Public Service, Private Profits

By Janice Castro

The courtroom looks like any other. A judge listens as two lawyers argue their cases; an American flag stands to one side of the bench and a Bible is handy for swearing in witnesses. But while the legal disagreement is ordinary enough, the courtroom is not run by any government. Instead, it is operated by a Philadelphia company called Judicate, Inc. For fees that average about $600, Judicate issues opinions in such noncriminal cases as personal-injury suits and contract disputes. The decisions of the firm's judges, all of whom have retired from the public court system, are either binding or not, depending upon the prior agreement of the parties. Judicate offers a convenient alternative to the crowded dockets in regular courts. The firm settled 140 cases last year in Philadelphia, New York and other cities, and recently opened a new office in Los Angeles. Says Company President Alan Epstein, a former Philadelphia district-court judge: "Resolving disputes is our business."

Judicate is only one example of a phenomenon known as privatization, which is becoming increasingly commonplace across the U.S. More and more companies are taking on tasks that are traditionally performed by government. These firms are earning profits by operating transit systems, cleaning streets and even fighting fires. Cities and towns are finding that private companies can often get things done more efficiently and cheaply than civil servants can.

The success of privatization at the local level has stirred the imagination of President Reagan, who thinks that it can work to a limited extent for the U.S. Government. The fiscal 1987 budget, which Reagan presents to Congress this week, was expected to propose selling many Government-owned operations to private companies. Among the things that may be put on the block are Dulles Airport, near Washington, the National Weather Service satellites, the Bonneville Power Administration in the Northwest, and the Navy's petroleum reserves in California and Wyoming.

One reason the White House is pushing for privatization is that the Administration is under enormous pressure to cut Government spending and the federal deficit, which hit $212 billion in 1985 and is expected to top $220 billion this year. The new Gramm-Rudman law dictates that the deficit must shrink to $144 billion in 1987 and disappear altogether by 1991. If those targets are not met, the law calls for automatic across-the-board spending reductions that would be divided equally between defense and non-defense appropriations. To avoid that meat-ax approach, the White House is exploring all possible strategies for trimming spending, and privatization looks like one of the most promising.

Communities have taken a fresh look at the idea in part because the budget crunch has forced Congress to reduce federal aid to state and local governments. Faced with that austerity, towns are looking for new ways to reduce their spending. Says Phoenix Mayor Terry Goddard, whose city saves money by hiring companies to perform such services as street sweeping and landfill management: "We're all in a fiscal bind right now, exacerbated by federal cuts and GrammRudman, and it is not going to get better. To a greater degree than ever before, cities are dependent upon their own resources, and they're going to have to be very innovative about ways to cut costs."

One of the communities that have been most innovative is La Mirada, Calif. (pop. 41,000), in Los Angeles County. City officials have hired private firms to run the parks and recreation department, perform public-works inspections, provide day-care services and remove graffiti from public buildings. Mass transit in the form of comfortable vans is supplied by a company called Dial-A-Ride. Says La Mirada City Manager Gary Sloan: "In some areas, privatization has been the most efficient, cost-effective way of providing service."

Many towns contract out some of their most vital services. Since 1979 a company called Valley Fire has offered fire protection to part of Grants Pass, Ore. (pop. 15,080), which is located on both sides of the Rogue River. The city fire department is on the north side of the river, where most of the residents live. Valley Fire built a fire station on the south side, and supplies the equipment and a company of 46 fire fighters and a reserve force of 32. At least two fire fighters are on duty at all times.

Grants Pass officials think that Valley Fire's $17,800 annual contract is well worth it. Says City Manager J. Michael Casey: "We pay only 2% of our $750,000 fire-protection budget to protect an area that contains 15% of our population. It would cost the city up to $125,000 for the same coverage, and another $250,000 to build a new station in that area."

Hiring contractors is sometimes the only way that outlying areas of small towns can obtain the services they need. Residents of districts just beyond the city limits of Elk Grove, Ill., used to rely upon the fire departments of neighboring Mount Prospect and Des Plaines. But in 1979 those two towns decided that their fire fighters could no longer cover that area, known as the Elk Grove Fire District. Rather than build a department from scratch, district officials decided to hire a company called American Emergency Services, based 15 miles away in Wheaton, to put out fires and provide paramedics. The district built its own fire station, but the firm supplies the personnel and equipment around the clock. Company Founder Gary Jensen estimates that the district's decision has saved it $200,000.

In many cities, private firms work in conjunction with government agencies to provide services. Madison, Wis., retains its own fire department but pays a company to provide fire protection at its airport. That saves the city the expense of training fire fighters in the special skills needed to cope with air crashes.

Some entrepreneurs see the trend toward privatization as an opportunity to create large new corporations. Nashville Attorney Tom Beasley formed Corrections Corp. of America with two partners in 1983. One of his first investors was Jack Massey, the Nashville financier who built the Kentucky ) Fried Chicken empire and Hospital Corp. of America, the largest U.S. chain of for-profit hospitals.

Already the biggest U.S. prison management company, C.C.A. runs three federal detention centers for illegal aliens in Texas and three facilities in Tennessee, including two juvenile facilities in Memphis, a workhouse near Chattanooga and a halfway house in Fayetteville. This week Tennessee legislators are expected to consider a proposal from C.C.A. to take over another work camp and to build and manage a new 512-bed medium-to-maximum- security prison.

Efforts at privatization have not always gone smoothly. Buckingham Security, which operates a 95-bed prison in Butler County, Pa., was forced to back away from a plan to build a new medium-security prison in Chartiers Township, Pa., after hundreds of angry residents stormed the town hall in protest. Among their concerns: Who would chase down escapees? Answer: the company would call in state or local law-enforcement officials.

Buckingham claims that it can build a prison for less than half of what it would cost the state, and can house inmates for just over half the usual cost. One way the company proposes to save money is by paying its guards less than what civil service guards make. Critics, however, fear that for-profit prisons have a greater incentive to keep inmates in jail than they do to rehabilitate them.

Officials in Evansville, Ind., faced some initial resistance to the city's decision to hire a private paramedic unit. Says Terry Grimm, an aide to Mayor Michael Vandeveer: "There is a public perception that the city is ridding itself of services, and the people are not sure that there will be the same quality service."

But private contractors have several incentives to maintain quality. Their contracts can be canceled, and they often face competition from other companies. Moreover, private firms generally have more freedom than public agencies to fire employees who do not perform well. Evidence abounds that companies can provide many services more cheaply than governments can. When Los Angeles County reviewed the results of its extensive privatization, it found that it was saving $23 million a year on 450 contracts. A study by the Department of Housing and Urban Development (HUD) found that cities that have not privatized spend an average of 96% more to build streets than they would if they used contractors, 43% more to clean streets, and 73% more for janitorial services.

Such impressive figures bolster the White House argument that privatization could save taxpayers billions of dollars annually at the federal level. The Administration's most important initiative in that direction has been its proposal to sell Conrail, the Government-owned railroad formed from the remains of the bankrupt Penn Central, to Norfolk Southern, a private railroad, for $1.2 billion. Said President Reagan in a talk two weeks ago: "Government ownership is no way to run a railroad. When the private sector can deliver better service for less money than the public sector, as it can with Conrail, then the Government must step aside." Congress moved closer to approving the Conrail sale last week when the Senate defeated an effort by opponents of the plan to challenge it on antitrust grounds.

Other Administration privatization initiatives have been less popular. In December, the White House backed away from a $3 billion proposal to sell the Federal Housing Administration after a storm of outrage started at HUD, the FHA's parent agency, and spread through the housing industry.

Created in 1934 to ensure that people of modest means could obtain home mortgages, the FHA has provided mortgage insurance to 50 million homeowners who might otherwise have been unable to buy houses. Critics of the Administration plan feared that if private companies took over the functions of the FHA, they might set tougher standards for mortgage insurance and exclude more people from home ownership. Disposing of the FHA, said Warren Lasko, executive vice president of the Mortgage Bankers Association of America, would be tantamount "to selling the American home buyer down the river."

Despite the opposition, the Administration is continuing to study the possibility of selling the FHA and spinning off many other Government operations. The President's Private Sector Survey on Cost Control concluded in 1984 that privatization could save the Government $28.4 billion over a three- year period. The Heritage Foundation, a conservative research group, has drawn up a privatization plan that its authors claim would cut the federal deficit by $10.8 billion by 1987. It includes selling the Washington airports and the FHA and contracting out some Postal Service activities.

Such proposals are beginning to draw grass-roots support. Last month a group of 300 associations and businesses formed a Washington-based organization called the Coalition of Americans for Privatization. It will ; lobby in Congress for measures to trim the Government's activities. Says John Albertine, the coalition's head: "Our Founding Fathers had no idea that the Government they created would be running a number of private business operations on the side. With our deficits so high and with the performance of these Government-run enterprises so dismal, I think it's time the Federal Government stopped moonlighting."

Only a few years ago, the size and power of many governments were still growing. But in the 1980s public officials seem to be taking a more critical look at what services governments can-- and cannot--provide efficiently and effectively.

With reporting by Thomas McCarroll/New York and Christopher Redman/Washington, with other bureaus