Cities: Services for Sale

A city that sprang from the bean fields of Southern California little more than 40 years ago may point the way out of the financial crises that have gripped local governments across the nation.

When the city of Lakewood was created in 1954 to escape annexation by neighboring Long Beach, it lacked everything a normal city takes for granted: a police force, a fire department, a fleet of garbage trucks, and a big staff to run the whole operation. To survive, it literally invented a new way to deliver services. By contracting out nearly all of its operations to county agencies and private firms, rather than providing them in-house, this radical innovator spawned a host of imitators whose streamlined, efficient operations hold lessons for cities everywhere.

California's "contract cities," as followers of the Lakewood plan are called, prove that the job of making urban government work in today's lean times need not be all pain and no gain, fit only for masochists. Contract cities take the principle of economy to an extreme. They reject the traditional assumption that only city departments can haul away trash, pave roads, or run buses. As their name implies, these cities contract out much of this work—up to and including police and fire services—to whichever public agencies or private firms offer the best quality and price.

"We are firmly convinced that it is the most economical and cost-effective way to provide major services, especially in today's economy," says Sam Olivito, executive director of the California Contract Cities Association, based in the Southern California town of El Monte. The organization, founded in 1957, represents 77 of California's 468 cities, ranging in size from 150,000 people to a mere 86.

With all the recent debate over privatization sparked by the Reagan/Thatcher era, "many people will find it surprising that all these cities have been going about contracting for services for over 30 years," observes E. S. Savas, head of the Privatization Research Organization at Baruch College in New York. "There is a wealth of knowledge and experience in California that can be tapped. It is something no responsible city manager or city council should ignore, especially given the new burdens imposed by states on local governments."

The movement was born in Los Angeles County after World War II, as hundreds of thousands of people migrated westward, attracted by sunny climes and defense jobs.

Of the many suburbs that sprouted up to house them, none was more remarkable than Lakewood, a giant planned development of 17,500 homes built almost overnight on 3,375 acres of bean fields and hog farms just north of Long Beach. With the country's largest shopping center and tract homes selling for $43 a month with no down payment, Lakewood quickly became the largest single family housing development in the nation, dwarfing Levittown. By the early 1950s, Lakewood had a larger population than 90 percent of American cities.

The city of Long Beach began eyeing the affluent development for annexation in 1952. Local civic and business leaders in Lakewood fought back with a campaign to incorporate as a new city in order to give local residents, rather than the county or Long Beach, the right to control services and land-use decisions. But the staggering cost and effort of creating such municipal services from scratch had kept any city from incorporating in California since 1939.

Then a young Lakewood attorney named John Todd came up with a revolutionary plan to sidestep that hurdle by buying services from the county. Supporters promised voters a city "without a payroll" by contracting for services. Lakewood voters turned out a big majority for incorporation in 1954, overnight creating the 16th-largest city in the state.

Lakewood became the first city in the country to buy all its basic services, from fire protection and law enforcement to mosquito abatement. It signed 23 service agreements with county departments. It also contracted with private firms for garbage collection, street sweeping, helicopter maintenance, traffic-signal maintenance, data processing, and tree trimming and removal.

"The city pays for exactly what it uses of these services and no more," its public affairs director, Guy Halferty, observed in 1956. The happy result was a property tax lower than those of all other cities in the county. Lakewood managed its affairs with only a city administrator, a city clerk, a city attorney, a director of public relations, an administrative assistant, and four secretaries—compared to the usual complement of 400 employees for traditional cities its size.

The Lakewood plan, as it came to be known, received national publicity and spawned numerous imitators. Twenty-six other Southern California communities totaling more than 580,000 people incorporated using its model over the next seven years. More followed in California, Washington, Oregon, Nevada, and parts of the East Coast.

Streamlined government was a powerful selling point. Backers of incorporation in Temple City adopted the slogan "representation without taxation." A leader in Dairy Valley—known as the "city of 500 people and 60,000 cows"—declared, "We don't intend to build a city hall or other public buildings."

The promises weren't mere rhetoric. By 1961, half of California's contract cities had tax rates only one-third as high as the average in older, traditional cities. The other half operated without any city property tax at all.

Contract cities, as promised, have also maintained lean bureaucracies: La Mirada in Orange County, population 43,000, employs only 77 people yet provides a vast array of services through some 70 different contracts; neighboring La Habra, a traditional city, needs a staff 31/2 times as big to serve 52,000 people.

Contract cities have undoubtedly saved money by shopping around for the best deals. A 1987 study by the San Mateo consulting firm of Hughes and Heiss found that the city of Cupertino, the home of Apple Computer in the heart of Silicon Valley, was saving about 20 percent on law enforcement and 10 percent on fire control by contracting with the county sheriff and fire district. "There's no question in my mind that it's cheaper to contract for services," says Cupertino City Manager Donald Brown, who has worked in both traditional and contract cities.

Saving money isn't the only advantage. By avoiding the headaches of dealing with large staffs and public employee unions, contract cities can change their mix and level of services quickly. If graffiti starts getting out of hand, for example, they can hire more cleanup crews without permanently adding to city staff. 'The point of contracting is flexibility," argues Lakewood spokesman Donald Waldie. "Contract cities have smaller work forces, so there is no cumbersome bureaucracy that has to be shifted like the Queen Mary."

Lakewood thus contracts separately with the county for gang prevention, drug-abuse prevention, and helicopter patrols. "We can purchase the service of an additional patrol car, then decide we don't need it any longer," Waldie says. "We can literally change year-by-year the total law-enforcement picture in the community, based on changing conditions in Lakewood."

Good performance requires close supervision, a condition most contract cities take for granted. "We monitor contracts by centralizing and computerizing our customer resident complaint system," Waldie explains. "We've been doing it for 20 years. We take in every complaint residents have about city services, whether provided by the city, county, or private contractors. They are responded to by the appropriate department and tracked." The ultimate aim of communities that incorporated under the Lakewood plan was local control over land uses and other decisions. Contracting offered them a way of reconciling two great American values: decentralization and efficiency.

Jewell Bellush, a political scientist at the University of California, Berkeley, reported to a state commission in 1960 that contract city officials saw their model as "vital to the preservation of the democratic way of life based on identity of community interests and protection of home rule."

A study of the Lakewood plan by Los Angeles County in 1977 similarly noted that contracting produces "a city operation without large capital investment and minimal overhead but retaining grassroots government. It is decentralized policy with centralized administration."

Not everyone sees this process as virtuous. Mike Davis, a socialist urban critic and author of City of Quartz, argues that the Lakewood plan simply gave affluent suburbs and industrial zones a cheap way to exclude outsiders through incorporation, accelerating the Balkanization of Southern California into pockets of rich and poor, white and minorities. "At the end of the day, the result is simple: The poor get poorer and the rich get richer," Davis argues.

Other critics think many contract cities go too far when they contract out some core services like public safety. Lee Risner, city manager of La Habra, says, "I think there are certain key things cities have to have to be cities. Police is one. You want more local control than you can get through contracting."

Even Risner, however, acknowledges the virtue of contracting for many other services when private firms do the job better. La Habra uses them to handle garbage collection, recycling, sewer cleaning, some tree trimming, street maintenance, and recreation programs.

But when good managers let the city perform jobs more cheaply in-house—an advantage that may come and go as competitive conditions change—La Habra sometimes contracts the other way: selling services such as animal control, building inspection, and fire control to nearby parts of the county. "We facetiously call it the La Habra plan," Risner says. "It's the opposite of the Lakewood plan." Whatever its name, the idea is catching on. According to Baruch College's Savas, the London borough of Wandsworth is selling services to other boroughs in that city as part of a contracting revolution that is sweeping local government in England.

However contrary on the surface, the La Habra and Lakewood plans have much in common: Taking nothing for granted, they abandon tradition in favor of seeking the best value for the public's money from the full mix of possible service providers.

Some of the more traditional, "full-service cities" have also denigrated contract cities as slaves of "big county government." In practice, however, contract cities have avoided letting counties jack up costs or let service quality slide. Using their political clout, the contract cities rammed a law through the state legislature in 1973 barring the counties from charging them certain overhead costs. And savvy cities have exploited the threat of competition—from private firms or in-house departments—to keep county agencies in line.

Cupertino just renegotiated its five-year contract with the Santa Clara County Sheriff's Department—but first it let the sheriff know that discussions were underway with neighboring cities to provide the same service. "As long as you have a real option, including forming your own department, that takes away any idea that we are a captive partner," says Brown. "We are a very valued client of the sheriff, and he does an awful lot to make sure we remain happy."

When Los Angeles County could not or would not deliver high enough service levels, several cities in years past turned to private companies to sweep their streets. Other cities set up their own library systems when they figured they could do it more effectively.

All this competition has had a salutary effect on county departments, which have to perform audits and justify their costs to their city clients. A 1977 report by the Chief Administrative Office of Los Angeles County noted, "The greatest impact of the program on County operations has been to create an awareness on the part of all departments that they are no longer providing services for a captive clientele—but to an audience of cities that can stop service at any time. Therefore, they are obligated to keep their services up to date, responsible, economical, and, above all, efficient."

The same review added that "ordinary citizen complaints may not upset a complacent bureaucrat in a jurisdiction which has a monopoly in providing services to the citizen. However, the siren blast of an irate city councilman stating that he can easily obtain his services elsewhere makes County employees most responsive…[and] in turn, results in improved methods and cost reductions."

The example set by the contract cities has spurred many old-line cities to reexamine their own practices and begin contracting with private firms or county departments. The cities of Glendora and Signal Hill, for example, which incorporated in 1911 and 1924, respectively, gave up their city fire departments and joined the Los Angeles County fire protection district some years ago.

Olivito of the California Contract Cities Association says he gets numerous calls from other cities requesting information on contracting. "It is a growing concept," he says. Or as League of California Cities spokeswoman Joan Hogan puts it, in the four decades since Lakewood stirred the pot, "all cities have to some extent become contract cities."

Jonathan Marshall is economics editor of the San Francisco Chronicle.