, or to collect important and useful performance data, and to use that data to make meaningful comparisons between municipalities based on those comparisons.  My view is that the lives of your municipalities depend on it.

Customer Service Is the Driver
We must create a customer-service oriented culture in our municipal governments.  We must align the incentives of our elected officials so that they get rewarded for providing efficient, high quality services.  This means we need them to focus on defining service levels, measuring them and rewarding superior performance by service providers.

A New Zealand Example
Consider New Zealand’s municipalities.  There performance pay is a significant portion of management’s compensation.  Municipalities set goals or outcome measures that are important; they might say that they will turn a building permit around in a week or fix a pothole in 24 hours.  With sophisticated measurement systems, the services actually provided are benchmarked against such standards.  Achieving performance goals, or continuous improvement against ever rising benchmarks, results in pay bonuses for management and employees.  It is no longer about spending budgets or losing them, or prolonging and complicating service to minimize effort or maximize overtime.

An Indianapolis Example
In Indianapolis, unionized in-house providers actually proposed and benefited from an internal system called gain sharing where 25% of all savings beyond the bid price went to employees.  With their eye on the ball of efficiency and good service, they outcompeted the private sector several years ago and became the most successful municipal employee union in the U.S., winning the highest pay increases in the country.

Reward Good Performance
High performing entrepreneurial communities measure their services in terms of what they get for their money, not on what they spend or how many employees they have.  That way they can measure and reward performance.  The employees, management, present and future residents and taxpayers all find their interests looked to and positive behavior rewarded.  The behavior that would be rewarded, by the way, would include creation of a co-ordinating tier of government for spillover services that allows economies of scale to be captured in those limited areas where they do exist.

Put Your Financial House in Order
One final observation about irrationality: the financing of much of our local government infrastructure (parks, roads, water, sewers, and the like) is economically irrational and it poisons relations between municipalities and senior government.  I can’t speak to the experience in your jurisdiction, but I can tell you that I spend a lot of time in Nova Scotia giving municipal leaders this message: “Stop complaining about downloading and underfunding.  In many cases you have the power to fix these problems yourselves but the fear of possible political fallout keeps you from taking action.  You will have only yourselves to blame when senior governments decide you can’t get the job done — and merge your municipalities out of existence.”

Stop Subsidizing Servicing Costs
Many municipal services are provided to consumers at considerably less than the real long-term cost, on the assumption that politicians at senior levels will pick up a significant part of the tab after the infrastructure’s useful life is over.  The totally predictable result is both that infrastructure is poorly maintained and that use of the infrastructure is much greater than if consumers had to pay the real cost of that use.  Hence the fact that, for example, a great deal of municipal water in Canada is still unmetered and people pay a flat fee regardless of consumption.  A formula guaranteed to encourage heedless consumption of water as well as needless waste.

Improve Capital Project Management
It is thus absolutely essential that, as New Zealand cost accountant Larry Mitchell constantly reminds us, we “… separate capital and operating budgets for efficient, transparent, and accountable capital investment [as well as using] carefully constructed cost-benefit analyses so that costs and benefits are correctly and completely documented.  Co-ordinate capital projects between local departments and special purpose bodies such as utility commissions …” so that, for example, road and water main maintenance and repair are jointly planned.  Stop doing all that stopgap maintenance.  It is costly and inefficient in many cases compared to doing the proper long term maintenance and repair.  We all know that politicians prefer projects that will happen before the next election, but proper accounting, public reporting, and other accountability measures will reduce this temptation.

Those Who Benefit Should Pay
But the difficulty in achieving these common sense recommendations is nothing compared to the key piece:  “Municipal infrastructure should be financed, as far as possible, by the residents who benefit from it, because this provides the surest guide to how much should be invested in what.”  This recommendation — which comes from one of Canada’s leading local government experts, Harry Kitchen — however sensible and essential it is, butts up against the reality that some local politicians regard it as a matter of commendable machismo that they can arm twist politicians at senior levels of government to pony up for their pet projects, with the result that the projects are often delayed by political wrangling and the final outcome is serious overbuilding relative to what is really needed.

End Reliance on Capital Grants
Senior government thus contributes to the economic irrationality of municipal infrastructure by essentially bailing out local governments who have failed to account properly for their infrastructure and failed to make people pay the real costs of their use of that infrastructure and now find themselves with their pockets empty when the infrastructure reaches the end of its useful life.  As Harry Kitchen so delicately observes:  “Economic arguments in support of capital grants are not strong.  Their use should be conditional on recipient governments setting efficient user fees, prices, and local taxes for services provided.  As well, recipients should have proper asset-management programs, along with requirements that asset replacement costs be included in the charge for services.”

Consider Prudent Borrowing
Now I know that many of you will object that municipalities have to share the property tax base with other public agencies (such as your county or the school board) and I agree that this is a problem.  However, the point I have been making is that, where the law allows, there are lots of mechanisms beyond the property tax base that allow the financing of infrastructure.  Ditto for borrowing, again where the law allows.  Where a piece of infrastructure has been subjected to a rigorous cost-benefit analysis and you are satisfied that it will provide a stream of genuine benefits that will exceed the capital cost over the life of the project, you should borrow to finance it, since it makes no sense to make today’s taxpayers foot the bill for benefits to be enjoyed by future citizens.  Borrowing is a way to distribute equitably the cost of the benefits enjoyed across the entire life of the infrastructure.  Borrowing also allows you to cross the divide between today’s system, where we have allowed the capital stock to deteriorate and not set aside any reserves to replace them, and tomorrow’s where we will charge people the full cost of the infrastructure (and many other) services they consume.

Consider Other Financing Sources
There is lots that could be said about the right way for municipalities to finance long term investments, including multi-year capital budgets and dedicated fund accounts, revenue bonds, your own gasoline tax (not a transfer from senior government’s tax), parking lot taxes, congestion and toll charges, and much more use of P3s (public-private partnerships).  This, however, is not the place to do so.  What I can say is that, if you want senior governments to allow you to survive, wrong-foot them by demanding that legislation not only allow but require such measures in order to ensure that municipalities can do their jobs and not constantly be crying poor.

The Bottom Line
Public sector competition, like private sector competition, is not wasteful, but is a healthy discipline that promotes efficiency, accountability, and good service.  Such competition, where it has been introduced into local government, has transformed it for the better.  That’s a lot more than the evidence suggests we can say about forced amalgamation — and most of what else passes for local government reform in Canada.

References
The quotes above from Professor Howard Husock (Director of Case Studies at the John F. Kennedy School of Government, Harvard University) were given in a talk entitled “Why Bigger Local Government Isn’t More Efficient: The Case for Breaking up Cities” on Friday, May 18, 2001 at Montreal’s Omni Hotel.