Who Really Runs Your City?

Privatization of Municipal Services Often Means Selling Off Democracy

ver the past decade, the city of Chicago has sold off more of its public infrastructure and services than any other city in the U.S. It is the poster child for privatization—for privatization gone wrong.

In 2006, the city leased four major parking garages to a Morgan Stanley-led firm for $563 million. In 2009, Morgan Stanley sued the city for threatening its profits by allowing a nearby building to open a public garage. Chicago had to pay $62 million to settle.

In 2008, Mayor Daley sold off 36,000 city parking meters to another Morgan Stanley-backed company, with little public input. It was later revealed that the deal was undervalued by $1 billion. Meter rates skyrocketed from $3 an hour to $6.50 an hour. And the firm charged the city millions for violating the contract by putting certain meters out of use for street repairs, parades, and festivals, and for giving free parking permits to people with disabilities.

Chicago has sold off a slew of other public functions in recent years, from school janitorial services to recycling collection to transit fare cards to its Skyway toll road, and has also farmed out government health and mental health clinics. City officials say they need the upfront cash to fill budget holes.

Andre Delattre, the executive director of the consumer group U.S. PIRG and a Chicagoan since 2004, says that the wave of privatization deals that have overtaken the city in the past decade have “reinforced the sense amongst citizens that the city is captured by special interests looking to benefit from these deals—that that is what is driving these deals, not any intent to act in the interest of the city or residents.” (Chicago machine politics, revelations of police killing cover-ups, and a “rubber stamp City Council” don’t do much to mitigate this sentiment.)

Chicagoans aren’t alone. The decades-long national trend of local governments passing off the duty to provide citizens with services and infrastructure “reinforces the disaffection so many people have with government at all levels,” Delattre says. “That’s the major dynamic we’re seeing in the election this year.”

We know by now that many of the grand promises that pro-privatization advocates have made over the past few decades—the piles of cash for broke cities, the efficiencies the private sector would to bring to public service delivery—haven’t panned out. After a roughly 30-year experiment in selling off traditionally public municipal functions—from garbage collection to toll-road operation to nursing home care—many cities around the country have been left with shoddier services, lower general fund balances, and poorer citizens.

But to this day, there is little discussion of the ways in which municipal privatization also erodes democracy itself. Privatization contracts are usually backroom agreements approved with little public say in the matter. They contain so-called “non-compete” and compensation clauses that prevent cities from implementing policies that impinge on firms’ profits, even if the policies are necessary to protect the public interest. And contract lengths are typically extraordinarily long—Chicago’s parking garage deal will last 99 years—preventing generations of voters from having a say in policy around that service.

As the Chicago case shows, as privatization undermines the very purpose and nature of a city, it also undermines the people’s connection to the city, and their desire to invest in and contribute to it.

Private “Public” Services

“Privatization trumps our democracy,” says Ellen Dannin, an expert on privatization and former National Labor Relations Board attorney.

The trend toward outsourcing toll road operation illustrates this well. As road privatization has become more and more common in recent years, cities and states nationwide have found their agendas bound by contracts penalizing them for building mass transit and alternative road systems, allowing carpooling, and even responding to emergencies.

Between 1994 and 2006, 43 highways became so-called public-private partnerships, according to a 2009 report by the Frontier Group. Many toll road contracts include provisions discouraging governments from improving or expanding nearby public routes in order to funnel traffic—money—to the privatized road.

Virginia’s 2006 contract with two private firms to build toll lanes on the Capital Beltway requires the state to compensate the companies whenever carpools exceed 24 percent of traffic in carpool lanes for the next forty years—“or until the builders make $100 million in profits.”

In 2008, the private consortium that owns the Northwest Parkway in Denver, Colorado, opposed improvements to a nearby public road, pointing to contract language that barred improvements—for 99 years—on city-owned roads that might divert traffic and “hurt the parkway financially.”

The state of Indiana had to reimburse the private company operating the Indiana Toll Road $447,000 in 2008 because the state waived the tolls of people who had to evacuate during severe flooding. The company also refused to allow state troopers to close the toll road during a snowstorm because it would hurt profits.

"After a roughly 30-year experiment in selling off traditionally public municipal functions—from garbage collection to toll-road operation to nursing home care—many cities around the country have been left with shoddier services, lower general fund balances, and poorer citizens."

“The terms [of contracts like this] may even create financial disincentives to government’s taking life-saving action,” Dannin warned in a 2011 paper. “[A] state or local government that is so short of money that it must ‘sell’ valuable public infrastructure has more to consider in a disaster than just saving lives. If it needs to ask how much protection it can afford, it may…be tempted to decide against taking actions that will require reimbursing the contractor.”

These types of deals “tie the hands of...government by saying, ‘you’re going to have to pay if your transportation system changes,’” says Tony Dutzik, a senior policy analyst with the Frontier Group, an environmental policy think tank in Washington, D.C.. Metropolitan areas have doubled their population size over the past few decades. Drastic changes in technology are bound to take place within a couple decades, let alone 75 or 99 years. “We could be in drones in 75 years!” Dutzik laughs.

“For environmental reasons, it’s infuriating” as well, says Ben Davis, an analyst at In The Public Interest (ITPI), an anti-privatization research and policy organization, because these contract clauses prevent states and municipalities from adapting transportation policy to address climate change.

Some 700 jurisdictions across the country have elected to privatize transportation policy on the traffic enforcement side as well, in the form of red light cameras. These are the cameras mounted at intersections that take a photo of your license plate when you run a red light. The company will then issue the ticket, usually after approval by local authorities.

Some of these firms require cities to approve a fixed percentage of all tickets in order to guarantee the company a certain level of income, thereby eliminating local judicial discretion. Some companies impose financial penalties on municipalities that make safety improvements at intersections if those improvements could affect the volume of tickets a company can issue. Contracts in the California towns of Corona, Bell Gardens, Citrus Heights, and Hawthorne levy fines on the city if it extends the length of the yellow light at intersections, which would cut down on the number of tickets the firm can give out.

“These deals sometimes prevent local governments from acting in the best interests of their citizens,” the authors of a 2011 US PIRG report noted, “especially when the terms of the deal prioritize delivering profits for the…private firm” over safety.

One of the sectors where privatization is most destructive is waste incineration. About 12 percent of all trash in the U.S. is burned in incinerators—called the most polluting possible way to dispose of trash by some environmental groups—and most of those facilities are operated by private companies. Typically, firms force so-called "put-or-pay" clauses on cities, which require the municipality to deliver a certain amount of trash to the company or compensate the company for lost profits.

Detroit’s private incinerator contract—which terminated in 2014—essentially banned curbside recycling. Once waste and recyclables were set out at the curb, they belonged to the Detroit Department of Public Works, which was required to deliver all of it to the incinerator.

“For close to 30 years, the city of Detroit was the only major city that didn’t have a curbside recycling program,” says Ahmina Maxey, the U.S. and Canada campaigns and membership coordinator at Global Anti-Incinerator Alliance (GAIA), who fought incineration in Detroit for many years.

The city of Indianapolis was fined half a million dollars annually for years because it couldn’t deliver the 60,000 tons of trash per quarter stipulated in the city’s put-or-pay contract with the local incinerator. That contract ended in 2014.

“Cities may have a desire to really push and lead on recycling, but financially and economically…they don’t have that option,” Maxey says, if they’re bound by a private contract.

"These contract clauses make it harder for us to redesign our communities to address climate change and avoid a carbon-based, unsustainable future," says Donald Cohen, the executive director of ITPI and a former AFL-CIO official.

“Shouldn’t there be a referendum?”

Compensation clauses and non-compete clauses are found in a wide variety of infrastructure privatization contracts.

“They operate as a form of penalty for governments taking actions in the public interest,” Dannin wrote in the 2011 report.

The Chicago meter contact, for example, discourages the city from opening bike routes or bus lanes or adding mass transit systems that could help address congestion and climate change because this would involve taking meters out of commission and interfering with Morgan Stanley’s profits.

And there’s virtually no way to get out of these deals. “Contracts are incredibly rigid documents,” Cohen says. Municipalities are locked in even when services are no longer needed, or if the company fails to deliver. “Cities need to be flexible…because you can’t anticipate the future,” Cohen adds. “If you don’t anticipate every possible thing—which is impossible to do—then something goes wrong.”

Generally contracts are negotiated “in an opaque manner behind closed doors and the people are left to deal with the consequences once it’s done,” says Mac McCarthy, the president of the Lincoln Institute for Land Policy, a nonpartisan foundation. In the Chicago parking meter deal, the city council had virtually no time to consider the contract before a vote, even though city officials had been working on it for over a year. “Why is this stuff generally done outside aegis of the public?” McCarthy says. “Shouldn’t there be a referendum on the ballot?”

Dannin thinks so, since privatization contracts “give private contractors a quasi-governmental status with power over new laws, judicial decisions, propositions voted on by the public, and other government actions,” she notes. Dannin argues that allowing private contractors this level of authority could violate what is called the non-delegation doctrine in administrative law that bars private entities from taking on governmental powers.

“When you sell off public assets to private parties basically what you’ve done is absolutely confined the ability of the public sector to dictate the terms by which public good is determined,” McCarthy says. “[Private] contract becomes law.” The Government Accountability Office has warned against privatization deals that exclude the public from the decision-making process.

And it’s not just corporations that cities have allowed to undermine their democracy; localities also regularly hand off public services to private nonprofits, with similar effects. In 2012, Chicago turned over late-night homeless services to Catholic Charities. LGBTQ Chicagoans expressed concern that the organization wouldn’t treat them fairly, given that the Cardinal of the the Archdiocese of Chicago had recently compared the Pride Parade to a Ku Klux Klan gathering. The city’s non-discrimination ordinance protects LGBTQ rights, but the private charity is not bound by this rule.

“The move to privatize is hugely problematic when it’s a for-profit,” says Jo Patton, the director of special projects at AFSCME Council 31 in Chicago, “but it’s also a problem when it’s not-for-profit because what you still don’t have there is the accountability to the broader public values” laid down in law. Privatization to nonprofits “is very much a part of the trend of government walking away from its responsibility,” she says, “which should be a broad public commitment.”

The Beginnings of Privatization

The range of city functions that municipalities have outsourced over the years is vast. Here are a few: park and street maintenance; garbage and recycling collection; building inspection, IT, clerical, and printing services; lotteries and liquor distribution along with sports and recreation facilities; public transit systems, highways, airports, bridges, parking garages, parking meters, and parking lots; nursing homes, health clinics, welfare systems; water systems, sewage systems, and fire protection; vehicle fleets and bus services; schools, traffic schools, college dorms, cafeteria services, and college dorms.

An estimated $1 trillion of America's $6 trillion in annual federal, state, and local government spending goes to private contractors, according to a 2014 study by the Center for Media and Democracy. When it comes to municipal public services specifically, roughly 40 percent were delivered by private contractors in 2012, according to research by Mildred Warner, a professor of city and regional planning at Cornell University.

Government has always had to contract out certain functions, but the privatization of traditionally public services and infrastructure took off during the Reagan years. As ITPI’s Donald Cohen explains in Part 1 of this series, “Cities were in fiscal crisis and a new conservative think-tank infrastructure ... that embraced privatization as a core strategy to downsize government was ready for a frontal assault.”

The sales pitch was that privatization would provide an up-front infusion of cash, and that private companies could also do the job better, faster, cheaper. It didn’t always work out that way.

Privately run services and infrastructure deals are inherently more expensive than the public version because governments can borrow at a cheaper rate. The higher costs of privately run services get passed onto the taxpayer, according to U.S. PIRG.

And since the private firm still needs to make a profit, the company “cuts costs” for cities by lowering wages and cutting benefits for former city workers—largely African-Americans and women. This undermines the economic well-being of the entire city, and means that many of these low-wage workers have to rely on public assistance like food stamps and Medicaid, transferring taxpayer savings from the privatization deal to increased safety net service outlays.

“I see a lot of stories of companies coming in and promising the moon and the stars,” Frontier Group’s Tony Dutzik says, “but they haven’t been able to deliver.”

In 2012, when Chicago privatized seven community healthcare clinics, the lower-level staff—mostly African-American—took a pay cut of about 40 percent. Partly as a result of the declining pay of city employees over the years, much of the neighborhood of Chatham where many of these employees live has fallen into disrepair, AFSCME’s Patton says. “When I moved to Chicago in the ‘70s, Chatham was a really nice neighborhood,” she says. “You drive around now and it’s just heart-breaking.”

Besides failing to deliver economic benefits to communities, privatization deals also deprive citizens of information about how their government is run. This is because private firms are not subject to open records laws in the way government is.

And a wide range of research has found that public services don’t improve once they’re privatized. “I see a lot of stories of companies coming in and promising the moon and the stars,” Frontier Group’s Tony Dutzik says, “but they haven’t been able to deliver.”

This is not to say that outsourcing never works. If city government imposes strict rules on the private companies, outcomes are less disastrous, McCarthy says. “You can convey monopoly power to someone to deliver the service but you regulate them,” he says. “You look at the quality and punish them if they’re at fault.” Selling off public control without regulation—which is what happens in many of these deals—“is [a] radical way to go,” McCarthy adds.

Today, the privatization trend is beginning to flag a bit, as the consequences become increasingly apparent and a new pro-public movement blooms. Some cities have “insourced” services again after realizing they could perform the work as efficiently as private companies.

Between 2007 and 2012, about ten percent of all municipal services delivered in the U.S. were newly “insourced,” according to research by Warner surveying 500 local governments (with roughly the same amount newly outsourced).

“There’s a pushback right now against privatization,” says Elizabeth Shermer, an assistant professor of history at Loyola University Chicago who focuses on business, labor, and urbanization. “As Americans see what it will cost in the long run, we might see a shift back to publicly run services and infrastructure.”

The Right to the City

In the meantime, the question that remains is what this shift in ownership of the city has done to society on both a collective and individual level.

According to the late urban theorist Edward Soja, “the commons” in any urban space encompasses not just parks, plazas, and streets, but also mass transit, buses, trains, and cars that move through the city. When these things no longer belong to the public, to the citizens, it can have profound psychological impact on those citizens, says Gabrielle Bendiner-Viani, an assistant professor of urban studies at The New School in New York who focuses on environmental psychology.

“People’s sense of place its sustaining to people’s sense of self,” she explains. “When people feel like they have no control over their environment, that the city is run only by the profit motive, their ability to feel connected to their city, to feel a part of their city, and hence to contribute to their city, is really undermined.”

It’s no wonder Chicagoans and Americans across the country feel disaffected. Remove citizen control of services and city structures and there is less physical and psychological space to develop as an individual in relation to a community.

“These municipal services and public spaces are not just practical, they’re actually part of a larger political ideal of actually living together and being together as part of a society,” Bendiner-Viani adds.

"When people feel like they have no control over their environment, that the city is run only by the profit motive, their ability to feel connected to their city, to feel a part of their city, and hence to contribute to their city, is really undermined.”

In 2012, Chicago shut down six of its city-run mental health clinics while increasing funding for private non-profit mental health care providers. Those clinics were not just places where people struggling with psychiatric disorders could go and get help, AFSCME’s Patton says. They were also important informal public gathering spaces for the community. “They operated as social centers,” Patton adds. “People who were having issues would just come by and sit in the waiting room for 8 hours and chat. That is very hard to replicate especially if it’s a non-profit… that has to make due with limited amount of money. It’s harder for them to play that role of unpaid social center.”

In 1968, French philosopher Henri Lefebvre developed the idea of the “right to the city.” Geographer David Harvey describes this right in his 2012 book Rebel Cities as “far more than a right of individual or group access to the resources that the city embodies: it is a right to change and reinvent the city more after our hearts’ desire.”

At the moment, Harvey notes, the right to the city is held “in most cases in the hands of a small political and economic elite.” But it might not always be that way.

“The freedom to make and remake ourselves and our cities,” Harvey writes, “is one of the most precious yet most neglected of our human rights.” The nascent anti-privatization movement is determined to claim that right.


Erika Eichelberger is an independent journalist and a former staff reporter at Mother Jones. She is based in New York.

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explore the series

The Hidden History of the Privatization of Everything

Note From The Editor

PART 1: The History of Privatization

PART 2: The True Cost

PART 3: Who Really Runs Your City?

PART 4: No Test Left Behind

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