Satisfaction and Savings: Private Contracting in New Hampshire

By Peter Girard and John Halstead

New Hampshire citizens have come to rely on local governments for a wide variety of services, both seasonally and year-round. At the same time, these citizens are ever mindful of the costs of these services. In an effort to see how local governments are dealing with service provision costs, in 2004 the Department of Resource Economics and Development at the University of New Hampshire, with the support of the New Hampshire Local Government Center, conducted a mail survey of New Hampshire municipalities to gather data on these services and the private, public, and cooperative arrangements supporting them. Surveys were sent to each of New Hampshire’s 234 cities and towns, and responses were received from about half of them.

The services looked at fall into the broad categories of Public Works/Transportation, Public Utilities, Public Safety, Parks and Recreation, Health and Human Services, Cultural Programs and Support Functions. They also cover a wide variety of skills and capital investment, especially considering the very small size of many rural towns. The study did not deal with the decisions about whether or not to provide a service. Instead, it dealt with the decisions by towns to produce the service with their own staff or by another arrangement, such as contracting with a private company, regional cooperative or nonprofit organization. It is our hope that the information provided will prove useful to municipalities considering the prospect of privatization.

The Prospect of Contracting Out
Local governments are constantly seeking to provide services to a demanding electorate while maintaining a relatively limited and heavily publicly scrutinized municipal budget. In the face of shrinking revenues, local governments are left with three major options: (1) cut back on services offered; (2) completely eliminate public provision of the service; or (3) find more efficient ways to provide necessary services. One option, perhaps the one of most interest to municipal officials, is to use private contractors to reduce production costs, while maintaining local control over how much of the service is provided. The level of control ceded to the private sector is of course a continuum, and the many variations of “privatization" and its political ramifications have led to a good deal of confusion. This article uses the term “privatization" to refer to municipal contracts with private firms, not the elimination of public involvement in the decision to provide a service.

Despite the prospect for cost savings with competitively bid contracts there may be a variety of other more practical concerns determining contract awards. Rapid changes in needs, the seasonal nature of some services or the inability to make capital investments may make flexibility more desirable than cost savings. In addition, the specialization of the contract provider may provide improvements in service quality. On the other hand, many services provided by the public sector have not been traditionally profitable. The same high costs that make contracting out to a specialized provider attractive may be equally insurmountable for private firms, hampering profitability and discouraging bids. There is also some fear that once a contract is initiated a town may have very little recourse to deal with suddenly escalating prices or sub-standard service. The utilization of contracts also may place an additional burden on towns to monitor performance and adherence to the agreement by the provider.

The New Hampshire Case Study
The vast majority of previous studies about private contracting have focused on large metropolitan governments. The state of New Hampshire is unique in a number of aspects including its small size, strong municipal government and rural demographics. The strength of local government in New Hampshire rests much more at the local level than the county level. This prevalence of small political units is often cited as an impediment to regional planning and cooperative action. The demographic composition of the state is also changing due to substantial immigration. As the fastest growing state in New England, municipalities in New Hampshire are not only being required to provide services to more people but also to a culturally changing electorate.

Current Fiscal Health
How vigorously municipalities pursue cost saving measures is in part due to their current fiscal status as well as their perceived future situation. Survey respondents were asked to place their city or town in one of five categories of fiscal health. While the responses to this question require interpretation by the respondent, they capture the perspective of key officials and provide insight into their decision making process. It is part of the mental framework these officials use in evaluating the many possible options for service production. For ease of discussion, towns with fewer than 1,000 residents are labeled “small," those in between 1,000 and 5,000 are referred to as “medium," and communities of 5,000 or greater are referred to as “large."

The most common response describing the current situation for municipalities of all sizes was that revenues were adequate but communities were not able to expand services. Towns of less than 1,000 people (n=27) seem to have the most optimistic view of their situation while medium and larger communities described inadequate revenues roughly 20 percent more frequently. This might indicate some bias caused by elected officials being the more frequent respondents in smaller towns compared to professional city managers in larger municipalities. Acknowledging even tacitly the need for more revenue may be an unpopular political position for those facing reelection.

Looking Ahead
Overall the respondents gave a slightly more pessimistic view of the next five years. Once again, the larger communities seemed to be the most worried about the necessity of cutting services due to inadequate revenues. Although the majority foresaw adequate revenues in the future, more than 10 percent saw some reductions in future services.

Most communities predicted the same level of privatization as is currently employed, with small and medium towns in particular predicting ‘remain the same.’ Larger municipalities responded quite differently with the largest response being ‘unsure’ followed by ‘no change.’ Large towns also had a much higher percentage foreseeing increased privatization—about 25 percent. By comparison, less than 6 percent of the responses in either small or medium towns were ‘increase privatization.’ This seems consistent with previous responses where larger municipalities were particularly concerned about inadequate revenues. When respondents were asked to identify the services most likely to be privatized, the most common response was janitorial services. This was followed closely by building/grounds maintenance, payroll administration and street repair/maintenance.

Neighborly Behavior
Nearly 75 percent of small and medium towns do not provide any services to other towns. On the other hand, 40 percent of large communities do provide some sort of service to their neighbors. This result seems to point to economies of scale larger communities may offer their smaller neighbors. Services most commonly provided to other municipalities were rescue services including ambulance, police, fire and the associated communications. Solid waste disposal was also a common write in response. The 25 percent of towns that provide service to other municipalities indicates that intra-government cooperation is a common and viable method for providing services.

Growing Into Contracting
Roughly forty percent of respondents stated that population growth has affected their ability to provide services. This was particularly true for larger communities. Twenty-eight municipalities specifically noted pressure on their police force with the next most common responses being street repair, fire control, code enforcement and schools in descending order.

Most communities described the trend of private contracts over the last five years as either stable or increasing. Small towns responded more heavily in the stable category while medium and large municipalities split more equally among stable and increasing. Very few governments of any size described their recent activity as decreasing the number of private contracts. Not many municipalities increased their contracts in order to provide new services exclusively, while many had used the contracts to provide an existing service or some mix of new and existing services. The majority of small and medium towns used contracts to provide previously existing services while the majority of large municipalities used contracts to provide a mix of new and existing services.

Private contracts are almost entirely bid competitively in the large municipalities, compared to only about two-thirds of contracts bid in the smaller towns. The percentage of towns reporting that an insufficient number of bids had been received for most contracts were 48 percent, 27 percent and 33 percent respectively for small, medium and large municipalities. This may point to a problem with the possible advantage based on competitive bidding. Local governments seem to be making the theoretically appropriate decision to use the competitive process, but certain aspects of the services desired may not be attractive to private sector contractors. Most communities, regardless of size, do not let their own departments bid on contracts. While this may be due to fears of cost shifting in order to win the contracts, it may also neglect the possibility that some services are better provided by public employees. This may be an indication that the decision to contract out may have at least some political motivations rather than purely economic ones.

Satisfying Civil Servants
The largest portion of the survey was devoted to a matrix of municipal services on which respondents marked both how a service was provided as well as their level of satisfaction with the service. The five possible response categories for service production were: “your employees entirely," “your employees in part," “another government or authority," “private for-profit" and “private nonprofit." The level of satisfaction with service delivery method was noted as a one through five response, with one indicating high satisfaction and five indicating low satisfaction.

Two groups of responses were selected which separated the respondents by privatization versus local government provision, and by cooperative provision versus provision solely by a single local government. For the first group, where the choice is clearly between municipal production and private contracting, a greater level of satisfaction accompanies public production in all cases. This is notable in that it runs counter to the idea that better service is a key driver for private contracting.

The second sample group selected examined six services that are often produced cooperatively with another government or authority. The group as a whole has higher satisfaction ratings associated with local municipal (rather than cooperative) production. In part this might be driven by the more unsatisfactory ratings given to cooperatively produced fire and police communication. It is likely that dissatisfaction might have more to do with the rurality of areas using cooperative communication structures as opposed to the institutional arrangement itself. Police and fire training on the other hand had nearly identical satisfaction across municipal or cooperative arrangements.

One interesting service in the second group is ambulance service, which is provided evenly by local municipalities, other governments, private nonprofits and private for profits. With each of these institutional arrangements providing at least 15 percent of the total, a valuable comparison of satisfaction between production types can be made. The highest satisfaction is with local government production and the lowest is with private for profit contracting. Cooperative and nonprofit arrangements fall in between in that respective order. This same pattern appears when the entire dataset of eighty-four services is examined.

This finding might be interpreted as an inherent bias towards satisfaction with services produced in house due to personal involvement of respondents in these activities. On the other hand, nearly half of the respondents were politicians rather than administrators, and even the municipal employees responding are those charged with making management decisions that require self-inspection. These responses notwithstanding, respondents still ranked other governments and nonprofits ahead of for profit contractors. The same “bias" does not explain this result. This consistency in responses placing private contractors lower than any other production method supports the finding that relative satisfaction with private contracting is low. In light of these results, the contention that increased service satisfaction can be generally associated with private contracting is not supported.

Overall Results
Two of the most striking findings in the survey are the responses that contracted services generally scored lower in measures of satisfaction and a significant portion of municipalities were receiving insufficient competitive bids. The first item is counter to one of the main theoretical supports for privatization, that specialized private firms will provide better service at a lower price. The second item is troublesome in that it alludes to a problem with the economic advantages of contracting out which are based largely on market-based competition. With nearly one-third of the communities surveyed stating that insufficient bids have been received on contract requests, it is clear that this is not a trivial issue in practice.

While about 30 percent of local governments responded definitively that contracting has resulted in cost savings, the majority (60 percent) gave the more lukewarm response of savings in only some instances. Despite these apparent problems, about 17 percent of all current services are provided by private firms. This is nearly double the number of intergovernmental arrangements identified. This makes private firms the largest provider of municipal services outside of direct municipal employees, despite the result that these arrangements with for-profit providers garner the lowest satisfaction ratings.