Photo by: Marc Fader

Just this summer, Chancellor Dennis Walcott nixed a contract with Future Technology Associates (FTA) after serious questions arose about the firm. The Bloomberg administration says it has rethought how to use private contractors, especially on IT projects, in the wake of CityTime and other controversies.

Mayor Bloomberg didn’t invent the idea of privatization—or contracting out. The opening scandal in the second term of Mayor John Lindsay’s administration was the discovery that the mayor had appointed Carter Bales, a principal at McKinsey & Co., to the position of assistant budget director as a thank-you for polling assistance during the campaign. At the same time, McKinsey itself had been awarded contracts worth at least $1.5 million, without competitive bidding. Part of the work that McKinsey did for the city was a glossy, high-end traffic report, with tissue paper between each page. It was an impressive product: “Their major finding was that traffic flowed into Manhattan in the morning and out of Manhattan in the evening,” deadpans Martin Tolchin, who covered the Lindsay administration for The New York Times.

Sarcasm aside, there’s nothing inherently wrong with asking a consultant to analyze a problem and offer solutions. Nor is there necessarily anything unwise about using private competition to provide better public services—as long as the solutions are good and the services are better and cheaper. The drive for privatization, though, has sometimes been fueled by the notion that the private sector always (or almost always) is the solution.

Bloomberg has pitched his businessman’s approach to government as innovative; his rationale for changing the law to facilitate a third term was that only his private-sector financial acumen could steer the city through its latest fiscal nightmare. But there’s nothing new about the notion that the biggest problem facing government is, well, government and that the private sector holds the answers. In fact, from Ronald Reagan’s “government is the problem” in 1981 to Barack Obama’s “we’re looking to run the government a little bit more like you run your business” in 2011, the idea that business can provide the model for getting things done has been the latest fad for a long time.

Under Bloomberg the city spends more on outside work: Even adjusted for inflation, his government’s spending on contracts is $3 billion more in 2012 than it was when he took office, and spending on “professional services” contracts has nearly tripled in that time.

But what’s really changed is the ambition behind the out- sourcing, from multimillion-dollar IT contracts to consulting deals whose dollar-figure isn’t stunning, but whose impact on city policy could be.

That there are things the private sector does better than government is obvious. And private contractors offer much that is attractive to municipal policymakers. Often their workers come without the encumbrance of pension and retiree health care costs. There are fewer unions to placate or work rules to deal with. Some of the private providers bring products or advice that can help city agencies navigate the sometimes-labyrinthine rules of instituting federally mandated policies. All of these can be helpful to city agencies looking to meet the bottom line, without busting the bank.

But the rosy picture that’s painted of the private options at government’s disposal often differs from reality. For one thing, privatization is often not really about competition. “Privatization does not result in cost savings in general, because most local-government services do not have a competitive market of alternate market providers. Without competition, all you do is substitute a private monopoly for a public monopoly,” says Cornell University professor Mildred Warner, a privatization expert. In a 2007 study of 1,400 municipal governments across the U.S. (New York City declined to participate), city managers were asked how many alternative providers they faced in their market for each of 67 different services, says Warner, who designed the survey. The answer: “The average was less than two.”

One needs to look no further than CityTime to see that private firms can have problems all their own. In the cases reviewed in this issue, no fraud is alleged, but we see other pitfalls of the private approach: Children left standing in the cold because their bus routes were canceled; the awarding of a multi-million-dollar laundry contract to a company with a troubled past; and the outsourcing of policy decisions to a Boston-based consulting company with no oversight by the public. The Department of Education’s SESIS program hit major snags during implementation and many of its users still need training, but even if the program succeeds at improving special education case management, it won’t wipe away the other problems facing special-ed kids.

In a perfect world, says City Comptroller John Liu, “city agencies would hire people based on need, and avoid outside consultants at all costs, expect when there’s a very short-term need, or a very specialized expertise that can only be obtained through outside consultants.”

The irony is, the agencies most affected by the contracts reviewed here—the Department of Education, the New York City housing Authority and the health and hospitals Corporation—embody an earlier generation’s very ambitious approach to government: that educating people, offering them access to health care and providing them with affordable housing is part and parcel of the social contract. Now those agencies are looking to the private sector for strategy, or even salvation. But what’s being lost in all the discussions during the Bloomberg administration about the benefits of private consultants and private contractors is the fact that government and business have two different missions, maintains Susan Lerner, director of the nonprofit advocacy group Common Cause.

“The difference between government and private industry is that government has to be responsive to more than just a profit motive,” says Lerner.

“That is why we have government—because it’s supposed to represent the best interests of the entire constituency, and to balance the different requirements of different groups of constituents.”

The CityTime debacle is one reason former deputy mayor Steven Goldsmith, a privatization guru when he was mayor of Indianapolis, wrote earlier this year that the city should try to in-source more of its IT work. If true, this might spare New York from more multimillion-dollar fiascos. But it’s not clear if the smaller consulting contracts like the ones performed for the DOE by Alvarez & Marsal, for HHC by Deloitte and by BCG for NYCHA, are included in the retreat that Goldsmith recommended. The fact that the administration is poised to veto the City Council’s Outsourcing Accountability Act doesn’t bode well. This bill would require agencies to explicitly state and track over time the costs and benefits of going outside their workforce to get a project done.

If City Hall is determined to keep private firms involved in making strategy and delivering services, then at a minimum, says Lerner, “there needs to be a thorough and clear discussion on what it means to move functions out of city government where elected officials can be held directly accountable and into the hands of consultants who are accountable to no one other than their own bottom line.”

Research support for this project was provided by the Investigative Fund at The Nation Institute.