Contracts and Contracting Out
(from Maine Townsman, May 2009)
By Lee Burnett
The list of municipal services delivered under contract continues to grow. Road paving and trash collection are now commonly done by the private sector. In smaller communities, police service, emergency radio dispatch, property assessment, and code enforcement may be delivered under contract with neighboring towns or regional entities. The Town of Belgrade, for example, now expends 85 percent of its $2.2 million budget under contracts.
Contracts can provide municipalities with flexibility, predictable and sometimes lower costs, and often a higher-end service.
But contracting is not as easy as shopping around and awarding the low bid. There's a lot of judgment involved in timing, length of contract, and how much risk to assume. The volatility of prices for home heating oil, liquid asphalt and recycling materials are adding complexity to the equation. Let's just say contracting is not a good home for conventional wisdom
Saving taxpayers' money usually means going with the low bid, but not always. Last year, Pike Industries was the low bidder on a good share of municipal road paving projects by excluding from its bid proposals an escalator clause covering a potential increase in the price of liquid asphalt. Pike had gambled and lost: the price of liquid asphalt did indeed spike from $307.50 per ton in January to $850 per ton by late summer and Pike Industries later informed its customers that it could not honor its contracts.
Kennebunkport had awarded Pike Industries a $1.6 million contract just weeks earlier and had already begun prep work when it received the news. "I'm not happy with the turn of events," Kennebunkport Town Manager Larry Mead told the Biddeford-Saco-Old Orchard Beach Currier.
In Kennebunkport's case, there was a semi-happy ending. The work wasn't completed until this spring, but Kennebunkport got it down within its budget by parting ways with Pike awarding the contract to Dayton Sand & Gravel, the next lowest bidder. Mead said Kennebunkport's long-standing positive relationship with Dayton Sand & Gravel helped resolve the money crunch.
"We have confidence and trust in (them) and a history of feeling secure," said Mead. "That being said, we're under no illusions that if fuel goes crazy, we'll need to adjust the price. We understand that and they also feel confident working with us."
In the future, Mead said paving contracts will almost certainly include an escalator clause for liquid asphalt prices. The escalator clause will shift additional risk to the town, but without it, bidders would almost certainly offer much higher bid prices to cover their uncertainty. "Otherwise, we won't get proposals, at least for the foreseeable future," said Mead. "In the next two years, if things settle down and we get comfortable again, it may fall by the wayside."
Most of Pikes voided contracts were eventually renegotiated, said Jonathan Olsen, general manager for Pike Industries in Maine. "We all shared the pain," he said. Olsen agreed that insisting on escalator clauses will level the playing field and ultimately produce lower bids by removing an element of uncertainty from bidders’ calculations.
Road paving is fast outgrowing its low-tech, informal roots, explained Olsen. "It's changed a lot in the last 20 years. There's specialized training. OSHA regulations expect a certain level of expertise. The DOT specs have evolved – even in the last five or six years – in the area of quality control. The days a guy could get a backhoe and a small dump truck and call himself a contractor are over," he said. Towns and cities now find it cost-effective to contract out all but the smallest projects, he said.
Olsen has some contracting suggestions. A series of smaller projects should be bid as a package for the lowest price. But a couple of larger projects – stretching over many months – should probably be bid separately for the lowest price.
Following Maine Department of Transportation specifications usually produces "a better product and better pricing," Olsen said, although many towns still prefer "informality" in the bid process. "A lot of public works directors like to go with a contractor he's familiar with. He (the PW director) thinks that's in the best interest of the town. And that's fine. It's an individual choice."
Sometimes, shopping around for the best deals can lead to unintended consequences. Belgrade, for example, shopped for the best prices on emergency dispatch and 911 service and now finds itself in the less-than-ideal situation where emergency communications are handled by three different agencies.
Emergency calls are first fielded by Somerset County Communications and – once the nature of the call is determined – it is relayed to one of two dispatch centers. Police calls are relayed to the Maine Department of Public Safety’s Regional Communications Center (RCC) in Augusta, which dispatches Kennebec County's sheriff's deputies. Fire and ambulance calls are relayed to Waterville Fire-Rescue, which dispatches the volunteer fire and ambulance squads in Belgrade.
Although the relays are done instantly, the hand-offs and division of responsibility introduce complexity to what should be a simplified crisis response, says Dennis Keschl, Belgrade Town Manager. "There are three different organizations involved; I'd prefer one," he said. "But we are continually under pressure to keep property taxes down and our budgets low."
The complicated arrangement has developed as Belgrade (and other Kennebec County communities) shopped for the best deal at a time of state- mandated consolidation of emergency 911 calls. Originally, the Kennebec County Sheriff's Department ran a dispatch center for area towns, but when the Department of Public Safety opened up the RCC, the dispatching landscape changed in Kennebec County.
Mostly for budgetary reasons, Kennebec County shut down its dispatch center altogether, shifting dispatch of patrol deputy sheriffs to the RCC. For Belgrade, which had been using the county dispatching, this move increased the town’s cost of dispatching. Belgrade opted to have its fire and rescue squads dispatched by the less expensive Waterville Fire-Rescue.
The final, complication came last year when the Public Utilities Commission approved a rate increase for the handling of emergency calls by the RCC. The net effect was a near tripling of communications costs for Belgrade. Earlier this year, Belgrade and a dozen other Kennebec County communities sought permission from the PUC to switch its emergency calls to the less expensive Somerset County Communications Center.
"The consolidation of PSAP was not a bad thing," said Keschl, "But how it was done in Kennebec County was not a good thing." Keschl said the best solution is to take the cost of answering emergency calls off the property taxpayers entirely and have it funded through a surcharge on cell phone users.
Clifford Wells, the director of the RCC, worries about the fragmentation of responsibility, but said shopping for the best price is understandable. "There is a loss of continuity," he said. "I don't think it's a serious concern, but it needs to be watched."
Buying Heating Oil
Locking in the price of heating oil in May used to be prudent because recent history has shown there are significant savings – to say nothing of predictable costs – in bulk purchasing in advance of the heating season. But now, new strategies are being hatched in response to last year's tumbling oil prices.
Last May, the City of Augusta locked in at $4.43 per gallon only to see the price drop by half in the next six months. For a city that purchases 400,000 gallons of heating oil a year, there was a lot of angst and second guessing over that decision This time around, Augusta still isn't willing to play the market, but also doesn't want to wait until late in its budget year to make such a consequential decision. It changed its policy on the timing of purchasing oil and when the price hit $2.27 in late December, Augusta locked in a full year in advance of the 2009-2010 heating season.
City decision-makers made it clear, they are not shopping for the absolute lowest price, but they think they stand a better chance of achieving some savings by giving themselves a wide window of opportunity. "If the market gives you an opportunity and you can stay within your budget, that's the lesson we learned: grab it," explained Ralph St. Pierre, assistant city manager and finance director. "That's the earliest we've ever bought it. If they would have let me lock in for two years, I would have done it."
Likewise, Bridgton has a new perspective on what's in the best interests of taxpayers. Last year, Bridgton locked in at $3.79 per gallon for approximately 20,000 gallons of heating oil. "Had I not locked in and played the market, it would be reasonable to say I would have saved $1.50 to $1.75 on each gallon," explains Bridgton Town Manager Mitchell Berkowitz. "I might have been too conservative."
This year, Berkowitz is again locking in – this time at $2.19 per gallon. "We do the best we can, but we're not in a position to gamble," he said. But Berkowitz is willing to assume a little risk, deciding against paying an additional 30 cents a gallon for "downside protection." Berkowitz reasons that for downside protection to be worthwhile, the price of oil would have to fall to below $1.90 per gallon – which has only happened once (last year) in the past four years. He terms the $6,000 cost of downside protection "an expensive insurance policy."
A few towns are rethinking the practice of selling recyclable materials themselves. A decade ago, as it became obvious that trash disposal costs could be substantially reduced through recycling, many communities capitalized by not just recycling, but selling their recycled materials. It meant investing in balers, compactors and storage sheds, but it seemed to be worth it if the processed commodities fetched a much higher price.
Selling cardboard, newspapers, plastic and glass isn't as appealing as it used to be. Two years ago, Brunswick stopped selling processed recycled materials. Last November, Bridgton followed suit. Today, most of the communities that truck their recycled materials to ecomaine, a municipally-owned recycled materials wholesaler in Portland, are less interested in getting top dollar for their materials than in avoiding $50 to $100 per ton trash disposal costs, says ecomaine General Manager Kevin Roche.
The decision to get out of the recycled materials markets is being driven by economies of scale as most small programs really aren't that profitable, says Roche.
"I know some people claim they're making money," he said. "I've operated a small program myself and the proof is if they were truly profitable the private sector would open a processing center in every community. They don't. Most small programs are very labor intensive ... Most recycling is not full cost accounting. They might use the public works building, or electricity another department, or they think the labor is free. All of these costs should be accounted for."
Bridgton stopped selling recycled materials last November, even though it had earned between $51,000 and $65,000 a year for the past decade. Bridgton got out just as the markets were crashing, but that was "pure luck," according to Town Manager Berkowitz. Bridgton now pays extra to truck unsorted recyclable materials to ecomaine and gets no income at all.
Why is Bridgton willing to forego a substantial revenue stream and let $150,000 worth of processing equipment stand idle? Because Berkowitz calculates there's more money to be saved in boosting recycling rates than in selling recyclables.
Bridgton already achieves a 40-41 percent recycling rate by having homeowners sort their own recycled materials into separate compartments when they deliver them to the transfer station, a process that has been timed to take on average between five and seven minutes. By going to ecomaine's single-sort recycling, homeowners toss all their recyclable materials into a single compactor, which reduces their drop-off time to between 30 and 90 seconds. If that convenience induces another 20 percent of Bridgton's population to recycle, then Berkowitz comes out way ahead. There will be lower trash disposal costs, a reduction in salaries by 1.5 employees, slightly higher trucking fees, and the loss of the recycling revenue stream. Net savings: potentially $71,000 to $85,000, a year.
"We won't know for a while if it makes sense. We'll monitor the situation closely," said Berkowitz. Bridgton is mothballing its processing equipment just in case the economics dictate reverting to town selling its own recycled materials.
Some 60 Maine communities have opted for single-sort recycling, observes George MacDonald, director of community assistance for the Maine Waste Management and Recycling Program. "I think they are evaluating their options more closely than before," he said. "The real savings is in avoiding disposal fees."
Counter to this trend, the small community of St. George, south of Rockland, recently began selling its rigid plastic and e-waste on recycling markets. Assistant Town Manager Tim Polky said it cost $2,000 to acquire the trailers, but the income from the sale of rigid plastic and e-waste will pay for the trailers in a couple of years.
"We've got a real good sorting mechanism: people," said Polky. "We charge 'em to dump [trash] but no charge to sort [recyclables]. We're pretty fortunate." Polky said St. George evaluated going to single-sort recycling through ecomaine, but concluded the trucking costs were too high to justify it.
Lee Burnett is a freelance writer from Sanford.