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A City is Not a Private Corporation Austin Reminds Us

| Written by David Morris | 1 Comment | Updated on Jun 1, 2012 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/austin-reminding-city-private-corporation/

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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About David Morris

David Morris is co-founder of the Institute for Local Self-Reliance and directs its initiative on The Public Good. He is the author of the New City States, Seeing the Light, and three other non-fiction books. His essays on public policy are regularly published by On the Commons, Alternet, Common Dreams and the Huffington Post.

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  • Bravo for Austin! This comes under the heading of “Do the Right Thing.” In so many cases, the notion that a private contractor can perform required city services more efficiently or more cost effectively than the public agency is only because the private contractor can hire cheaper labor, not because they can inherently do the job better, faster, or cheaper.

    As for Milton Friedman’s comment about the social responsibility of business being only to increase profits, that is not any more true today than it was when he said it. I formerly worked for the Atlantic Richfield Company (still the best company I ever worked for before or since) whose President, Thronton Bradshaw, debated Friedman on this topic. ARCO, which was considered one of the more socially responsive companies of its time, was well known for its philanthropy. I am thankful for that and for the lesson learned then that there are some businesses who believe that they are citizens of the larger community and that their responsibility is to more than just shareholders.

    Rich Mignogna
    Golden, Colorado