A City is Not a Private Corporation Austin Reminds Us

A private corporation has one legal obligation:  to maximize the return to its shareholders.  As Milton Friedman famously remarked, “There is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profit….”

A city is also legally structured as a corporation, but a municipal corporation has a different obligation:  to maximize the well- being of those who live within its borders.

Which means a city’s cost benefit calculus should inherently be different from that of a private corporation.  Unfortunately with a depressing regularity cities (and states) make decisions as if their bottom line were the same as AT&T or Walmart.  Whether selling public assets like roads or parking meters or contracting out public services they simply want to know whether it will reduce the costs to the municipal corporation.

Austin Texas seems ready to try to put the public back into public corporation.  The decision was prompted by a routine resolution introduced earlier this year to approve an extension on a cleaning contract between a Georgia company and Austin Energy, the city owned utility.  According to the Austin Statesman, city staff estimated the extension would continue to save the city about $225,000 a year.  But city councilors believed the cost-benefit analysis should not stop there.  Several noted that the savings came from the private company paying a below-living wage ($11 per hour) and no health benefits.

“I do think we’re spending a fair amount of public money on these jobs regardless of how they get performed,” noted Council member Kathie Tovo, “and we should be mindful of what those jobs are like and whether they provide a fair and living wage.”

Council member Laura Morrison recalled an earlier conversation the city council had had about contracting in which the sentiment seemed to support bringing jobs in house “if there are opportunities for full time…that provides for stability for some people in Austin”.

A few meetings and many conversations later a unanimous city council directed the city staff to bring the 10 janitorial positions in-house.

The conversation about the contract led several council members to question the city’s ad hoc approach to outsourcing. The city requires companies lured to Austin with handsome tax incentives to provide employees health care coverage.  But a 1990 Texas Attorney General opinion concluded that cities cannot require contractors to provide health insurance or retirement plans.    “We should be consistent,” Morrison argued. “There are a lot of ways we could save money that do not meet our values.”

Council Member Bill Spelman hypothesized that a full cost accounting analysis might significantly reduce the estimated savings from contracting out.  He noted that of the projected savings, “At least some substantial portion of this is not really a difference because we’re going to end up paying for the contractors’ health problems anyway,” for instance, if they go to the hospital without health insurance. He added, “And at some point we’ll probably have to pay more (to provide services) because their wages are so low they won’t be able to pay for saving for retirement.”

The city council ordered a comprehensive report on how many outside contractors are hired to perform duties such as cleaning buildings and maintaining parks, and whether those duties could be done more effectively by employees added to the city payroll.  The report is due back in June.

Meanwhile, giving janitorial employees a living wage and health benefits will increase the average Austin’s electricity bill 50 cents a year.




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David Morris

David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.