☆ A failure of privatization—or a sound adaptation to the market? The Sandy Springs story (2/4)
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After contractor premiums shot up, Sandy Springs, GA pulled many services inhouse to save tens of millions of dollars. But going from a mostly privatized city to more of a hybrid model didn’t come without a sacrifice, says Mayor Rusty Paul in Part 2 of an Opp Now exclusive Q&A. When it comes to procurement, City Manager Eden Freeman believes that contractors are much more efficient.
Opportunity Now: In terms of city services, when you switched to inhouse, a lot of people in the media were characterizing it as a failure of privatization. How would you describe it?
Mayor Rusty Paul: We operate more of a hybrid today. We still outsource an awful lot of services. When we rebid the last contract, I think we saved $26 million over the last five years.
City Manager Eden Freeman: At our founding in 2005, all non-public safety services were provided by one company, CH2MHill.
In 2011, the City Council directed staff to rebid the city’s general government services, which resulted in the city saving $7 million per year.
In 2019, the city rebid general government services again; it was projected to save the city $13.5 million over five years. In reality, those savings are closer to $26 million, including additional staff that were added by the city during the five-year period.
RP: But it comes with certain sacrifice, and I rail against it all the time. We’ve lost some of the nimbleness and innovation. We’ve become a little bit more bureaucratic, and we’ve lost some flexibility, the ability to say if something’s not working out, just call up a contractor. Eden and I talk about it a lot: are there areas where we can regain and recapture some of that private sector initiative?
The great thing about the public–private model is we have the flexibility to use whatever aspect of the marketplace today at the least cost.
ON: So, a more flexible and responsive government would cost a little more money?
EF: I wouldn't say responsive, because I still believe that we are extremely responsive, especially when compared to other cities across the country.
RP: I would agree with that. I don't think we've lost any responsiveness. I don't think we've lost any quality of service, but I do think we have lost the nimbleness and flexibility and some of the innovation, and we're trying to figure out how, within this hybrid model, how to recapture some of that.
ON: What areas are you focusing on?
EF: Purchasing laws are difficult to get past. For example, when we've had things outsourced, a contractor could go and acquire services from someone else much quicker and faster than we can when we have to follow state purchasing regulations to do it right.
ON: Regulations like prevailing wage requirements?
RP: Not unless we have a federal contract. We don’t have that problem at the state level. It’s just that the state has certain procurement processes we have to follow. Even if a private company is using purchases for our purposes, they could go into the marketplace with a little bit more flexibility and less restrictions than we have as a municipality.
So it just bypassed some of those more hidebound rules that local governments have when they're buying directly.
ON: So you’re saying that when using contractors, you don’t suffer from what Mark Moses warns about, privatization in name only, where contractors working for the city are hindered by the same regulations?
RP: When it comes to environmental regulations and all the other things cities complain about, a private company’s got to deal with the same issues that everybody else has to deal with.
But there were just niches where that flexibility really, really paid off.
It’s a mindset difference. They make money when they figure out how to do things faster and quicker, cheaper, better. And there's not that incentive in a governmental entity; nobody's going to make a profit by figuring out how to do it more cheaply. They get paid regardless, and so they are more focused on following the rules.
We figure out how to cut costs, too, but the private sector has much more incentive.
ON: But you were able to save $26 million over about five years by bringing some services inhouse in 2019, which is twice what you projected. Isn’t it hard to ignore how much you saved by going inhouse?
RP: At the time when we rebid those contracts, the market was as hot as it’s been in maybe 20+ years. Contractors were charging a premium for everything because they had so much work going on that they were adding premiums to everything. We just said, we’re gonna wait until the market cools down a little bit.
EF: It was cheaper to go inhouse because when offerors submit their proposal, they have to give us pricing for five years.
They also have to tell us what their not-to-exceed annual escalator would be, which we can still go negotiate with them, to lower that.
Plus, they have to tell us what their fully burdened rate is, and that FBR has to include the fringe benefits for the employee, their profit, and any risk that they want to add into the cost at the average number
The average fringe rate for the contractors during that period was around 70%, and the city's for that same time period was 42.15%.
ON: And that takes into account retirement?
RF: Yeah, all the add-ons besides salary.
ON: So, you’re still able to make people millionaires at 42%?
EF: Yeah.
ON: Are you looking for angles to get back into even more contracted services?
RP: We’re looking for what is the most efficacious, cost-effective way to deliver service, right? The second we find that the pendulum swings back the other direction, I don't think we'll have any hesitancy about trying to figure out what services that we could put under contract.
Something that I hope never occurs again, but is always likely, is that we hit a recession. That'd be a perfect time for us to take a really good hard look at the market and see what we can get done more cheaply.
Not that I'm wishing that we get one, but the market is still pretty hot in this area. The economy hasn't slowed down at all. It's a timing issue more than anything else.
EF: It’s also worth noting that whenever you start one of those procurement processes, it's much longer than you think. It's not going to be a 30-day or even 90-day process. It's, at a minimum, six months. And when we did the first big rebid of city services in 2011, it was an 18-month process.
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