MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Stockton, Calif. last week became the largest city in the U.S. to file for bankruptcy, but it probably won't be the last. Local governments across the country are struggling to meet rising pension and labor costs with less tax revenue after the housing collapse. Joining me in the studio to talk about whether privatization of public services could be the answer: Michael Nadol of the independent advisory firm Public Financial Management, Kim Rueben of The Urban Institute and Kerry Korpi of the American Federation of State, County and Municipal Employees.

MS. DIANE REHMJoining us from radio station KUVO in Denver, Colo., Harris Kenny of the Reason Foundation. You are always an important part of the program. I invite you to join us by phone at 800-433-8850. Send your email to drshow@wamu.org. Join us on Facebook or Twitter. And good morning to all of you.

MS. KIM RUEBENGood morning.

PROF. MICHAEL NADOLGood morning.

MS. KERRY KORPIGood morning.

MR. HARRIS KENNYGood morning.

REHMAnd if I could start with you, Kim Rueben, talk about how Stockton came to the point of bankruptcy.

RUEBENSo Stockton was actually a victim of its success. So in the earlier decade, it was growing like gang busters, and it thought it was going to be the new suburb of the Bay Area. And so there was a lot of investment. There was a lot of houses being built.

REHMJust to be clear, it's 85 miles outside San Francisco.

RUEBENIt is 85, but there was a lot of talk about how regular people needed houses. So the people who were sort of the firemen and the police in the Bay Area needed somewhere to live, and they wanted bigger houses. And so they would commute in from Stockton, so there was a lot of investment in houses. There was some overbuilding. There was a lot of investment in infrastructure, and some debt was taken out to try and increase the infrastructure in this city. And then when the housing boom busted, it was left holding a lot of debt, not having a lot of money come in and not raising a lot of tax money.

RUEBENSo it lost two types of money. First, property tax revenues were lower than they were expecting because house prices fell, as you said before, from $400,000 to about $100,000. And then they also lost developer fees because builders stopped building new things because there was an excess supply of housing. So, partly, if they had been a little more cautious during the boom period, they would be in much better shape than they are right now.

REHMAnd, of course, some people wondered whether it was simply an oversupply of optimism or whether some funny things were going on.

RUEBENAnd I don't know if there's any real evidence that there was funny things going on. I think partly because of the way California's finance structure is set up there's a lot of incentive for cities to encourage a lot of development because they like getting developer fees in because they can keep that money, whereas property taxes are limited because of Proposition 13 and the state gets to decide how that money is shared.

RUEBENAnd so I think part of it was that they were trying to encourage development, and then they were also optimistic and probably, because they were getting so much money in, did have some negotiations with the unions that were more optimistic and probably hired more people than they should have, too, because they thought that they were going to be building all of these houses and need schools for families. And so I don't think there's a lot of evidence that there was anything untoward going on rather than just being more optimistic than they really should have.

REHMKim Rueben of The Urban Institute. Turning to you now, Kerry Korpi, the question arises how many municipal employees have been affected and how by this declaration of bankruptcy.

KORPIWell, in the case of Stockton, it's been devastating for everybody. Stockton is one of about four municipalities, I want to point out, that have declared bankruptcy four years now into the worst downturn since the Great Depression. There's a fifth that's -- Harrisburg -- that's trying desperately to avoid bankruptcy. And I think Stockton is illustrative of some of the things that happened in terms of unbridled optimism, in terms of overbuilding, in terms of risky investments that went bad and left cities holding the bag.

KORPIBut I don't want to overstate the problem of bankruptcy. I think we're talking about four cities out 53,000 local governments in the country that have gone bankrupt. So while there are serious fiscal problems, it doesn't seem like a rash of bankruptcies is in the air.

REHMSo what happened to municipal employees as a result of bankruptcy...

KORPIWell, in...

REHM...in Stockton especially?

KORPIWe do not represent the employees in Stockton, but what we've seen around the country is our members are being laid off in great numbers. They are taking pay cuts. They're taking unpaid furlough days. They're seeing reductions in health benefits. They're seeing reductions in pension benefits. And I want to point out that AFSCME members, on average, make about $45,000 a year.

KORPISo we talk about generous employee salaries, make about $45,000 a year, and after contributing to their pensions for their entire career, earn an average pension of about $19,000 a year in retirement. And many of our members, about 20 percent of them, don't collect Social Security. So that's their only retirement income.

REHMSo if their -- if Stockton and other cities are reducing those costs, to what extent is that helping them deal with the whole question of bankruptcy?

KORPIWell, it's one of the costs, but it's not going to get them out of the debt that they incurred. For example, the biggest bankruptcy prior to this was Jefferson County, Ala., which had incurred sewer debt to the tune of $3 billion, I believe. And 20 -- there were 20 convictions. There was crime -- there were crimes committed in that case. There were 20 convictions. So they can do what they want with the workforce, but when you're committing crimes and incurring debt on that scale, it's not going to address your problem. That's the least of your problems.

REHMKerry Korpi of American Federation of State, County and Municipal Employees. Michael Nadol, how do you see this problem, how Stockton got into it, how others, that is, around the country are dealing with it?

NADOLI think Stockton is emblematic of challenges that many governments face, but they went over the edge due to a number of unique factors. And so some of the commonalities that create challenges for municipalities across the country involve structural forces with revenues that just don't keep pace with the underlying spending growth. Revenues at best in most governments tend to keep pace with the economy.

NADOLIn Stockton, with the collapse of the housing market, the collapse of their development-related revenues, the economic conditions they were keeping pace with were very weak. On the spending side, the federal Government Accountability Office, the GAO, has estimated that all state and local governments, the sector as a whole, faces a 12.7 percent shortfall going out for decades because the underlying cost structure of governments, particularly at the municipal level, is again growing faster than those economy-linked revenues.

NADOLThat's mostly the result of health care. Local government's labor intensive. Most city governments have three quarters of their spending associated with the people who do important work patrolling the streets, responding to emergencies, picking up the trash, but those people have health care for themselves. They often have health care under government retirement structures after their employment.

NADOLAnd those costs are growing much faster than the economy as a whole and therefore creating this gap that needs to be closed. For most governments, that's an on-going chronic condition and challenge. It requires greater efficiency. It requires squeezing out costs. It can require reductions in services, and it's a big problem for everybody, for the Stocktons and the other handful of governments that have tipped over the edge.

NADOLThere's typically some kind of additional shock to the system, something acute in terms of a legal judgment, a poor set of investments gone wrong, something that tips them over the edge. But the underlying challenges -- while not necessarily leading to bankruptcy on a widespread scale -- are nonetheless serious, and there are serious implications for all of this.

REHMMichael Nadol, he is managing director for Public Financial Management. And if you'd like to join us, 800-433-8850. One last question, Mike, before we take a break. Talk about the differences between Chapter 9 bankruptcy that these cities, counties are taking versus corporate or personal bankruptcy.

NADOLIn the public sector, there are a number of important differences. In the corporate world, bankruptcy has become almost accepted. It's a common practice for restructuring from a difficult set of financial conditions. In the public sector, it's a much more difficult and untested set of procedures. In many ways, it's certainly not a solution. At best, it's a process that might help lead to a solution but a process that really only works, if at all, in a fairly narrow set of circumstances.

NADOLIn the public sector, you have breathing room under Chapter 9. You have an opportunity to adjust your debt, to put a stay or a freeze on any lawsuits against the municipality. You have the opportunity to open up and reject contracts and potentially to restructure them. But you don't have a cure. You don't have a panacea and...

REHMMichael Nadol. And we'll take a short break here. When we come back, we'll bring in Harris Kenny and your calls. Stay with us.

REHMAnd as we talk about bankruptcy in Stockton, Calif., as well as three other cities around the country, we'll be taking your calls, 800-433-8850. One person we haven't heard from yet is Harris Kenny. He's a policy analyst with the Reason Foundation. Harris, tell us first what the Reason Foundation is and how you figure into this bankruptcy.

KENNYThanks for having me on, Diane.

REHMSure.

KENNYReason Foundation -- at Reason Foundation, we're basically a small libertarian or a free-market think tank that works with policymakers and Republican and Democrat parties to find solutions to what they're doing and how they can do things better. We do -- we partner a lot with areas of privatization, optimization, public-private partnerships, reform, basically just helping them ask different questions, and we work with them at no cost. We're -- and we also conduct research. So we're kind of split between research and implementation.

REHMSo tell me how you see what's happening in Stockton, Calif. and the other cities around the country who are facing this same kind of problem.

KENNYI think to say that Stockton was too optimistic is a euphemism. Basically, they got hungry. When things were going well, they decided to bet big, and they bet big that Stockton was going to boom. And they weren't doing it because they were hopeful that flowers would bloom all over the city, and they would have a -- be a new renaissance. They basically wanted to double down and grow their tax base, so they took out bonds for economic development projects that would grow revenue further.

KENNYThey renegotiated very generous contracts with their public employee unions. One of these contracts guaranteed raises between 2.5 and 7 percent for employees, which is basically a heads, the city loses, tails, they win -- the employees win kind of bargain because that included a clause where they get a bonus whether or not the general fund goes up or down. So even if the city is bleeding, it's in contract that the employees will continue to get bonuses.

KENNYAnd, in addition to that, they took out a pension bond obligation, which is where they borrowed money that they were going to invest through CalPERS, the California pension agency. But that investment went sour. And so now they owe more money on top that. They basically borrowed money to pay their owed money, and then the investment cratered. And this combination of pressures is not uncommon. Unfortunately, Stockton's the worst case scenario.

KENNYSeveral cities in Rhode Island have similar pressures. Woonsocket, R.I., for example, they got the same type on pension bond obligation where they're saying, basically, we're going to borrow extra money and hope we can make extra on the investments 'cause we have to cover our pensions now. And Central Falls, R.I. had a similar scenario where public employee compensation, pensions, other post-employment benefits and health care pushed them over.

KENNYSo Stockton's like those, and it's not quite like Harrisburg or Jefferson County where, in those cases, you have really unique -- and also Mammoth Lakes, Calif. just declared bankruptcy yesterday. They had an economic development problem. They had a big plan that went awry. So, anyway, what I'll say is these are all nuanced. Each city is different.

REHMEach city is different, Kim Rueben, but he says that optimism is kind of a euphemism.

RUEBENWell, I think it might be that they were too willing to try and grow their city. I think places in California especially, because cities don't necessarily control their tax bases or their property tax, there are incentives in place for them to actually try and grow and have developer fees. So part of it has to do with the specifics of California finance where it's really tough to be in municipality. I don't know enough about the pension rules and the wage agreements.

RUEBENBut it isn't -- often in California, when things seem to be going very well, long-term agreements are put into place that give a lot of benefits. And so I don't think Stockton is unique in that. I think the state's done some of that. I think other cities have. But I think the fact that they thought they were going to be a much bigger place at the end of the decade than they ended up being is part of the problem.

REHMAnd, Harris, weren't there rules in place in California requiring municipalities to engage in mediation before declaring bankruptcy, and did that happen?

KENNYYes, there were. And that law, AB 506, was actually passed in response to Viejo, Calif., which went bankrupt in 2008. And after that bankruptcy -- and they just left bankruptcy a little while ago. But after that, they declared -- there was basically a flurry of lawsuits, a lot of fighting, a lot uncertainty, and so at the state level, they passed AB 506 to say, if you're going to declare, you need to try to enter negotiations and figure out if you can't try to hammer this out.

KENNYStockton's the test case. And at minimum, observers are hoping that it may at least make the court battles less contentious. But at the same time, Stockton's also hoping to be the first U.S. -- municipal bankruptcy filer since at least 1981 to reduce the principal that they owe to bond holders. So, basically, of their debt, they're trying to reduce the principal payments, which is very unusual. So this court case will do that.

REHMThat's not going to make bond holders very happy, is it, Michael Nadol?

NADOLNo. And, to date, most of the prior bankruptcies have been relatively protective of bond holders. The municipal markets have a long history of being a safe haven for investors. So to see those kinds of changes taking place would certainly be a break and is a significant movement.

REHMOf course, I am particularly concerned with the people involved and how the ordinary citizens who really had nothing to do with the rule making are affected.

REHMAnd here's an email from Fran, who says, "I'm a public employee. I'm tired of taking the blame. We outsourced janitorial services. Our buildings are never clean. We outsourced waste water services, and increased fees are staggering. With outsourcing, you lose control and level of service. I've worked here for more than 20 years. I have institutional knowledge that a new employee won't have." And I'm sure there are a lot of people, Kerry, who feel that way.

KORPIOh, absolutely. The -- when people talk about overpaid, underworked public employees, I'd like to put a face on our members. We're talking about your local librarian. We're talking about the school lunch lady. We're talking about the sanitation worker. Spend a day in their shoes and, you know, spend a day outside in Washington, D.C., today where it's 105 degrees, chasing a trash truck. But let me just say, privatization is often touted as the answer to problems.

KORPIPrivate companies exist to make a profit, the answer to their shareholders, and that's perfectly fine if you're making cars or you're making widgets. But when you're providing a public service, it distorts priorities. Let me talk about the private prison industry, for example. In their reports and their shareholder analyst calls, they say that one of the biggest threats to their industry is a decrease in the crime rate.

KORPINow, most of us would consider that good news. But if your profits depend on incarcerating people, it kind of distorts priorities, and so we've seen plenty of disasters when services were privatized.

REHMHarris Kenny, what do you think about the move toward privatization? Obviously, to reduce pensions, to reduce health care costs and indeed to reduce salaries.

KENNYWell, privatization is simply a policy tool, and anybody that would say that it is a cure-all, I would suggest them to rethink that claim. And a big part -- big hurdle with privatization is the actual procurement process, how you actually privatize things. And I'm not familiar with the details of Stockton's decision to outsource custodial services. But I think everybody can agree that custodial services are not a core function of government. It's clearly commercial firms doing that.

KENNYSo there's nothing inherently governmental about cleaning a floor. The question is, was the contract written well? Because the public sector wrote the contract, and given that it's a city that went bankrupt, it's entirely possible that they may not have the channels in place and the system in place to use a tool like privatization effectively.

REHMMichael Nadol.

NADOLI would agree that privatization is a tool. I don't think we should get caught up in the ideology of whether the public sector is more virtuous or the private sector is more effective.

REHMBut does it work as well? That's the question.

NADOLWell, I think if you step back from the term privatization and think about it as contracting, there are a couple of points that emerge. One is that private organizations contract for many of the things they do or subcontract as a regular part of their own operations. A private firm may outsource its IT function. It may have a private partner provide the custodial services in their facilities.

NADOLThey may engage a private adviser because of expertise or offload some risk by having a private firm take on energy retrofits in their buildings for a share of the savings they may generate. That has nothing to do with government versus the private sector. That's about contracting, whether you're contracting effectively. A second point, I think, that emerges when thinking about contracting is that it can be a way to involve nonprofit organizations for many important service functions.

REHMBut how frequently is that done, and how realistic is the use of nonprofit organizations to do that kind of basic work?

NADOLFor basic work, not so much, but for many of the community-based health and human services that governments are responsible for, for different community-based housing programs...

REHMGive me an example.

NADOLWell, in Philadelphia, which is my hometown...

REHMSure.

NADOL...we have a large network of nonprofit, community-based and some larger institutional nonprofit child welfare organizations. They're the folks who may take care of kids in adoption programs, who may provide homes for kids who are not in a position to be in their own homes. That's a part of how governments can link the communities. Again, it's a tool. And if it's wielded well, it can be an effective tool. Where it's not wielded well, whether with for-profit vendors, nonprofit vendors, partnerships with other governmental entities, it's not going to work effectively. It's a tool.

REHMKim Rueben.

RUEBENSo I would agree with most of that. The key, though, is who has more experience writing these contracts, and it all comes down to how well the contracts are written and whether cities, especially small cities and governments, actually are sophisticated enough to know what they're getting into when they write some of these contracts. And so I think there is a role for privatization, but it's critically important to understand what your contracts look like and where the loopholes might be and where the unexpected costs might be as you're going forward.

REHMBut, of course, individual citizens don't ordinarily have an opportunity to see those contracts. It's the folks at the top. And, Kerry, sometimes their interest may be different from those of the ordinary citizens.

KORPIYou're absolutely right. Kim is correct in saying -- both of you are correct in saying that it's really important how well the contract is written. It is virtually impossible to write a contract that covers every single possible contingency that might come up in the course of a job. And what we find often is that privatization takes a cost off the books and into the shadows. It's no longer publicly available information.

KORPIYou don't necessarily -- you can't tell how much a city is spending on contracting out services, whether the workers under contract are paid a decent wage or not, what -- whether you're actually saving money. There's -- you know, it's basically off the books and into the shadows.

REHMAnd you're listening to "The Diane Rehm Show." We're going to open the phones now, 800-433-8850, first to Baltimore, Md. Good morning, Diane. You're on the air.

DIANEGood morning. Thank you for having me on your show.

REHMSure.

DIANEI have a couple of points to make. I'll try to be brief. I want to point out that our country was founded on the idea of the social contract, that it is in everyone's best interest to take care of one another. I'm an educator who's worked in nonprofits, and I'll tell you that we suffer terribly with privatization. And an important point to remember that's not being discussed yet is that, since the 1960s, corporations at every level pay fewer and fewer taxes.

DIANEThere are now so many loopholes and ways to avoid taxes that corporations can get away with, controlling our government and buying off politicians at the federal level, at the state level and at the city level and so that essential services are cut. And those of us who take care of everybody in society, including the most needy, find ourselves very vulnerable. And then city governments are dependent upon private interests to try to boost their budgets. And this is the wrong way around. And also there's military spending, which, as we know, has spiraled out of control.

REHMAll right. Harris Kenny, do you want to respond?

KENNYDefinitely. I think the important thing to think about here is that, again, this is a policy tool. And actually at the local level, the biggest privatizer right now is Rahm Emanuel, who was the former chief of staff to President Barack Obama. He's doing more to privatize and reevaluate what his city is doing than anybody else at the local level.

REHMAnd you're talking, of course, about the mayor of Chicago.

KENNYYes. Yes, the mayor of Chicago. And I think it's important to try to take this out of traditional conservative-liberal, progressive-libertarian paradigms and to try to just understand this for what it is, which is getting value for money. And there are cities like Sandy Springs, Ga. that have privatized almost everything. And they have no pension obligations, no long-term employee health care obligations. And something like what happened in Stockton will never happen to a city like Sandy Springs.

REHMAnd what about that? How do you view what's going on in Sandy Springs? Kim Rueben.

RUEBENSo Sandy Springs is sort of an interesting case because it's a fairly newly incorporated city. So while the city won't have any pension obligations or any health care costs, they still have some obligations for the county employees that were already providing some services. So it's actually...

REHMBut that number is minimal. Isn't that correct?

RUEBENIt's Georgia, so I would say it might be kind of minimal...

REHMYeah.

RUEBEN...because I'm guessing they have fewer benefits than, say, New England cities. But partly they can do that because they're starting from scratch. You can't take a city like Stockton that's been in existence and say, OK, we're going to privatize, and then we're not going to have any of these obligations anymore, because they're still responsible for their obligations for pensions and retirements.

REHMKim Rueben of the Urban Institute. Short break. We'll be right back.

REHMAnd just before the break, one of our guests, Harris Kenny, raised Chicago and Mayor Rahm Emanuel. First of all, I gather, Michael Nadol, this took place under the prior Mayor Daley.

NADOLWell, I think while we were off the air, there was some discussion of some bumps along the road that Chicago has had with privatization, particularly with its off-street -- I'm sorry -- its on-street parking program, and that was under the prior administration...

REHMOK. And what else is happening with Chicago? How successful or otherwise is it, Kim Rueben?

RUEBENWell, so the parking was sort of an interesting case because, in part, they privatized and sold it because the city didn't necessarily want to be responsible for increasing parking rates. So it was the kind of thing where they actually privatized something rather than actually face people being angry about the fact that parking rates were going to have to go up a lot to actually even out supply and demand.

REHMSo what did that mean for the municipal employees who have been hired to give out parking tickets?

RUEBENI think they still do.

KORPIWell, you know, what it's meant mainly is, for the citizens, they've not only seen astronomical increases in their parking rates, but the city gets sent a bill when, for example, there's a street festival and parking meters are shut down or there's a weather emergency and parking meters are shut down. It's -- as I think Harris Kenny said in another case, it's heads, they win, you know, tails, we lose. No matter what happens, we're paying through the nose for parking in Chicago.

REHMAnd we have another email, "How does the Stockton, Calif. default bankruptcy rate as the largest? What about Cleveland, Ohio and New York City bankruptcies in the '70s and '80s?" Kim.

RUEBENSo the key is they didn't actually go bankrupt. They were threatening with bankrupt. The state ended up stepping in. The federal government stepped in. And basically, New York lost some autonomy and renegotiated a bunch of contracts in its debt and basically has different and more transparency and methods in place right now to try and make sure that they stay on track.

REHMMichael.

NADOLIn fact, only about half of the states authorize bankruptcy. And if a state doesn't authorize bankruptcy, a local government can't declare it. And what many states have, instead of the option for bankruptcy, is a set of a different control board, oversight structure alternative, recovery coordinator alternative mechanisms for trying to resolve severe fiscal distress.

REHMAnd how effective are they?

NADOLIt varies from place to place, but a lot of cities have had success with it. We're sitting here today in Washington D.C., which is a somewhat unique case because of the federal government's stake in the nation's capital. But Washington, D.C. recovered very well from Fiscal distress in the mid-1990s through a balanced set of solutions and through a process that included a multi-year perspective looking at fixing the city's structural budget problems.

NADOLNot every place is going to have the level of help that the District had from the federal government. But in different ways, other communities have adopted balanced approaches with a multi-year structural perspective that have worked for them.

REHMAll right. To Benton Harbor, Mich. Good morning, Dennis.

DENNISGood morning, Ms. Rehm. I've been listening to you for years. You have an excellent show.

REHMThank you.

DENNISYes, I would have to state -- I'm in a city called Benton Harbor, Mich., which is in the state of Michigan, and we are under an emergency manager law called Public Act 4. We're not allowed -- this is due to (unintelligible) and we were not allowed to file bankruptcy several years ago, neither were we allowed a loan to get ourselves out of a deficit. And so what had happened in 2011, a law called the emergency manager law was passed in the city -- I mean, in the state of Michigan, which basically posed Trojan horses for privatization to corporate giants.

DENNISCorporations now seem to be government. We are on a pristine waterfront on Lake Michigan. And as I see employees -- as a matter of fact, I am an elected official who has no authority now due to this law and not being allowed to have any input to bring about an economic balance to our strapped city. What has happened -- and I'm going to ask the panelists what you see in this -- we see that different laws apply to different places, and these laws diminish or privatize cities or municipalities, as you would have them.

DENNISAnd then they diminish the voting powers of many individuals and then turn cities into -- in our case, it's going to become a tourist city, no longer industrial and therefore diminishing the economic capacity, as you would say jobs, for the many. I've seen many people lose their jobs in two years.

REHMAll right. Kerry.

KORPIYeah. The law that the gentleman was referring to we call the local -- we call it the local dictator law. It basically takes the kind of measures that Michael was talking about earlier to an extreme, where the state can decide that it's going to appoint an emergency financial manager, a local dictator, who has the power to get rid of local elected officials, to tear up contracts with employees, with vendors, and decide what to do with the city itself and the land.

KORPIAnd in fact, there is actually a measure on the ballot in November to overturn that law. There are several jurisdictions in the state of Michigan that are under this law. And, as the gentleman mentioned, in the state of -- in the city of Benton Harbor, it's looking like the city is going to turn into an exclusive golf course on the waterfront.

REHMHarris Kenny.

KENNYI'm sympathetic to local government officials because they are under a lot of pressure, and a lot of things get passed down to them that they cannot control. So you've got state level laws. Like in Rhode Island, the state requires -- recently passed a law saying you have to pay the bondholders first. California has their Prop 13 tax revenue. So I'm sympathetic for locals that don't have a lot of control. But I also think that they need to understand that they're in a precarious situation.

KENNYAnd they need to be careful because if they want to please everybody and sign generous contracts and be dreamers and sign economic development programs that aren't going to pan out, then they're going to have to deal with the state whom they owe money. Stockton owes them -- their largest ower that they owe money to is California Pension Fund, so they owe money to the state.

REHMKim Rueben.

RUEBENSo I also just wanted to point out that there are differences across states, and, in some ways, Michigan is in a especially bad situation because of its demographics, right. So it has a declining population of often older people and has pension obligations based on when a lot of these cities and towns were industrial and growing. So they have these obligations for the pensions based on when the cities were industrial, and they don't have the demographics or the people in those cities.

RUEBENSo I think it's really tough, and it brings up a whole other set of problems about what we do with some of our Midwest cities and shrinking cities and how do you sustain places going forward.

REHMAre you suggesting that, like Stockton, Calif., you may see a lot of other smaller cities, municipalities going in this direction?

RUEBENWell, I think places in Michigan are in a especially tight situation, in part -- unlike Illinois and some other places in the Midwest, Michigan cities are responsible for their pension obligations. I was in Flint last February, which is an exciting time to be in Flint, and they had more obligations to pay pensions and health care for their retirees than they were bringing in every year. And so for some of these places, it's really tough, and it's not clear how we solve the problems.

REHMAll right. To Rockwall, Texas. Good morning, Chris.

CHRISHey, good morning. I love your show. I've been listening for years.

REHMThank you.

CHRISHey, I just want to make some comments, just, you know, your basic stuff of people in charge or, like, you know, spending money -- they got blank checks. Out here in Rockwall, they built a giant monolith of a courthouse, and they actually had to add another -- I don't know many feet, the dome. They put a dome on it because it was next to the stadium at the school. And they found that it wouldn't be proper if the stadium was taller, I mean, the stadium was taller than the courthouse.

CHRISSo they spent another half million or $1 million to put a dome on this thing. I mean, it's the highest tax, but the smallest counties pay the taxes. But I already knew that coming in. I kind of came in like a speculator, you know. I came out here, bought a little property. I was going to go sit on it for a while and sell it and get out of here. But now I'm stuck because of the economy, you know. But, I mean, they're just wasting people's money down here, you know, just on little stuff that, you know, they're too big for their britches. I mean, you know, they...

REHMToo big for their britches. How do you respond to that, Michael Nadol?

NADOLWell, I'm not familiar with Rockwall, Texas and their unique set of circumstances. But I think the -- a lot of what we're talking about in terms of investments that are made and whether a community can afford them in terms of commitments that a community makes to its public employees or to its citizens per certain services and whether those can be afforded, I think to get those working together, to have a balance, you need to take a mull to your perspective.

REHMBut, you know, all of this, it seems to me, is being debated by the federal government as well the smaller local governments which enterprises -- for example, the post office, for example -- I mean, how do you deliver the mail? Does the federal government have responsibility for that? So that's taking it to the larger level, but there are lot of people debating this privatization issue at all levels. Let's go to Pensacola, Fla. Good morning, Mike.

MIKEGood morning. I'm enjoying the show this morning.

REHMI'm glad.

MIKEGood job. Two quick things to say: First, we -- I was a state employee in Florida in -- for 35 years and worked in management most of the time and had a great relationship with AFSCME. I don't think that they really get enough credit. I'm glad to see that you have them on the show today because even though I was in management, on the other side of grievances and things like that, I found that we were both after the same thing, which was a good employee doing good work, so...

REHMI'm glad to hear that.

MIKE...that worked out really well. And I think they're taking a beating right now in the media because in Florida, we have been situations where we got no benefits, no raise, nothing, and we didn't -- as she was saying a while ago, we didn't make a lot of money. The word entitlement just kind of raises the small hairs on the back of my neck because we worked for less than the average employees in the private sector...

KORPIThat's right.

MIKE...because we were going to get a retirement, not a great retirement as she pointed out, so some wonderful points. But to your real program issue today on contracting, we negotiated a contract in -- when I was in the juvenile kind of prison system. And we negotiated for less money for the next five years, then we get to pay the provider the previous five years.

MIKEAnd we had told the provider, if you show us that you spent all the money in the program, we'll be glad to give it back to you and had an accountant to went through it meticulously and actually knew their budget better than they did when they came to the table. And we found that they hadn't paid this -- or hadn't hired $40,000 employee, so we reduced the contract by $40,000. We got a call from the state office that said, how can you reduce the contract this year after what you paid them last year?

MIKEMy comment back to them was, have you ever thought that maybe we paid them too much to start with? And that they had never had that thought, I guess. But the reality was -- and we can't say this for certain because it would be totally illegal, and nobody in government would ever do anything illegal. But it seems that they have somebody that they knew and a lot of contracts seem to go that way.

MIKEI was told on more than one occasion, we couldn't do this because there was a state plan when I was trying to expand services with, you know, reasonable amount of money going through a different location. The providers were telling us what they were going to do as opposed to us, who were doing the contract, telling them what they needed to do to plan.

REHMAll right. Mike, thanks so much for your call. And you're listening to "The Diane Rehm Show." How do his comments resonate with you, Kerry?

KORPIWell, they resonate totally with me. I think it goes back to the issue of how hard it is to write an airtight contract and to know exactly what you're getting for your money. But I also did appreciate his comment about working closely with our members in Florida. It's our members on the frontline who want to deliver high quality public services, who want to work with managers to make sure that services are delivered most efficiently. And it's always good to hear a manager who shares that goal.

REHMAnd finally, Harris, you've written about a town in Carrollton, Texas that's taken a managed competition approach to keeping costs down. How does that work?

KENNYBasically, it's the alternative to the Sandy Springs model, which I referenced earlier. And one of other panelist was right in saying that a city like Stockton can't flip the switch and become Sandy Springs. That is true. But what a city like Stockton or somewhere else could do is what Carrollton, Texas has done, which is basically they just sit down, and they say, we're going to look at everything we do. We're going to consider contracting out for all of it, and we're going to let our public employees bid. We're going to let companies bid.

KENNYAnd public employees win a majority of these contracts in Carrollton, Texas. They actually have not been forced to outsource most things. Their public sector has maintained service delivery. But what has happed is the public employees in the departments have said, OK. We're going to decide together where we can cut rather than having the city council decide arbitrarily what they think they should cut because they don't know. We're on the ground. We're going to make that decision as a team, as a bidding public employee group. So it's a pretty reasonable alternative.

REHMBut what does that mean as far as health care and pension funds?

KENNYIt depends on the nature of how they proceed. If -- you know, it depends. I mean, when they bid, what they moved towards in Carrollton is all in accounting, full-cost accounting so that when they bid, everything is in there.

REHMKerry.

KENNYThere's a lot issue -- yeah.

KORPIYeah. The term managed competition was initiated, I believe, in Indianapolis quite some time ago now, and we represent the employees there. And Harris is right. We ended up wining most of the bids. And what would happen was we maintained our compensation, we maintained our workforce, but we were able to tell the city how to fill potholes cheaper, how to make tar out of melted tires as opposed to buying it by the bucket load from some corporation. So it was basically process efficiencies that our members were able to introduce.

REHMSo lots of different plans out there, and we hope that some of them are going to be successful. Thank you all so much: Harris Kenny, Kerry Korpi, Michael Nadol, Kim Rueben. And thanks for listening all. I'm Diane Rehm.

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