Late last month, I put in an Anaheim Anytime request for a fairly routine problem with one of my local stop lights. I use Anaheim Anytime fairly regularly and have found it to be a good system to get problems fixed in the city. However, this most recent Anaheim Anytime request turned into anything but routine and showed in clear terms the downside to outsourcing Anaheim’s city services.
A few weeks after making my initial Anaheim Anytime request, I received a call on my cell phone from somebody saying they were with the City’s transportation department. They were calling about an email I sent and wanted to get some more information. Of course, I hadn’t sent an email and had no idea what the person I was talking with was talking about. I tried to ask for some clarification but had difficulty cutting into to this person speaking a mile a minute. Eventually I deciphered that the call was about my Anaheim Anytime request and we started to move on.
Now, if you have AT&T as your cell phone provider and live in Anaheim Hills, you’ll know that the cell service isn’t the most reliable. After a frustrating forty seconds on the phone, my phone started to cut out. I tried asking for a phone number to call her back, but it was too late, she could no longer hear me. And yet, I could still hear her, because as she was hanging up the phone, I heard her say to someone else, “That asshole hung up on me.”
Over the years, I’ve come into contact with many city staff members through my work, as a member of a city board, and simply as an engaged resident. Never before had a city employee spoken to me in anything but a respectful and professional manner. And it turns out that a city employee still hasn’t spoken to me in anything but a respectful and professional manner. Unfortunately, the City Council has decided to outsource many of the job from within the city to private companies. The person I was talking to about my Anaheim Anytime request happened to be an employee of one of these private companies.
There is no doubt that, over the long term, government employees are expensive. Mostly due to retirement benefits. To put this retirement benefit into perspective, it’s useful to look at the present value of their pension payouts. In other words, how much money would someone need in the bank today to retire with an annual income similar to what a government employee makes from their pension?
Let’s say that the retirement income in $40,000/year is current year dollars. Let us also say that the average inflation rate is 4% per year and that the income is taxed at 25%. Finally, let’s also assume you can get a return on your investments of 2% above inflation. Given these assumptions, a retiree would need $8 million in the bank to get the same type of income government employees make from their pension. Eight million dollars is a lot of money, more than most people save for retirement. In fact, to save $8 million, it requires putting away $130,000 per year over a forty year career (assuming it grows 2% above inflation and is tax free.)1
The appropriate way to look at a public employees compensation is their salary plus $130,000/year in retirement benefits.
So we can see that public employees are expensive over the long term, and when you’re just looking at the bottom line it makes sense to try to outsource as many job functions as possible but in doing so we also lose a certain amount of quality in the work preformed by government.
Dead-weight loss is a term that normally refers to the affect taxes have on a standard supply and demand curve and describes the inefficiencies that come about through taxes. Because of taxes, producers make less profit on sales, so they produce less while purchasers have higher prices so they buy less. The relative burden on producers and purchasers is determined by the slopes of the supply and demand curves. Outsourcing jobs, as Anaheim has done, produces a perverse dead-weight loss, an inefficiency, that behaves just like raising taxes.
Instead of a tax bringing the quantity of goods produced down, the profit the private companies extract from their contracts with the city behaves in the exact same way that a tax would. Anaheim is paying a certain amount for services and instead of all of that money going to the people who are actually preforming the services, as it would if they were city employees, some portion of what the city is paying is being diverted towards profit for the companies it contracts with.
The end result of this type of dead-weight loss is that the city is unable to get the same amount of services as they would if they spent the same amount of money on city employees.
In the end, Anaheim is left between a rock and a hard place, but there is a way out as demonstrated over the past few years by the Anaheim Union High School District: negotiate with the public employee’s unions. Anaheim residents and tax payers are not getting the quality and quantity of services that they’ve paid for due to the city outsourcing many government jobs.
The public employee’s unions want to keep the number of employees high, the more employees they have the more power they have. They should be willing to negotiate on pay and retirement benefits in order to stop the outsourcing of government jobs.
Unfortunately, the current mayor and city council seem to have no interest in negotiating with the employees and their unions and instead have worked hard to outsource as many jobs as possible within the city. While outsourcing these jobs might help the city’s finances in the long run, doing so also severely decreases the quality of services residents receive when interacting with Anaheim “staff”.
1. I’ve made some huge simplifications with regards to how CalPERS works, this is purely for illustrative purposes only.
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