Union strategies in privatizations: Shakespeare-inspired alternatives.
Antony: Let Rome in Tiber melt, and the wide arch Of the ranged empire fall!(1)
This article focuses on the strategic choices available to public sector unions facing privatization, and explores several alternative approaches that a union may wish to consider at the outset of a privatization.(2) There are many alternatives; the most common is for unions to oppose privatization.(3) In opposing privatization, the union will often apply political pressure.(4) Typically, this approach will result in conventional collective bargaining negotiations relating to severance and other similar issues.(5) A second option is to identify problems at the governmental level and remedy those problems by an internal restructuring.(6) A third approach is to contract out management.(7) For example, if one of the central issues to be addressed is poor management, then this rarely considered approach has significant potential.(8) A fourth approach is to negotiate a new collective bargaining agreement with the third party brought in as part of the privatization.(9) Finally, a fifth approach, not regularly pursued in a disciplined financial fashion, but which certainly should be, is for a union to pursue an employee stock option plan (ESOP) or joint venture, as a competitor to other bidders in the privatization.(10)
This article not only identifies these specific strategic choices, but also suggests a process for making these choices--one that unions may wish to include in their collective bargaining agreements well in advance of any contemplated privatization.(11) Unions in the public sector may consider this process in order to maximize their ability to protect their members and advance their interests.
This article is not an effort to provide a general set of analytical tools to analyze privatization plans from a financial perspective. The relevant analysis for privatization would always have to be case specific. Instead, this article will examine the public financial details of certain recent privatizations.(12) The public financial record in privatizations is often quite sketchy.(13) Accordingly, conclusions are tentative at best, but unequivocally demonstrate the importance of financial analysis for effective union decision-making.(14)
The specific cases cited in this article are representative of the variety of privatizations and are similar to the business opportunities discussed at conferences, such as the Office of Management and Budget (OMB) Annual A-76 Conference, which seeks to create commercial opportunities for federal privatizations,(15) and in periodicals, such as The Bidders Compendium, which lists privatization opportunities at the state and local level.(16)
This article suggests that privatizations are very similar to corporate restructurings, in which various stakeholders reformulate their relationship to the common entity.(17) Private unions have extensive experience in defending their interests in restructurings,(18) upon which public sector unions may wish to draw. In private sector restructurings, unions have come to recognize the importance of participating in the process on a fully informed basis.(19) This is the case whether they elect to oppose the restructuring, or whether they actively participate in the process. By taking the latter path, private sector unions have established both the conditions of their participation, and the specific processes by which they are able to participate in restructurings. This article examines those conditions and processes.(20)
To participate fully requires, at the outset, access to contemporaneous financial information that others use for their decision-making.(21) This article argues that unions must take into account all financial facts about the condition of their employer and the market that their organization serves.(22) Mastering such information will allow the union to make an informed decision where financial standards are the relevant standards by which others conduct their discussions and on which they base their decisions.(23) Moreover, unions can observe that other participants in these discussions will draw upon the expertise of specialists such as bankers, consultants, and others.(24) Unions would be well served also to seek this expertise;(25) otherwise, they unilaterally disarm themselves. Moreover, it is common for the government's financial advisor also to be a privatization proponent. This means that the union should not expect disinterested advice.
Unions should recognize that privatizations create new value.(26) It is frequent for additional value to come from labor savings.(27) effect, distribution of the new wealth goes to the new owners or operators,(28) and to the governmental entity.(29) Unions have typically not shared in that value.(30) From the perspective of unions, of course they should. The approach set forth in this article suggests a tested means to do so.
Brutus: And we must take the current when it serves, Or lose our ventures.(31)
Privatization has been much more frequent and significant Internationally(32) than it has been in the United States.(33) This reflects that federal, state, and local governmental units own few businesses, as compared to other countries.(34) Governmental entities in Europe and South America have had significant economic interests in many industries, including the telephone companies, banks, airlines, steel manufacturers, and other commodity producing businesses.(35)
Although governmental dispositions of stock or assets in the United States have not been common, there are a variety of forms of privatization.(36) For example, a public manager may elect to deliver a public service in any number of ways, and use various mechanisms to evaluate alternative approaches to the financing and delivery of public services.(37) These mechanisms include public-private comparison,(38) managed competition,(39) publicization,(40) asset sale,(41) franchising,(42) public-private partnership,(43) value capture transactions,(44) and voucher programs.(45) The most significant of these mechanisms, however, has been the contracting out of services to the private sector.(46) This mechanism has major consequences. First, it causes a significant loss of members to unions.(47) Just as importantly, it shifts jobs to the non-unionized private sector.(48) The labor movement must think of this issue in the broader context of its ability to fulfill its core functions in society. Unions represent a diminishing percentage of the private sector workforce.(49) In many private sector industries where union density had traditionally been strong(50) it is substantially less so now--under ten percent.(51) This state of affairs is a result of unions representing employees in declining or shrinking industries,(52) yet failing to organize new industries that have provided much of the recent employment growth.(53) Even aggressive union organizers expect that rebuilding union density in the private sector is a long-term project.(54) In contrast, the proportion of workers belonging to unions, and the union density in the public sector, have been much greater than that in the private sector--thirty percent to as high as eighty percent.(55)
All this is not to suggest that privatization efforts will succeed, but rather that the labor movement is at a critical juncture. It must replenish, not diminish, its ranks, or face the potential risk of losing its status as an economic and political force. As labor unions are beginning to refocus on strengthening their private sector organizing presence, they cannot afford to have union membership or density weaken in the public sector without calling into question the viability of the movement. Unions, which have been able to moderate certain excesses of capitalism,(56) and advance issues of social justice,(57) will be unable to fulfill those roles if they fail to represent a sufficient portion of workforce. Privatization has the potential to move jobs into the non-union column in large numbers.(58)
It is difficult to gauge the precise amount of privatization related Activity(59) because many of the recent efforts have not been reported fully. A number of municipalities,(60) however, across the United States have carried out privatizations.(61) Some, such as the privatizations in Indianapolis, Indiana,(62) were reported nationally. Others, however, went largely unnoticed in the national media--the auction by the City of Anchorage(63) of its municipal telephone company, and the privatization by the City of Atlanta(64) of its water and sewage facilities, the largest in North America.
Those interested in strong unions or perhaps just per se opposed to privatization efforts might want to reconsider their strategies that exclude privatization in light of recent developments.(65) Although some legal barriers to privatization(66) still exist in various jurisdictions, it is clear that the barriers are falling.(67) Legal barriers are a reflection of, and subject to the public's will and constitutional restraints; ultimately the force of economic and political reality are recognized in the law.(68) Indeed, both federal(69) and state(70) legislation increasingly permit or encourage privatization. This trend mirrors the increasing use of outsourcing by companies in the private sector.(71) Moreover, the effect of the internet on governmental operations is as yet terra incognita, but it is not unlikely to also have an impact in unpredictable ways that would affect unions.
Changes in the law underscore an important shift in the public discussion of privatization. The spectrum of activities presently performed by governmental entities now contemplated for privatization has dramatically expanded over the past decade.(72) This willingness to consider the use of private providers for traditionally public functions is reflected in the current debate regarding social security reform, where extensive efforts have been made to transfer responsibility for administering and investing the social security trust fund to the equity capital markets.(73)
The business cycle is another factor in influencing privatization efforts. When the economy constricts, the pressure on government to lessen expenditures for services typically becomes heightened. The alternatives to reducing costs are likely to include some forms of privatization.(74) Obviously, the depth and perceived breadth of any economic downturn will affect the likelihood and speed with which such steps might be considered.(75) Most states,(76) and more recently the federal government,(77) have been enjoying the surplus resulting from the economic expansion and favorable financial environment. Today, the pragmatic view adopted by many political office holders is that there is no reason, in light of the surpluses, to focus on cost reduction programs, including privatization.(78) Once the business cycle turns again, however, and it will, governments are likely to be under pressure to reduce costs in order to avoid tax increases and eliminate deficits. Governments are likely to reduce services, reduce costs, or both.(79) Voters, especially those whose wages have been stagnant,(80) have been receptive to both calls for tax reductions, and resistance to further tax increases.(81) Policy makers and elected officials have limited options in these circumstances. The pragmatic approach that has avoided confrontation on the privatization issue in the past may produce a different pro-privatization course of action in less favorable economic circumstances.
One marked difference from past thinking is that organized business groups now view governmental activities as potential profit centers.(82) These groups believe that they can profitably perform governmental activities more efficiently than can the government.(83) To date, there has been a varied range of activities in which private business entities have taken over the operation of what used to be strictly governmental tasks.(84) For example, some now manage welfare caseloads and disbursements,(85) and others administer prisons.(86) Certain industries have business plans, and are capitalized, to acquire government assets.(87) The water industry is a case in point.(88) Other companies raise funds to become alternative providers of educational services.(89)
In addition, governmental entities can no longer afford to retain certain economic activities.(90) For example, certain traditional government monopolies, such as water and sewer services may have substantial capital expenditure requirements in order to comply with environmental regulations.(91) These may be endeavors that states and localities must privatize. Again, when governmental budgets are under pressure, any activity requiring significant new investment might be expected to be a candidate for privatization.
Another factor that may encourage privatization is the quality of service provided. Again, one subject of great public significance is the educational system. State takeovers of certain local school systems,(92) the rise of charter schools,(93) and the voucher movement(94) reflect public dissatisfaction with the status quo. The recent public enthusiasm for school voucher programs in New Mexico,(95) Texas,(96) and Florida(97) highlights this issue.(98) Some private companies, most notably the Edison Project, claim they can deliver better services to students and their families than can their public counterparts.(99) If the public's concerns in this context are more effectively addressed by the private sector, it will set a precedent in that sector and others.
These comments do not suggest the inevitability of privatization. This article has not yet touched on factors that might weigh against such an outcome.(100) Even avid proponents of privatization acknowledge that there is little evidence demonstrating a reduction in governmental activity.(101) As a percentage of overall economic activity, governmental expenditures have not grown since the 1980s, but have been relatively constant.(102) Yet, from a union perspective, it would be safer, for planning purposes, to assume that there will be continued efforts to privatize services currently performed by government entities, and that a material number of these efforts are likely to succeed. Publicly proposed privatizations rarely fail to be consummated.(103) Given this reality, public sector unions should consider their optimal strategies. That is what this article now proposes to do.
II. THE CONVENTIONAL MODEL: OPPOSITION TO PRIVATIZATION
Sly: I'll not budge an inch(104)
In general, unions typically resist privatization in any form and use all available avenues to derail the process.(105) As elected officials, union representatives are likely to be under great pressure to pursue this approach.(106) The leadership of a union usually is focused on short-term job impact and not on structuring a long-term relationship with the employer providing the newly privatized service.(107) Therefore, when the service is privatized, the union finds itself in a weakened position, or simply not representing any employees.
Employees usually have little input, if any, into privatization decisions.(108) Even if afforded a limited role as in the case of managed competition, employees are rarely in a position to protect their interests or offer an alternative.(109) They usually do not have the ability or resources to gather information and assess relevant financial and operational data, construct a business plan, and, if appropriate, organize the formation and financing of a new company.(110)
The most common reaction by unions to proposed privatization has been unequivocal opposition.(111) One illustration of this approach was the union's reaction to the privatization of the Investigations Service of the Office of Personnel Management (OPM).(112) In the last quarter of 1996, the functions of the Investigations Service of the OPM were transferred to a new private company called US Investigations Services, Inc. (USIS).(113) Interestingly, this privatization was undertaken by the democratic Clinton administration, reflecting the changing public attitudes on this subject.(114) The American Federation of Government Employees (AFGE), a union, sought to block this privatization effort.(115)
An intriguing aspect of this privatization was that the USIS management took the company private using an ESOP, though without active participation by most of its employees.(116) To the contrary, the ESOP merely afforded a convenient financing device.(117) Indeed, the ESOP provided neither extensive employee participation in the economics of the company, nor any corporate governance role for either the employees or the union.(118) Moreover, after the privatization, management declined to recognize the union, which had represented the employees before the privatization.(199) In short, the privatization resulted in a complete defeat for the union.(120) Yet, the key premise of the privatization-cost savings to the government--was far from established by the financial projections.(121) The union would have better served its members by addressing the financial case promoted by the privatization's sponsors from the outset.
The General Accounting Office (GAO) analyzed the areas of projected savings identified by the OPM in support of its efforts to privatize the Investigations Service.(122)The following table summarizes the GAO's findings:(123)
Summary of Benefits and Costs of Privatization U.S. Investigation Services, Inc.
1996 1997 1998 1999 2000 ($ in millions) Price Reductions 0.4 0.5 1.8 3.1 2.5 Federal Corporate Income 3.0 2.3 1.6 1.3 1.2 Reduced Pension Costs (0.7) (0.6) (0.5) (0.5) (0.5) Severance Pay (8.4) TOTAL (5.7) 2.2 2.9 3.9 3.2
The GAO made several observations about these savings categories. As to the price reductions that the government would receive from the newly privatized enterprise, the GAO noted several objections.(124) First, the GAO believed that OPM's methodology for comparing in-house and contracted-out performance did not use truly comparable information.(125) Therefore, the GAO concluded that it could not meaningfully predict the `"true"' savings in this area.(126) In addition, the GAO observed that OPM used pricing data developed in 1994 as part of its Revolving Fund Financial Plan.(127) The prices set by OPM in this plan were "higher than actual costs of conducting investigations in order to create a surplus to use to pay down an existing operating deficit."(128) Put differently, the savings that OPM asserted were attainable were actually derived from an artificially inflated base. The GAO, however, did not offer to provide a more realistic figure, if any, for the savings suggested in this category.
The second area of purported savings that OPM identified was an increase in federal corporate income taxes.(129) The tax revenue was to be generated from existing and newly introduced products. (130) The GAO report, citing a consultant's report prepared for OPM, suggested very significant incremental revenues from the introduction of new products.(131) In fact, by the fourth year, projected income tax revenues for new products would exceed those of existing products. (132)
Whether or not such projections were realistic at the time--since the evidence in the public record on that subject suggests that OPM had historically been consistent in missing its forecasts for revenues and costs of USIS(133)--the GAO raised two concerns regarding the tax revenue projections.(134) First, the tax revenues derived from new products might be based on business that USIS would capture from competitors.(135) Any taxes paid by USIS in this regard would be simply replacing taxes that its competitors would otherwise pay.(136) The GAO also raised a concern as to whether USIS would obtain the legal authorization to expand its product marketing to state and local governments.(137) If it failed to obtain such authorization, it could not rely on the new revenues associated from such activities.(138) Again, it simply was speculative as to whether the projected savings would materialize, and therefore such projected income should have been discounted by an appropriate risk factor.
The last area identified as providing savings was pension costs.(139) The savings were to be generated by relieving the government for pension contributions going forward.(140) As in many privatization cases, labor cost savings were the one area where there were incontrovertible savings, subject to an offset, in this case, by severance payments.(141) The OPM originally identified the cost savings from pension reduction as $12.1 million.(142) The GAO indicated that it believed the OPM overstated the savings amount because such savings would be spread over time to reflect actual annual net savings.(143) Under this approach for calculating pension costs, and assuming all other savings posited by OPM, the net result would have been a $5.7 million loss for the government during the first year of privatization.(144) Under the projections adjusted by the GAO for pension costs, this first-year loss from privatization would not be recouped until the fourth year after the privatization.(145)
The GAO observations are significant because they highlight the importance of conducting an appropriate level of financial analysis in connection with privatization discussions. The union might have made a plausible case that the privatization might not have made economic sense for the government on the basis of projected cost savings for the immediately foreseeable future. It could have done so had it been able to scrutinize the financial and operational projections in the USIS business plan. That is not the ground, however, upon which the union built its defense. Indeed, there are indications that OPM continues to perform certain functions in-house that were performed previously by the newly privatized unit.(146) The cost of these OPM actions probably was not taken into account in the privatization analysis and perhaps could have been part of the union's analysis.
If a union finds itself facing governmental representatives who lack direct business experience, the union may find that those in command of the financial issues can control the privatization process. Unions in these circumstances are well advised not to rely upon advisors retained by the governmental entity. They might very well be parties who either have practices in which they promote privatizations or otherwise have financial interests in the privatization, for example, those who will be the equity owners of the new enterprise or the financiers thereof. As a result, it is sometimes difficult to obtain purely disinterested advice from such parties.
The privatization of the vehicle maintenance services of the City of Albany provides another example of union opposition to a privatization, and also underscores the importance of financial analysis.(147) Again, the union resisted the privatization using its conventional tools, and was defeated.(148)
The table below sets forth the costs of such operations in 1990, when the services were provided in-house, and those in 1993, when the services had been contracted out. (149)
Selected Costs of DPW Operations and Contracts City of Albany
Absolute 1990 1993 Change (in thousands) Departmental Central Garage Costs $906 $185 ($722) Departmental Third Party Costs $478 $1,229 $752
As the table shows, the outsourcing, in this case, resulted in higher net costs than when the city performed these services itself. Although the cost of internally performed work declined precipitously, it was more than offset by higher outside contract costs, as presented by Professor Scalar.(150) The higher costs incurred by third parties appear to have, resulted, in part, from overcharging by outside contractors due to the absence of sufficient supervision, who had been forewarned in union investigative studies.(151) Indeed, the City Controller found overcharging, which led to extensive monitoring and supervision of bills and services, the cost of which were not taken into account in the privatization process.(152) To properly assess the merits of privatization, the city would have needed to quantify the cost of auditing and monitoring the contracts, as well as change its accounting systems to permit such on-going monitoring of cost and quality control mechanisms.(153) Albany officials recognized that the privatization plan was not working and abandoned it two years later.(154)
The City of Albany case again illustrates that a careful financial analysis might have permitted the union to identify flaws in the privatization justification before its implementation. By opposing the privatization at the outset of the process, the union was not in a position to review the underlying business plan, leaving it to play the role of post-transaction critic. Even if the union proves effective in this role, it does not mitigate the loss of employment and membership.
In the typical privatization, the union may have a broader range of strategic options than it might initially realize.(155) If the union believes it will be able to defeat a privatization effort, it will more likely attempt to challenge privatization.(156) It would be sensible, however, for any union electing this approach to consider diligently two points.
First, a union challenging privatization should have a high degree of certainty that its resistance will succeed. If the union uses its resources toward that end, and is unsuccessful, it is unlikely to subsequently participate in the privatization process and thereby shape its outcome. The union's choice typically becomes an all-or-nothing gamble. In financial markets, parties often try to manage risks to avoid those types of extreme choices. A similar approach in collective bargaining might be worth exploring. A union does have certain leverage opportunities it can apply and use to its advantage. In most cases, the union is likely to have at least one central weapon at its disposal--the ability to introduce risk into the business equation. While it should be obvious that neither the governmental entity seeking to privatize specific functions, nor any commercial party seeking to contract with the governmental enterprise, can be certain at the outset of how a particular privatization will unfold, to the extent that the process might encounter difficulties, however, a rational businessperson will seek to reduce the risk. Put differently, each of those parties should be prepared to pay some price to obtain the goal they have in mind and to reduce the risk in achieving that objective. The point at which the union is likely to have the most leverage--absent the clear ability to defeat entirely a privatization--is at the very outset of the process.(157) As the process unfolds, and those promoting a privatization pass various hurdles, the interest in negotiating with the union commensurately decreases.(158) In cases where the union does not have a high degree of confidence in its ability to resist the privatization, it may wish to attach conditions to the privatization that meet its basic concerns.
Second, even if it can defeat the privatization, doing so might not be, in all cases, in the best interests of the union.(159) In certain situations, the union must analyze the situation further, and understand the market served by the governmental entity, because if the particular market is in flux, or even disappearing, then the union's victory could prove pyrrhic. In the current environment, for example, healthcare services might be just such a case.(160) In the short term, a healthcare facility might remain operational, despite insufficient revenues associated with the patient base, regardless of whether other alternatives may provide greater security for long-term employment.(161)
III. INTERNAL RESTRUCTURING
Doctor: Therein the patient Must minister to himself.(162)
The internal restructuring approach requires an intensive effort to understand and achieve efficiencies that will reduce the difference in costs between government and market-based entities and provide comparable levels of services.(163) The union must squarely address the cost or service problems that might exist and that may be causing the government to seek privatization. In many ways, the internal restructuring alternative could be the most promising approach for the union because it is the least likely to disrupt the existing employer-employee relationship and the union's role.(164) As such, internal restructuring may be an avenue that governments should consider early in the process since, if effectively implemented, it could yield many of the results that governments seek without instigating more active opposition by the affected unions.(165)
One example of the internal restructuring approach is provided by the experience of the employees of the Indianapolis Fleet Services (IFS), led by union Local 3131 AFSCME District Council 62.(166) In 1992, Mayor Stephen Goldsmith was elected on a platform of privatizing city services in Indianapolis.(167) During the campaign the mayor identified the IFS, which was responsible for maintaining the city's fleet of over 2,500 vehicles, as a candidate for privatization.(168) In 1991, the IFS was operating at high costs and delivering poor service.(169) The union was wary of Mayor Goldsmith's privatization plans.(170) The election was followed by a period of extensive hostility between Goldsmith's administration and the AFSCME local union.(171) Mayor Goldsmith proposed that the contract for the maintenance of the city's vehicles would be conducted under a competitive bidding approach.(172) The administration, however, was willing to let the city employees compete with private vendors.(173) The administration and the AFSCME local union agreed that the union would participate in a restructuring of the department to facilitate its competition for the work that was to be privatized.(174)
The union immediately began efforts to lower costs, increase efficiency, and improve customer service at the IFS.(175) The city employees and the union prepared a vehicle maintenance contract proposal for the competitive bidding process in January 1995.(176) By that time, the municipal operation had reduced its payroll from 119 workers to 84 by eliminating supervisory and clerical positions.(177) After all contract proposals were submitted, the union-led in-house services proved to be the lowest-cost bidder.(178) Its proposed staffing compensation was reportedly comparable to the staffing proposals made by outside competitors.(179)
The restructuring can best be judged by the financial and operational results it produced. Set forth below is a table prepared by Professor Sclar, reflecting the financial performance of the restructured unit.(180)
Savings 1991 1991 1992 1993 1994 1995 1996 vs. 1996 ($ in millions) Unadjusted Budget 13.7 13.8 13.9 12.6 12.2 12.6 1.1 Total Ad- justments for New Activity Since 1991 (0.4) (0.5) (2.4) (2.3) (2.9) (2.9) (3.1) Adjusted Budget 13.2 13.3 11.6 10.3 9.3 9.4 3.8 Costs
On an unadjusted basis, total costs were reduced by Approximately eight percent, for a savings of $1.1 million between 1991 and 1996.(181) When the budget costs are adjusted to reflect the additional activities performed by employees, total costs were reduced by approximately twenty-nine percent, for a savings of $3.8 million.(182) Furthermore, these savings would be even greater when adjusted for inflation.(183) Most impressively, service quality actually improved, notwithstanding the cost savings.(184) Set forth below is a table(185) quantifying several measures of service levels under the restructured unit.
Fleet Services Performance Indicators Indianapolis
1990 1991 1992 1993 1994 1995 Fleet Size 2153 2043 1969 1967 2104 2202 Number of Employees 113 119 109 93 84 81 Written Complaints 149 30 24 6 5 7 Customer Meetings n/a 81 139 156 192 165 Under 8 Hr. Turnaround % 71% 71% 70% 72% 72% 80% Indirect Labor as % of Cost 40% 40% 38% 35% 31% 33% Lost Hours- Workers Comp 4933 6040 3903 2619 4062 1119 Miles Driven (in thousands) n/a n/a n/a 18,535 20,992 25,389 Miles Driven per Vehicle n/a n/a n/a 9423 9977 11,530 ($ in thousands) Tire Expense $729 $787 $830 $637 $684 $640 Net Auction Proceeds $316 $1,432 $826 $1,379 $1,114 $1,300
As the table indicates, the internal restructuring of the IFS resulted in greater efficiency, increased savings, and a better work environment. Under the restructuring, the IFS instituted and increased the number of "Customer Meetings" designed to "obtain customer feedback on service-related issues."(186) The percentage of vehicles that were serviced and had less than an eight-hour turn around time increased from seventy-two percent to eighty percent from 1994 to 1995.(187) The restructuring also resulted in a lower tire expense and an increase in the miles driven per vehicle.(188) The fact that these improvements could be made in conjunction with a decrease in overall costs indicates that the IFS was then operating more efficiently. Accordingly, an internal restructuring in which the union participates may forestall the privatization altogether by delivering greater cost savings.
IV. CONTRACTING OUT MANAGEMENT
Hamlet: For `tis the sport to have the enginer Hoist with his own petar(189)
The contracting out of labor services by private and public enterprises is a commonly considered approach for reducing costs.(190) Many participants in the private sector, however, have come to appreciate that the quality of management is critical to any enterprise.(191) One approach that is typically not considered in privatizations is the contracting out of management functions.
Under this approach, the union allows the management function to be contracted out to a third party.(192) Although there is no change in employer for union employees, the union agrees that the third party may hire and dismiss employees subject to grievance procedures.(193) The contracting out of management allows for competition among vendors based on management skills rather than reductions in employee compensation levels.(194) The additional benefit of this approach for the union is that it eliminates the incentive to replace its members as the union achieves compensation and benefit improvements.(195)
This approach, contracting out management, was adopted by the City of Buffalo Water Board, which at the end of 1996 was presented with a budget for 1997 that reflected significant increased costs.(196) As a part of its efforts to mitigate the cost increases, the Water Board sought to renegotiate its collective bargaining agreement.(197) It did obtain certain productivity improvements through work rule modification.(198) The magnitude of such improvements cannot be determined from the public record, and many of the participants interviewed indicated that the value of such improvements might not have been calculated.(199) It would appear that the savings achieved from the productivity improvement were not, and could not have been, in and of themselves, sufficient to avert significant rate increases.
In the pursuit of additional cost savings, the Water Board ultimately entered into a five-year contract (with a five-year optional renewal) in July 1997, with American Anglian Environment Technologies(200) for the operation of the city's water system.(201) American Anglian commenced operation of Buffalo's water system in September of that year.(202) Under the contract, American Anglian is responsible for the management of the entire water system.(203) The Water Board, however, maintains ownership of the system, retains rate-setting responsibilities, and remains partly responsible for large capital improvements.(204)
Under the contract with American Anglian all employees remained "public Civil Service employees" without any change in compensation and benefits.(205) American Anglian, however, is charged with managing these employees.(206) AmericanAnglian also provided a guarantee that they would not lay-off any of the city employees for the duration of the contract and would maintain the current level of compensation and benefits.(207)
While the Buffalo Water Board had estimated that its operation and management budget for 1997-1998 would be $14.4 million, the contract with American Anglian capped the budget at $9.8 million.(208) The savings realized by contracting out to American Anglian were passed on to citizens through an eight-percent rate reduction in 1997-1998.(209) The Water Board and AmericanAnglian also projected that rates would stabilize during the contract period, despite a $15 million annual capital improvement program.(210)
Set forth below is a table reflecting the budget choices and proposals received and accepted by the Water Board.
Water Services Buffalo Water Board(211)
1996 1997 Proposals Proposals Range of Net Budget Expected Received Accepted Savings Budget 13,900 14,400 $9,000- 9,800 $3,200-$5,200 11,000
The striking feature of the Water Board's approach is that it achieved very substantial savings without the elimination or the apparent substantial modification of the union contract.(212) Simply put, an outside management team concluded that it could manage the facilities substantially more efficiently than the Water Board and still earn a sufficient return (i.e., profit).(213) In the water industry, there are currently a number of companies seeking to provide management services for water utilities.(214)
V. COLLECTIVE BARGAINING AGREEMENT REQUIREMENTS FOR A PRIVATIZATION
Miranda: O brave new world(215)
Another approach used by unions is to insist that parties who are bidding in the privatization engage in a dialogue or negotiate with the appropriate bargaining agent at the governmental organization.(216) The simplest mechanism for such a dialogue is to incorporate into the request for proposal (RFP) a requirement that interested contractors recognize the union as the collective bargaining agent for the affected employees.(217)
Another variant on this approach is for the RFP to go to the winning bidder to negotiate a new collective bargaining agreement before the award is finalized.(218) Such a requirement would be attractive from the union's perspective, but it is more difficult because of the perception that the union would hold a de facto veto over the outcome of the privatization effort.(219) Such concerns, however, can be overcome by incorporating automatic conflict resolution mechanisms, such as mandatory arbitration, should the union and the winning bidder come to an impasse in their negotiations over a new collective bargaining agreement,(220) The bidding procedures might also specify the terms of the current labor agreement to be negotiated with a third party, with all parties undertaking a good faith effort to reach a mutually acceptable resolution.
Another, less attractive, variation provides for the rights of first refusal granted to the government employees for employment with the new contractor.(221) Unions, such as AFSCME, have given this approach careful consideration and have developed many detailed legislative, and other, remedies in this context.(222)
The drawback of this approach, in its various permutations, is that the union depends upon favorable governmental action to protect the interests of its members. Unions are in a decidedly weaker position in obtaining these kinds of protections when the decision to privatize has already been made. At that juncture, the government and all potential bidders wish to face as few impediments as possible. In order to protect their interests in such situations, unions may want to carefully consider negotiating for successorship language, as it is referred to in private sector collective bargaining agreements before privatization efforts have begun.
It would be advantageous for unions in the public sector to include provisions that address the issue of a change in the employer. In the private sector, successorship language is one way that the issue of a change in control is addressed by unions.(223) One form of successorship requires that the new owner assume the existing collective bargaining agreement.(224) A second, more stringent, form requires that the new owner conclude a new collective bargaining agreement with the union(225) and places the union at the negotiating table, where it may have its concerns directly addressed by all participants in the transaction.(226)
VI. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
Edmund: Thou hast spoken right, `tis true; The wheel is come full circle; I am here.(227)
Yet another approach is to economically compete with the proposed privatization by establishing an employee stock ownership plan (an "ESOP"),(228) either by itself or in conjunction with a joint venture. This approach allows unions to establish a business owned, in whole or in part, by employees that would provide the services previously provided through public-sector employment.(229)
Unions typically enter employee-ownership transactions to enhance benefits and advantages to their members, as well as long-term job security.(230) The typical financial objectives motivating other investors are of secondary importance to the employees and the union, and this option is typically considered only after others have failed.(231) This is because employees and unions are interested in employment and compensation, and do not generally view businesses as investment opportunities.(232) If employees and unions do decide to proceed with an ESOP, the unions and their members will have a long-term-investment horizon as a consequence of the objectives described above.(233) In structuring an ESOP, the objectives of management, and, if applicable, outside investors, may not be the same, and, accordingly, the structure must accommodate these varied interests.(234)
The union and its members have advantages as bidders in a privatization. Even if the collective bargaining agreement or the request for proposals does not contain any applicable protective provisions, as discussed earlier, the employees have the advantage of knowing the current system and its participants.(235) Nevertheless, employees and the union must still address three issues in order to harness this advantage: (i) how to convert or harness this knowledge base into a coherent business plan,(236) (ii) how to attract management and organize the resources to mount an effective bid,(237) and (iii) how to raise necessary financing.(238) The ability to raise financing, in large part, depends on satisfactorily resolving the first two issues.
One way to deal effectively with these issues is by joining with a strategic or financial partner. In addition to supporting a union-led ESOP transaction, a joint venture partner can also assist in staffing management personnel and in providing certain overhead services. This is particularly true when the privatization involves a relatively small operation because it is often too costly to create a separate overhead structure. In selecting a joint venture partner, the union must determine the requisite characteristics from a business perspective and then assess the relative merits of potential joint venture candidates. For example, if the operation needs improvements in management, the union's analysis would focus on the relative management strengths of potential candidates. Alternatively, the new enterprise may need financial credibility, in which case, a strong balance sheet and a willingness to commit financial and organizational resources might be the more pertinent criteria.
To date, the author is not aware of any notable examples of this approach. Typically, the union does not focus on this approach, and may not have the resources to execute it.(239) The District of Columbia and an affiliate of AFSCME that represented physicians (the Doctor's Council) were in the midst of negotiating such an arrangement when, concomitantly, the District was stripped of its power to enter into such an agreement by Congress.(240) Under the agreement, the new entity to be formed by the Doctor's Council and other unions would have provided specific medical services to the city through an ESOP joint venture in exchange for an agreed upon compensation.(241) Regrettably, this novel experiment did not reach fruition.(242) In another recent case, a Connecticut union and a commercial company submitted a joint bid for the outsourcing of the state's computer services.(243) The bid was unsuccessful and the privatization did not go forward.(244) Undoubtedly, other opportunities will emerge where this approach might be used. Having said this, the ESOP approach is one that is more complicated than the others described, and requires more technical outside expertise to be completely executed. As a consequence, unions should explore this option, but should exhaust other possibilities before embarking on this route.
VII. PROCESS PROTECTION
Horatio: O day and night, but this is wondrous strange!
Hamlet: And therefore as a stranger give it welcome.(245)
To evaluate the various options discussed above, a union should consider taking the initiative in the privatization process. First, it must be aware of proposed privatizations, including the terms and schedules. Second, it should involve itself early in the process if it has concluded that it will be unable to stop the privatization through political means. Finally, it should consider developing alternative privatization models. The union needs to provide a credible financial and operational alternative to frame the privatization debate. Absent such an alternative, the union is likely to be less able to fully defend its members' interests. Unions play a critical leadership role in this regard. Legal counsel also plays a vital role in advising its clients of the available options. All too often, the union merely voices its opposition after it is inevitable that the privatization will occur.
The union should ask itself two questions at the beginning of any privatization. First, what is the likelihood that the union will be able to halt the privatization? Second, what is the cost and likelihood of organizing a newly privatized service or enterprise? If the union concludes that there is a low probability of reversing the privatization, and believes the probability of organizing the employees after privatization is low, then a careful reassessment of its position towards the privatization may be in order.
If the union fails to participate in the process, it has little ability to shape its outcome. By participating in the process, the union gains access to financial and operational information that allows it to better assess the options before it--including making the case as to why privatization may not be economically sensible from the perspective of the taxpayer.
In considering how to participate in the privatization deliberations, public-sector unions can draw upon the experience of private-sector unions in corporate restructuring situations. In those cases, which will be expanded on in the next sections,(246) unions have developed specific processes to identify financial and operational issues and to craft union responses that may be useful for purposes of considering a privatization.
VIII. RESTRUCTURING ANALOGY
Antonio: [T]o perform an act Whereof what's past is prologue; what to come.(247)
Many privatizations are similar to corporate financial restructuring or bankruptcy.(248) In a financial restructuring, the company informs its various constituents (creditors, stockholders, and others) that their respective relationships must be reformulated.(249) The same holds true in privatization. Furthermore, in a restructuring, the company must be made profitable--and typically it achieves this goal by reducing its costs.(250) The same is true in a privatization. In each case, the union's goals also are similar to the other players in the corporation. The union aims for job preservation and security,(251) appropriate compensation levels,(252) long-term enterprise viability,(253) and the ability to participate in decision-making.(254) While the goals are similar, unions have found that the conventional means of collective bargaining may be insufficient to achieve their objectives.(255) Accordingly, they have developed the alternative process discussed below.(256)
The primary difference between corporate financial restructuring and privatization is limited to the role of the government as a seller.(257) Otherwise, both involve a multi-party discussion over the form of the restructuring necessary to achieve profitability.(258) They also involve a negotiation over the allocation of value among the parties in recognition of value "created" through new capital, labor cost reductions, and stronger management.(259)
Each restructuring or privatization, of course, will have its own unique issues. Restructuring and privatization negotiations are typically more complex than traditional collective bargaining negotiations.(260) The foundation for negotiations is an understanding of the company or the organization and the requirements for their viability.(261) The parties in such negotiations, therefore, must develop a thorough understanding of the organization's business plan and its corporate and financial structure.(262) These topics are rarely covered in the traditional collective bargaining context.
To address these issues properly requires different internal planning and organizational support for the company, the organization, and the union.(263) The negotiations involve more participants, including the union, management, the company's board of directors, or the organization's governing body, and other stakeholders.(264) In order to participate successfully in restructuring or privatization negotiations, the unions also must develop a communications program to educate members on complex issues and win their support on non-traditional union issues, such as financial and corporate governance issues. In addition, each of the parties typically relies upon technical assistance from "[i]nternal and external advisors,"(265) including corporate lawyers and bankers, because exceedingly complex issues need to be explored and negotiated. Unlike traditional labor negotiations that are driven by deferrable contractual deadlines, restructuring and privatization negotiations are more time sensitive because of pressures that threaten the company or the organization.(266)
IX. CONDITIONS FOR UNION PARTICIPATION
Hamlet: Whether `tis nobler in the mind to suffer The slings and arrows of outrageous fortune, Or to take arms against a sea of troubles, And by opposing end them.(267)
Generally, unions are not invited to participate in the privatization process.(268) Some governmental entities carrying out privatizations establish committees, which inform employees about the progress of a privatization,(269) but these sessions assign a passive role. In most cases, other actors in the privatization process will reject active union participation.(270) To the extent a union wishes to avoid confrontation, it may wish to focus on internal restructuring and contracting out of management.
Certain essential conditions must be satisfied for the union to participate in a restructuring.(271) These conditions are similar to those of other investors and lenders participating in restructuring negotiations--access to confidential information relating to the company's financial and operational business plan,(272) access to management,(273) agreements to `"standstill"' until negotiations are completed,(274) and to reimburse the union's expenses.(275) The union's members are similar to investors or lenders because they all look to the company or organization for a stream of cash payments in exchange for services or resources provided. Those payments may be dividends, interest, or paychecks. The union may find it useful to learn from the mechanisms developed by other parties in such circumstances to protect their economic interests. In essence, the union must develop an independent view of the business and financial issues facing the company to develop an appropriate restructuring plan and to participate in formulating and implementing such a restructuring plan.(276)
In privatizations, the conditions for union participation are similar. First, the parties must agree to the development of reliable cost and performance information. In the private sector, such data are easily assembled.(277) This may not be true in the public sector. Organizations that function with budgets, but that have never been required to account for costs in a detailed manner, may have difficulty generating such information.(278) The union requires access to all relevant internal information and management for discussion of it.(279) The importance of this condition cannot be overstated, and is highlighted by drawing upon two illustrations: (1) the City of Atlanta's privatization of its water and sewage system, which was the largest outsourcing of water operations in North America,(280) and (2) the City of York's privatization of a waste water treatment plant. The information set forth below is derived from a review of reports prepared by Price Waterhouse(281) (now, Pricewaterhouse Coopers) and Apogee Consultants(282) regarding the Atlanta and York projects, respectively. The review was limited to those specific reports. It is reasonable to assume that there will be more of these kinds of privatizations to follow.(283)
In the case of Atlanta, the city retained Pricewaterhouse Coopers to prepare a study to ascertain whether to privatize its water and sewage system.(284) The most notable feature of the reports is what was left out: there is little rationale for justifying the assumed labor savings.(285) One might expect to see a detailed analysis that would benchmark efficiency and productivity between the Atlanta facilities and comparable ones elsewhere. All that is offered in the Atlanta analysis is an estimate of annual savings,(286) and the assertion that private operators would be more efficient;(287) however, no data to support such a claim. The back-up analysis that would indicate the supporting documentation for the estimated savings, to the extent available, was not referenced in, or included in, the public report.(288) The Price Waterhouse Coopers report sets forth various reengineering options to achieve cost savings.(289) Set forth below is a summary of such estimated savings.
Restructuring Options City of Atlanta
1998 1999 2000 2001 ($ in millions) Light Reengineering / Outsourcing 6.4 13.9 15.0 14.9 Heavy Reengineerng / Outsourcing 9.1 20.8 25.1 25.4 Contract 14.0 29.1 33.0 33.5 Operations -- All Five System Mgmt -- All 21.6 37.6 38.6 39.6 Systems
The Price Waterhouse Coopers report asserted that the percent of savings, which largely comes from labor reductions, is quite high, particularly when measured in relationship to operating costs.(290) Although the report does not explicitly make the point, it does concede that much of the savings may be realized without privatization. The report suggests that up to $40 million in potential savings may be captured through system management of both the water and waste water/sewer systems by a single contractor(291)--more than twenty percent of projected costs of over $170 million.(292) The city's approach of contracting for the private management of the water system, at the wastewater plant, and the overhaul of remaining functions, was projected to save only slightly over $30 million by 2001.(293) The alternative of engaging in heavy reengineering and some outsourcing would have produced $25 million of savings.(294) Under this last option, the city would have retained control of the operations.(295) Put simply, much of the savings would have been realized without privatization.
The report does not make a compelling case as to why a private operator would be better able to secure the additional $5 million in savings. No analysis is provided to support the assertion of incremental savings through privatization. The validity of this assertion should have been demonstrated before the consultants' recommendation to privatize was adopted. Moreover, there is no discussion of the costs for monitoring performance and contract compliance by outside operators, or costs of maintaining sufficient internal expertise for future negotiations with outside vendors. Further, there is no recognition of the fact that an outside vendor must build in a profit margin. Therefore, its financing costs, of necessity, must be higher than those obtainable by a municipality.(296) None of these points were discussed in the report. Accordingly, the privatization might have been challenged on the merits. (Significant environmental liabilities, a record of consistently poor operations, and a general perception of gross mismanagement of the water and sewage system, nonetheless would have been needed to be quantified and taken into account in order to argue that the city should have retained these assets).
In the case of the City of York, the question posed to the consultants at Apogee was how to capitalize an investment fund by leveraging the assets of the municipal wastewater treatment plant (WWTP).(297) The rationale for the investment fund was not discussed in the report. The options considered in the study assumed an internal restructuring in most cases.(298) The restructuring was based on strategies used by the best practices of privatized operators across the United States and worldwide.(299) Unlike the Atlanta case, the consultants assumed that (1) the savings would be realized under all scenarios,(300) (2) relatively paltry savings could be realized by a private contractor from synergies/shared services with other plants,(301) (3) an outside contractor would require a minimum profit to be included in the bid,(302) and (4) the municipality would bear contract administration costs.(303) The latter two items should have been taken into account in any proper privatization study.
The analysis of projected cash flow from asset sales is unusual. The consultants determined the market value of the WWTP based on the average of three methodologies: original cost minus depreciation, replacement cost, and discounted cash flow (DCF).(304) The first two of these methods are less relevant to a real buyer in valuing the asset, and yield substantially higher values than the discounted cash flow method.(305) For the DCF method, the consultants use a discount factor of ten percent,(306) which may be too low. A higher discount factor leads to a lower valuation of the asset.(307)
The asset sale alternatives are unattractive because of the legal penalties incurred by privatizing the WWTP.(308) These penalties, however, are less severe in later years,(309) so the consultants concluded that the best alternative is to proceed with the reengineering for now and to sell the WWTP subsequently.(310) The margin of difference between the two best alternatives (reengineering only as compared with reengineering and a delayed asset sale) was $8 million.(311) The impact of using the two flawed valuation methods is to raise the assumed value of the WWTP by more than $10 million--before any potential adjustments in the discount rate used in the DCF approach.(312) Thus, a proper valuation of the assets (the discounted cash flow method) would lead to the conclusion that there is no financial benefit to privatizing (a loss of $1.7 million),(313) even using the discount rate selected by Apogee. Presumably, the City of York, having been advised that a sale should be postponed, will reevaluate the issue later. The city was subsequently presented with a cost savings proposal from its own Departments of Business Administration and of Economic Development, clearly a response to management and employee concerns about privatization.(314)
In the York case, an argument could have been made that the privatization was not in the city's best financial interest.(315) To argue this, the union had to be a participant with access to financial information and the ability to assess such information.(316) The union may want to consider seeking a "standstill" agreement with the government until the process and negotiations are completed in order to avoid distractions that will deflect all parties' attention from the task at hand.
The union might also consider the establishment of a union-management committee to review information. This concept is built into legislation in the private sector side through labor-management committees to address business issues.(317) Joint selection with the employer of technical and financial advisors, and having such advisors report to the committee, helps protect the union.(318) The union typically will need a financial expert and advocate in these kinds of exercises, or it will find itself unable to participate meaningfully.(319)
In constructing a comprehensive joint plan, the union must insist upon the inclusion of true operational and budget figures to meet realistic cost and quality targets. To do less will inevitably lead to alternatives that are more drastic. By constructing a more favorable alternative, the union may be able to deliver various items of real value to the employees in the privatized company. In the restructuring context, value has been delivered to employees through financial interests, job security,(320) and corporate governance.(321)
It is worth reviewing these different types of value. To the extent that the analogy suggested here between the restructuring and the privatization process holds true, and unions in the restructurings have been able to obtain various things of economic value and decision-making roles for their members, then it should also be the case that the same may hold true in the privatization context. If the union is a participant in the privatization, it may obtain some or all of these items from either the governmental organization, if the work is retained in-house, or from a third party, if an ESOP, a joint venture, or a party with whom the union has an alliance undertakes the work.
Employees can share in the financial performance(322) of their companies or organizations on a variable basis by several means.(323)
As noted earlier, there is often value to be reallocated in these circumstances, but the union must know how to frame its position and negotiate it effectively.
Unions have also protected their members' jobs through job security provisions that take various forms, especially (i) limiting outsourcing and subcontracting,324 (ii) restricting mergers and acquisitions,325 (iii) circumscribing downsizing and asset sales,(326) and (iv) providing no furlough protection for specific time periods.(327)
To the extent that the union pursues an ESOP or joint venture, the corporate governance of such entities are extremely significant.(328) Unions have negotiated for corporate governance protections that have included, in appropriate circumstances, membership on the board of directors,(329) participation on committees of the board,(330) and, especially, influence over fundamental corporate transactions.(331) The union's role is magnified because its members are voting stakeholders. While employees often focus on the legal form of employee ownership, it is a subsidiary issue to the issue of the viability of the company over the longer term.
For example, agreements at United Airlines established a twelve-person board of directors.(332) The participating unions directly selected several directors, other directors were initially selected by the participating unions (subject to the approval of the board of directors and the shareholders of the company), and other directors were selected by the remaining public shareholders and management.(333) These agreements also required the supermajorities for the board to make extraordinary changes, thereby assuring the unions of a significant voice in the direction of the company.(334) Such provisions included: amendments to the certificate of incorporation, mergers, consolidations, amendments to the by-laws, entry into any new form of business, airline acquisitions, redemption of rights under the Shareholders Rights Plan, the sale, lease or disposition of assets for gross proceeds of more than $200 million, and the approval of the issuance of equity or equity equivalent securities.(335)
Agreements at Northwest Airlines provided that employee directors could block particular decisions when all three union directors, plus two other directors, vote against the item.(336) The areas subject to these provisions included: debt restructuring, the annual operating and capital budget, mergers and consolidations, sales or transfers of substantial portions of the companies assets, declaration or payments of dividends, significant joint ventures, voluntary bankruptcy filings, and approval or dismissal of the president or the chief executive officer.(337)
These agreements illustrate the possibility of union representation on the board of directors, but, more importantly, these union-affiliated board members can have the ability to influence major corporate decisions. Both the United Airlines and the Northwest Airlines agreements provided real power to the unions.(338)
Supermajority Voting Rights
Unions have also sought and obtained special veto rights or requirements for Board consensus for fundamental corporate transactions.(339) Examples of fundamental corporate transactions include sale of substantial company assets or stock, mergers, acquisitions and sales of companies, diversification, downsizing, liquidation or bankruptcy, appointment or dismissal of senior management, and change in control protections. Restrictions are also often placed on certain transactions between the company, on one hand, and management and significant owners, on the other hand.(340)
In circumstances where the work is retained in-house through an internal restructuring or the contracting out of management, the union may still wish to identify significant issues and to explore how best to participate in the decision-making on such issues. Unions have negotiated various settlements depending upon their objectives and bargaining leverage. In the privatization context, unions may elect to focus on other issues that are significant to its members and to the union as an institution. Pension benefits, severance arrangements, or recall rights are examples.
Unions have a choice between opposing or participating in, and thereby shaping, privatizations. In each case, the union must quickly assess which path will allow the union to achieve its key objectives. Different alternatives are appropriate in different circumstances, depending on the underlying economics, the government's objectives, and the union's risk/reward preferences. Recognizing that it is easier to retain representation than to organize new facilities, unions may be well advised to consider the various alternatives in a privatization that best protect the interests of its members. To develop these alternatives, unions should draw from the experience of private sector unions who have confronted similar problems and created useful precedents. In particular, they should be aware of the need for financial analysis, which permits unions to understand the value of each of their available choices.
(1) WILLIAM SHAKESPEARE, ANTONY AND CLEOPATRA act 1, sc. 1. John L. Lewis, the leader of the United Mine Workers of America, often cited various literary references in his speeches. The references to Shakespeare in this article are in remembrance of that rich, oratorical tradition.
(2) See infra notes 32-339 and accompanying text (discussing privatization and the problems surrounding internal restructuring, contracting and management, collective bargaining, employee stock options plans (ESOPs), process protection, restructurings, and unions).
(3) See infra Part II (observing the conventional model of using tunnel vision, and ignoring the big picture).
(4) See infra notes 111-22 and accompanying text (showing that the unions are afraid of losing their power).
(5) See infra Part V (showing the value of a union acting as a collective bargaining agent).
(6) See infra Part III (discussing the cost-benefit analysis of union-provided services).
(7) See infra Part IV (illustrating the third-party influence as the big boss, improving efficiency).
(8) See infra notes 196-214 and accompanying text (noting how the City of Buffalo, New York, for example, returned a profit on its water systems by contracting out).
(9) See infra notes 216-27 and accompanying text (discussing a brave new world" in employer/employee relations).
(10) See infra Part VI (stating the enhanced benefits of an employee-owned business, which include financial advantages and long-term job security).
(11) See infra Part VIII (analyzing the initiative to move forward in improving financial conditions).
(12) See infra notes 280-316 and accompanying text (discussing union participation in the restructuring of the City of Atlanta and the City of York water systems).
(13) Even in cases examined infra, the record consists of what is available publicly, and, for that reason, does not include work-papers, and therefore, may not be complete.
(14) See infra notes 320-21 and accompanying text (noting the economic interests involved in deciding whether to privatize).
(15) See generally Posting of Sara Blitch, email@example.com, to firstname.lastname@example.org (Apr. 3, 1998) (on file with Albany Law Review) (describing the Office of Management and Budget (OMB) Circular A-76 as "a tool created by the federal government to maximize the effectiveness of the services it contracts for while minimizing their cost").
(16) See generally THE BIDDER'S COMPENDIUM, http://www.bidders.com (referring to the Compendium as a "national summary" of solicitations for services). States, such as New York, are quietly, but nonetheless consistently, providing contractual opportunities to commercial vendors for work that a governmental unit would otherwise perform. See Scott Christianson, Government by Contract, EMPIRE ST. REP., Apr. 1999, at 16, 19 (highlighting this proposition by discussing how government employees are against contracting out and how it affects their job security). For example, the State of New York "has reduced the state employee workforce by more than 21,000 jobs--in part by turning over government work to private companies." Id.
(17) See infra Part VIII (analyzing similar goals of restructuring and privatization, such as reduction of costs, generation of job security, and log-term viability).
(18) See infra Part VIII (demonstrating that unions are knowledgeable about advocating for their rights).
(19) See infra Part IX (discussing how all parties need both public and confidential information in order to effectively manage their business plans).
(20) See infra Part IX (providing two examples of how active participation in a privatization effort at the onset may afford a union a greater chance at helping to structure the eventual outcome).
(21) See infra note 272 and accompanying text (discussing how access to all financial data is an invaluable resource).
(22) See infra notes 268-79 and accompanying text (noting how the union must step back and take an objective, third-person view when analyzing the company).
(23) See infra notes 284-321 and accompanying text (providing two illustrations of how savings can be achieved by reviewing economic data).
(24) See infra notes 284-321 and accompanying text (stating how, using financial analysts, the cities of Atlanta and York received critical information).
(25) See infra notes 284-321 and accompanying text (showing how a city can benefit from an outside and independent financial specialist's analysis).
(26) See infra notes 284-321 and accompanying text (examining the effects of two municipalities' use of the method of privatization to extract additional benefits from existing systems).
(27) See infra notes 288-96 and accompanying text (mentioning how labor savings were a key component of the City of Atlanta water systems restructuring).
(28) See infra notes 288-96 and accompanying text (arguing that any savings realized through privatization could be achieved through partial outsourcing, and option that would allow the city, and hence, the union, to retain control of the functions and the value inherent in that control).
(29) See infra notes 288-96 and accompanying text (showing that at least some savings may be achieved). Any savings, of course, would benefit the municipality rather than the union. Additionally, a surrender of control, with its accompanying responsibility, may be an attractive option for the government entity.
(30) See infra notes 289-96, 315-16 and accompanying text.
(31) WILLIAM SHAKESPEARE, THE TRAGEDY OF JULIUS CAESAR act 4, sc. 3.
(32) See generally Douglas Wardle & Nick Towle, Global Privatization, in INTERNATIONAL PRIVATIZATION 1, 1-27 (Dennis Campbell ed., 1996) (discussing and comparing the intricacies of recent privatization abroad, with "most emerging markets and developed economies at least contemplating the privatization option").
(33) For factors affecting privatization in the United States, see Florencio Lopez-de-Silanes et al., Privatization in the United States, 28 RAND J. ECON. 447, 447-51 (1997), describing the unique political and social structure in the United States that roadblock and burden privatization attempts, such as social goals, political patronage, and ideology. See also Andrei Shleifer & Robert W. Vishny, Politicians and Firms, 109 Q. J. ECON. 995, 995-98 (1994) (examining the behavior of private and public businesses in situations in which politicians try to influence the enterprise to pursue political objectives, and comparing the United States to models from abroad).
(34) See generally Paul W. MacAvoy & George S. McIsaac, The Performance and Management of United States Federal Government Corporations, in PRIVATIZATION AND STATE-OWNED ENTERPRISES: LESSONS FROM THE UNITED STATES, GREAT BRITAIN AND CANADA 77, 77 (Paul W. MacAvoy et al. eds., 1989) (acknowledging that "there is less public enterprise in the United States that in the United Kingdom or Canada," but that "the scale and scope of operations of the Federal companies are still considerable").
In certain cases, the federal government has owned assets as a result of a restructuring. In these cases, the government provides significant financial assurances to support large enterprises, whose potential demise would have significant adverse economic consequences affecting the national economy. See, e.g., Paul E. Tsongas, Did the Chrysler Bailout Work?, N.Y. TIMES, Aug. 2, 1983, at A19 (stating that the possibility of a major corporation, such as Chrysler, going bankrupt would have wreaked havoc with the national economy and acknowledging that "there may be circumstances when a bailout is in the national interest"). The bailout of the Chrysler Corporation, in which the federal government obtained equity interests that it subsequently disposed of, is an example of a circumstance where the government owned the business enterprise for a period of time, but did not control it. See id. (noting that bailouts "create an unworkable system that reward[s] mismanagement and inefficiency" but that, in the Chrysler situation, it worked). Other cases include USEC and Conrail, government-owned enterprises, ultimately sold to the public. Some, like Synfuels, were not.
Privatization has caused even governmental entities to begin transforming themselves into more market driven enterprises, sometimes in anticipation of being privatized in the future. See, e.g., Michael A. Crew & Paul R. Kleindorfer, Pricing in Postal Service Under Competitive Entry, in COMMERCIALIZATION OF POSTAL AND DELIVERY SERVICES: NATIONAL AND INTERNATIONAL PERSPECTIVES 117, 117-20 (Michael A. Crew & Paul R. Kleindorfer eds., 1995) (discussing economic efficiency models of postal pricing in the context of a once-traditional monopoly-held industry, that is now dominated by competition); Michael A. Crew & Paul R. Kleindorfer, Rowland Hill's Contribution as an Economist, in COMPETITION AND INNOVATION IN POSTAL SERVICES 1, 9-10 (Michael A. Crew & Paul R. Kleindorfer eds., 1991) (discussing the need for postal administrations to become "more responsive to the needs of their customers" and to move "into new postal markets ... to share in the growth in the demand for communications"); Thomas E. Leavey, Issues Facing the International Postal Service, in REGULATION AND THE NATURE OF POSTAL AND DELIVERY SERVICES 1, 4-5 (Michael A. Crew & Paul R. Kleindorfer eds., 1993) (stating that national postal administrations must contain their costs to keep them competitive, work to reduce operating costs, and find a fair means of compensating their employees for services, or private operators will expand to meet all the consumers' needs); Vanessa Fuhrmans & Silvia Ascarelli, Europe Watches Deutsche Post for Signs of Life For New Issues, WALL ST. J., Nov. 21, 2000, C14, WL-WSJ 26617494 (reporting that the initial public offering of Deutsche Post shares had risen by 1.9% by the end of its first day of trading, amid an extravagant promotional effort).
There is one additional collateral effect when a particular state-owned enterprise privatizes. It places pressure on other states to do the same with state-owned enterprises in the same sector. The airline industry is but one example of this phenomenon. See infra notes 321.40 and accompanying text (discussing the restructuring of United Air Lines and Northwest Air Lines to provide financial interest and corporate governance to their employees). One might anticipate others, such as the postal service. See Robyn Chalmers, Bidders Have Experience in Change, BUS. DAY, Jan. 28, 1999, available at http://www.bday.co.za/99/0128/news/n8.htm (discussing the merits of proposals from the Canada Post Team, France's La Poste, and the combined New Zealand Post and Royal Mail relating to a "strategic management contract to restructure the SA Post Office" to make it more competitive).
(35) See Shleifer & Vishny, supra note 33, at 995-96 (noting that states controlled a range of industries in Europe and Africa).
(36) See infra notes 37-45 and accompanying text (discussing various mechanisms relating to the financing of public services).
(37) See generally, Richard K. Zuckerman, Privatization, Managed Competition and the Provision of Municipal Services, Presentation at the New York State Bar Association Labor and Employment Law Section's Fall Meeting (Oct. 2-4, 1998), at 237-50 (discussing the "big picture" of privatization in the competitive marketplace, and the challenges it creates).
(38) In this approach, public managers compare the cost of delivering a public service with the cost of doing so privately. See id. at 239. The service, however, is retained internally. See id.
(39) This process contemplates competitive bidding between both private and public-sector bidders and has the government pursuing a "dual role" as both bidder and as evaluator of the bids. See id. at 239.
(40) This approach provides the service delivery of a program or function by the public sector where it had previously been provided by the private sector. See id. at 240. Perhaps the starkest example, in terms of aggregate deal size, is New York State's takeover of certain Long Island Lighting Company operations (Lilco). See Bruce Lambert, The End of Lilco, as Zone Island Has Come to Know It, N.Y. TIMES, May 28, 1998, at B8 (explaining the new corporate changes and delivery of services at what was once one of the largest public electricity utilities in the country); Bruce Lambert, In Whirlwind of Paperwork, State Authority Takes Over Lilco, N.Y. TIMES, May 29, 1998, at B8 (describing the state's takeover of electric service provider, which caused electric bills to decrease).
(41) This process involves the "[s]ale of a government-owned facility or enterprise, such as an airport or water treatment facility." Zuckerman, supra note 37, at 240. The asset sale generates a large, one-time infusion of cash and may create new revenue streams. See, e.g., APOGEE RESEARCH, INC., EVALUATION OF OPTIONS TO LEVERAGE THE ASSETS OF THE CITY OF YORK WASTEWATER TREATMENT PLANT 26-29 (Prepared for the York Sewer Authority) (1997) [hereinafter APOGEE RESEARCH] (setting out an analysis of the valuation and distribution of proceeds from a proposed sale of the York, Pennsylvania wastewater treatment plant).
(42) There are two aspects of the franchising approach. Certain government service organizations market their services to other agencies on a reimbursable and cost-effective basis. See GENERAL ACCOUNTING OFFICE, GENERAL ACCOUNTING DMSION, PRIVATIZATION: LESSONS LEARNED BY STATE AND LOCAL GOVERNMENTS, GAO/GGD-97-48 (1997) [hereinafter LESSONS LEARNED] 44-45 (describing both franchising of internal services, where government agencies provide administrative services, and franchising of external services, where a government allows a private sector business to operate within a particular market, such as national parks). Internal administrative and technical services are delivered in competition with other government organizations. See Zuckerman, supra note 37, at 240 (stating that franchising "[c]an be done with an internal service provider"). Another variation of franchising is when a government grants a concession or privilege to a private entity to conduct business in a particular market or geographical area, sometimes for a specific duration. See id. (stating that, typically, franchising "involves government granting a private provider the right to operate a business within a particular area"). "[G]overnment may regulate the service level or price, but users of the service pay the provider directly." LESSONS LEARNED at 45. Examples of franchise agreements have included cable television service, solid waste collection, vehicle towing and storage, and bus system operation. See, e.g., Wendell Cox & Jean Love, Bus Service, in NEW YORK STATE SENATE ADVISORY COMMITTEE ON PRIVATIZATION, PRIVATIZATION IN NEW YORK 154, 156, 158-64 (E.S. Saves ed., 1992) (advocating for the privatization of mass transit in New York City, and citing a 94% rise in per mile costs nationwide for the operation of buses); Barbara J. Stevens, Solid Waste Management, in NEW YORK STATE SENATE ADVISORY COMMITTEE ON PRIVATIZATION, PRIVATIZATION IN NEW YORK 215, 215-29 (E.S. Saves ed., 1992) (concluding that waste collection franchise agreements are more cost effective than municipal collection).
(43) The government is able to achieve public policy goals through any number of cooperative efforts, in partnership with the private sector. See Zuckerman, supra note 37, at 240 (stating that a public-private partnerships "[e]nables the public sector to engage private sector expertise and achieve various efficiencies, while at the same time sharing benefits and risks"). Examples of this include solid-waste disposal facilities, see Stevens, supra note 42, at 218, and other large infrastructure projects, see, e.g, Steve Steckler & Lavinia Payson, Infrastructure, in NEW YORK STATE SENATE COMMITTEE ON PRIVATIZATION, PRIVATIZATION IN NEW YORK 186, 196-98 (E.S. Saves ed., 1992) (analyzing examples of possible privatization of infrastructure, such as wastewater projects and toll roads). Mass transit projects involving public-private partnerships are becoming more common, as are projects involving operation of public parks and recreational facilities through user fees. See Keon S. Chi, What Other States are Doing in NEW YORK STATE SENATE COMMITTEE ON PRIVATIZATION, PRIVATIZATION FOR NEW YORK 15, 17 (E.S. Savas ed., 1992) (discussing these types of projects as part of an analysis of trends in state privatization).
(44) This approach is exemplified when the government builds a major infrastructure project such as a sports arena or toll road, which in turn enhances the local economy through creating new jobs. See Zuckerman, supra note 37, at 240 (defining value capture transactions as a "method of financing a public project that attempts to recover costs from those who receive the benefit"). Some of the economic benefit of the project can be captured and made available to the private sector developer. See Steckler & Payson, supra note 43, at 191-92 (noting that the private operator has a "direct financial interest" in the satisfaction of its customers since user fees fund the project). For example, in California, private contractors built toll roads and agreed to contracts that provided that when construction was completed, title would be transferred to the government. See id. at 196-98. However, the developers will collect the tolls for up to thirty-five years to recoup their investments. See id.
(45) Voucher programs specify a monetary value, provided by a government agency, to purchase a service available on the open market. See Zuckerman, supra note 37, at 240. Theoretically, this allows consumers to choose from a variety of service providers and create an incentive to provide high quality, low cost service. See LESSONS LEARNED, supra note 42, at 47 (explaining how governments can use vouchers to purchase services from private service providers); see also Howard Gardner, Paroxysms of Choice, N.Y. REV. OF BOOKS, Oct. 19, 2000, http://www.nybooks.com/nyrev. WWWarchdisplay.cgi?20001019044R@p7 (visited Oct. 25, 2000) (noting that "the voucher movement reflects the market-dominated vision of Friedrich yon Hayek and Milton Friedman ... visionaries [who] threaten to introduce social Darwinism into the hitherto unprotected enclave of educating the young"). Gardner sees the voucher movement as introducing into the education system a type of parent who no longer looks simply at the available public school options, but, who, "equipped with a sum of money or its equivalent ... is now a customer looking for the most attractive deal in town." Id. At the state and local level, vouchers are used for day care, programs for the elderly, recreation, vocational training, and public housing. See Siv S. Gustafsson & Frank P. Stafford, Links Between Early Childhood Programs and Maternal Employment in Three Countries, in THE FUTURE OF CHILDREN, at 218 (Center for the Future of Children, Winter 1995) (noting that state-funded services are provided in one of two ways: states either provide programs for all families, or only at-risk families and certain communities).
(46) See infra Part IV.
(47) See Andrew Hacker, Who's Sticking to the Union?, N.Y. REV. OF BOOKS, Feb. 18, 1999, at 45 (noting that the percentage loss of private sector workers belonging to unions is much greater than that of public employees since World War II).
(48) See Stephen Goldsmith, Can Business Really Do Business with Government?, HARV. BUS. REV. May-June 1997, at 110, 120 (stating that "[o]ne of the toughest political issues stemming from privatization is the loss of public-employee jobs").
(49) See Hacker, supra note 47, at 45 (noting that, at the end of 1997, only 14.1% of American employees belonged to unions, down from 35.3% at the end of World War I, and that in the private sector, the figure is one in ten).
(50) See id. (noting that membership in the Teamster's Union has fallen dramatically from 2.3 million to 1.4 million members).
(51) See id. at 49 (noting that, in 1997, only 9.7% of United States workers belonged to a private-sector union).
(52) See id. at 48-49 (noting that many manufacturing jobs have been lost to other countries,, and since manufacturing jobs form the core of the labor movement, (16.3%) many union jobs as well).
(53) See id. at 49 (noting that important members of the new economy are less likely to join unions). Only 8% of non-manufacturing workers, 27.6% of college graduates, and only 39.4% of women join unions. Id.
(54) See id. (noting that "[r]eviving the labor movement won't be easy," and that "unions would have to find 15 million new members to return to their 1945 high"). Traditional union organizers and supporters, such as the Democratic Party and the AFL-CIO, will have to wait for the new economy to fully emerge before the ability to achieve definite results returns. See id. at 47-48.
(55) See id. In 1997, among the total United States workforce, only 9.7% of private sector employees belonged to unions, in the public sector 37.2% of the workforce was unionized. See id. Within the public sector, 42.7% of local government employees belonged to unions. See id. Postal service employees unionized to a higher degree than others with 71.5% union membership. See id. Among the total United States workforce, only 14.1% belonged to unions. See id. This rather paltry figure represents the lowest percentage in nearly fifty years. See id. Lawyers (4.6%), waiters and waitresses (2.0%), bank tellers (1.5%), and hairdressers (1.2%), ranked lowest among recognized occupational groups with respect to union membership in 1997. See id.
(56) See id. at 45 (noting that unions protect against the excesses of management and its attempts to take a "larger piece of the pie"). Stanley Aronowitz hopes that unions may be able to "recruit the working poor," "`establish connections' with minority and women's groups, and make common cause with environmentalists," in order to make a "more just America."
(57) See id. (noting that unions redistribute income to preserve its members' standard of living).
(58) See, e.g., AFSCME, Privatization Update, http://www.afscme.org/private/pw001011.htm (visited Nov. 11, 2000) (describing how a proposal to privatize in Hillsborough County, Florida could eliminate 500 county jobs).
(59) For further recent information about privatization issues in the public sector, see, generally Goldsmith, supra note 48, at 114-18, discussing the private and public sectors' mutual involvement in business and potential innovation, opportunities, and improvement the public and private sectors can achieve when working together.
(60) See generally MARY N. STONE ET AL., NAT'L LEAGUE OF CITIES, PERSPECTIVES ON PRIVATIZATION OF MUNICIPAL GOVERNMENTS 13 (1997) (reporting that, in a survey of all cities having a population of over 50,000, 28% of respondents indicated that municipal services have been privatized); CMC FEDERATION, FROM PRIVATIZATION TO INNOVATION: A STUDY OF 16 U.S. CITIES v-vii (1996) (discussing outsourcing in Chicago, Fort Worth, and Norfolk; competitive contracting in Cleveland, Indianapolis, New York, Philadelphia, and Phoenix; restructuring in Austin, Charlotte, and San Diego; and employee innovation in Louisville, Milwaukee, Scottsdale, Seattle, and St. Paul); Revitalizing Our Cities: Perspectives from America's New Breed of Mayors, http://www.alliance.napawash.org/ALLIANCE (detailing the actions and plans of a "new breed of mayor[s]" who are attempting to "revolutioniz[e] urban governance," and their use of privatization).
(61) For recent privatization activity in Arizona, see Jim Flanagan & Susan Perkins, Public/Private Competition in the City of Phoenix, Arizona, GOV'T FIN. REV. (June 1995), http://www.alliance.napawash.org/ALLIANCE, discussing the benefits, steps, and purposes associated with the competitive process with regard to Arizona. For recent privatization activity in Illinois, see Robin A. Johnson, et al., Municipal Privatization Resource Guide, Illinois Office of the Comptroller 2 (1997), discussing the growth of privatization in Illinois from small towns, where the resulting labor and equipment savings were necessary, to larger cities, where cost reduction has become attractive. Iowa, Kentucky, Ohio, New Jersey, Pennsylvania, Tennessee, and Wisconsin have all experienced successful, albeit limited, privatization undertakings within the last ten years. See Chi, supra note 43, at 28-29 (setting out, in tabular form, state contracting efforts in a variety of service areas).
(62) See http://www.indygov.org (providing a starting point for search links to specific privatization sites, such as http://www.state.in.us/legislative/bills/1998fscal/hb1383.html, which deals with legislation enabling the contracting out of corrections services, and http://www.state.in.us/cei/news/July98/acec.html, which notes a lobbying coalition formed by trade associations to force federal agencies to use private industry and related web pages of the City Government of Indianapolis, Indiana that are accessible from this web site); see also Indianapolis Pushes Privatization Tradition Several Steps Further, L.A. TIMES, Oct. 20, 1995, at D7 (discussing privatization of services in Indianapolis, Indiana); Dirk Johnson, In Privatizing City Services, It's Now `Indy-a-First Place,' N.Y. TIMES, Mar. 2, 1995, at A14 (discussing the privatization in Indianapolis, Indiana).
For information about other cities' privatization efforts, see, for example, John A. Turner, Fire Protection, in PRIVATIZATION: THE PROVISION OF PUBLIC SERVICES BY THE PRIVATE SECTOR 151, 153 (Roger L. Kemp ed., 1991), citing examples of other privatization efforts in the United States, as well as in Canada and the United Kingdom, including one from Florida, where a union's predictable response to the privatization of the fire department was to picket, publish newspaper advertisements, and to use a mobile, truck-mounted sign to denounce privatization efforts. See also Yolanda K. Kodrzycki, Privatization of Local Public Services" Lessons for New England, NEW ENG. ECON. REV. 31, 35 (May-June 1994) (underscoring the positives and negatives in an arduous privatization process and noting that New England local governments are active in privatization, but not with regard to large-scale government programs).
(63) See Tom Bell & Eve Rose, $295 Million Bid for ATU; City Rejects Top Offer, Eyes No. 2, ANCHORAGE DALLY NEWS, Oct. 15, 1998, at 1A, LEXIS, Nexis Library, ANCHORAGE DAILY NEWS File (discussing city officials' rejection of the top offer to purchase the telecommunications company).
(64) Various local articles chronicled the City of Atlanta's steps toward privatizing their water/waste services. See generally Kathey Alexander, Privatization Is Working Well, Say County Officials, Looking to Expand Practice, ATLANTA J. & CONST., June 1, 1995, at 12G, LEXIS, Nexis Library, ATLANTA J. & CONST. File (remarking, on the prospect of privatization, that "[t]he private sector does whatever it has to do to get paid ... [t]he public sector works 9-5 and goes home"); Carlos Campos, Focus On Privatization, ATLANTA J. & CONST., Feb. 8, 1997, at 2E, LEXIS, Nexis Library, ATLANTA J. & CONST. File (reporting that the City of Atlanta looked to Indianapolis for answers concerning privatization); Carlos Campos & Julie B. Hairston, Atlanta Water Plan Has Bidders Pouring It On; Going Private: Corporate Giants Assembling Lawyers, Accountants, and Lobbyists in Efforts to Cement Deal, ATLANTA J. & CONST., Mar. 4, 1998, at 1B, LEXIS, Nexis Library, ATLANTA J. & CONST. File (discussing the impact of the Atlanta City Council's decision "to find private contractors to run its water department and its largest sewage treatment plant"); Carlos Campos & Julie B. Hairston, United Water `A Safe Selection,' Winning Bidder to Run Atlanta Water System Has Experience and a Solid Reputation, Industry Observers Say, ATLANTA J. & CONST., Aug. 28, 1998, at 6D, LEXIS, Nexis Library, ATLANTA J. & CONST. File (examining the process of selection by which United Water Services won the contract; "in the end, it was United Water's low bid that killed off its competition"); Charmagne Helton, Atlanta's Sewer Maze; Council Votes to Check Into Privatization, ATLANTA J. & CONST., Apr. 8, 1997, at 2E, LEXIS, Nexis Library, ATLANTA J. & CONST. File ("[T]he Atlanta City Council on Monday proceeded with its own investigation of whether to privatize the city's water and sewer operations."); Charmagne Helton, Task Force's Look At Privatization On Schedule, ATLANTA J. & CONST., May 15, 1997, Local News, at 2C, LEXIS, Nexis Library, ATLANTA J. & CONST. File ("[A] City Council task force has emerged as the only public forum to discuss how--or--whether it should be carried out."); Community: A Guide to Water Privatization; The Issue, ATLANTA J. & CONST., Aug. 27, 1998, at 2JD, LEXIS, Nexis Library, ATLANTA J. & CONST. File (discussing privatization and the positive impact that can be generated from such an initiative); Community: A Guide to Water Privatization; The Mayor Speaks, ATLANTA J. & CONST., Aug. 27, 1998, Citylife Atlanta, at 2JD, LEXIS, Nexis Library, ATLANTA J. & CONST. File (discussing the Mayor of Atlanta's plans to hire a private firm to run the city's water and waste systems); Letters, Faxes d3 E-Mail; Atlanta Water Privatization Faces Real Deadlines, ATLANTA J. & CONST., Feb. 27, 1998, News, at 16A, LEXIS, Nexis Library, ATLANTA J. & CONST. File (discussing the privatization initiative in Atlanta's waster and waste-water systems that Mayor Bill Campbell will implement).
(65) Many of the traditional obstacles, whether legal, economic or cultural, are giving way to necessity, and state and federal legislation has made the transition into privatization smoother. See infra notes 66-71 and accompanying text (discussing legal barriers to privatization and the revisions being made to simplify the process). Moreover, with profit sharing and employee ownership, the division between management and union is less clear than in the past. See New Study Shows ESOPs Improve Performance in Public Companies, Employee Ownership Report 1, 2 (Nat'l Center for Employee Ownership No. 1, 1999) (noting that eighty-five percent of companies using ESOPs gave increased access to management-type information to employees and that stock ownership is more widespread); infra Part IV (discussing Employee Stock Ownership Programs (ESOPs) that are a new tool in collective bargaining for both unions and management in that they intertwine the goals and possibilities of success for both groups).
(66) See, e.g., Chi, supra note 43, at 31-33 (noting various legal obstacles to privatization, including article 5, section 6 of New York State's Constitution, which limits privatization opportunities). Although not addressed by the Report of the New York State Senate Advisory Commission on Privatization, privatization in New York would also need to have the legislature reconsider the Taylor Law, which governs labor relations between the state and unions. The Taylor Law is the popular name for the Public Employees Fair Employment Act of 1967, N.Y. CIV. SERV. LAW [sections] 200-14 (McKinney 1970 & 1979). Under the Taylor Law, certain issues are mandatory subjects of negotiation, such as the subcontracting of exclusive bargaining unit work between the union and the governmental entity. See Mary Helen Moses, Scope of Bargaining Under the Taylor Law, in THE TAYLOR LAW: TWENTY-FIVE YEARS OF PUBLIC SECTOR COLLECTIVE BARGAINING, THE NEW YORK EXPERIENCE, May 7-8, 1992, at 51-58 (Government Law Center of Albany Law School) (noting that, under the Taylor Law, whether a subject is deemed mandatory or non-mandatory is important because an employer does not need union input for non-mandatory subjects). As a result, the public employer's ability to privatize work performed by bargaining units is severely circumscribed. See id. At 55. In effect, the only option the public employer has is to cease providing the service to the community if it wishes for the work to no longer be performed by the collective bargaining unit, as the public employer may not contract with a third party for the same service. See In Re Niagra Frontier Transp. Auth., 18 PERB [paragraph] 3083, at 3182 (1985) (establishing that a transfer cannot occur if the employees' bargaining unit would suffer a detriment).
In Niagara Frontier, the Public Employment Relations Board (PERB) established general rules for determining whether the transfer of collective bargaining unit work outside the unit violates the Taylor Law. Id. The Board held that a public employer's unilateral reassignment of unit work to non-collective bargaining unit employees, without a change in job qualifications, violates section 209-a.1(d) of the Taylor Law if the transferred duties are (1) substantially similar in form, and (2) have been exclusively performed by collective bargaining unit employees on a historical basis. See id. (holding that this is true "unless the qualifications for the job have been changed significantly"). The Board applied this two-prong test of "substantial similarity" and "exclusivity" in many cases. See id. (eliminating any prior ambiguity concerning the Taylor Law by holding that the detriment needed to restrict the transfer of unit work applies to the organization as a whole, insofar as "their rights of organization and representation may be diminished if the scope of the negotiating unit is reduced"). The Board also explained, in another case, that once exclusivity is lost as a result, for example, of farming out a substantial portion of work to a private company, that work can no longer be exclusive. See Indian River Cent. Sch. Dist., 20 PERB [paragraph] 3047, at 3103 (1987) (noting there was no distinguishable boundary between work performed by the public and private sectors and, as a result, contracting out the service was "not improper"). It is an all or nothing proposition. See id. (holding that once a significant portion of bus driving duties was contracted out to a private company, there no longer was exclusivity to that type of work). The board left in place the caveat that, if the particular work is seasonal or is unique with respect to time of operation, specialized expertise, etc., then some portion of exclusivity may remain. For a more complete analysis of "exclusivity", see Town of Brookhaven, 27 PERB [paragraph] 3063, at 3145-47 (1994), finding that, where both union and private employees performed the same tasks in connection with garbage and transportation, is was impossible to discern the boundary of unit work; County of Clinton, 28 PERB [paragraph] 3041, 3095-97 (1995), holding that, where the county has previously used private contractors, because of their specialized equipment, the union could not claim exclusivity. Generally, to determine if transferred work is "substantially similar," the Board will compare the type of service that is rendered by the private subcontractor with the work previously, or concurrently, provided by public unit employees. See City of Rochester, 21 PERB [paragraph] 4541, at 4602-07 (1988) (holding that, it was a violation of the city's bargaining duty to unilaterally replace police officers directing traffic with private construction company guards); West Irondequoit Cent. Sch. Dist., 20 PERB [paragraph] 3064, at 3137-40 (1987) (holding that the district's decision to use the Board of Cooperative Education Services (BOCES) to provide summer school programs is a subject of non-mandatory bargaining); see also County of Westchester, 30 PERB [paragraph] 4691, at 4953-57 (1997) (holding that the county violated its bargaining obligation under the Taylor Law when it unilaterally transferred and subcontracted work to a private nursing service to administer patient care services, irrespective of the fact that the unit nurses were not the only ones who did that work).
Another stark example of an entity facing a barrier to privatization is the Health and Hospitals Corporation of New York City (HHC). See Council of the City of New York v. Guiliani, 710 N.E.2d 255 (N.Y. 1999). The New York Court of Appeals unanimously held that the Health and Hospitals Corporation, which runs New York City's hospital system, was not allowed, by virtue of the state law that created the public corporation over thirty years ago, "to sell off hospitals and other assets, or even to lease them to private entities." Alan Finder, Court Deals Blow to Giuliani's Hospital Privatization Plan, N.Y. TIMES, Mar. 31, 1999, at B1. See also Giuliani, 710 N.E.2d at 260 (stating that "the statutory language, amply buttressed by the legislative history, supports the result reached by both the trial court and the Appellate Division: the proposed transaction is not authorized by the statute").
(67) See Chi, supra note 43, at 31-33 (discussing the necessary revisions to eliminate legal barriers to privatization, including the legislative history in New York state).
(68) See Rick Bragg, Florida Will Award Vouchers for Pupils Whose Schools Fail, N.Y. TIMES, Apr. 28, 1999, at A1 (reporting on a plan by the Florida legislature to assess public schools based on standardized test scores and then pay vouchers to allow children in failing schools to attend better-rated schools or private schools); Alan Finder, State Constitution Poses High Hurdles for Voucher Proposal, N.Y. TIMES, Mar. 5, 1999, at A1 (stating that even if an experimental school voucher system is approved, "the idea of using public money to send New York City school students to private schools will still face serious, and perhaps insurmountable, legal hurdles"); Julie Flaherty, Maine's High Court Rejects Families' Bid to Use Vouchers for Religious School, N.Y. TIMES, Apr. 28, 1999, at B11 (noting that "it]he Maine Supreme Court has denied a constitutional appeal by five families who wanted to use taxpayer money to send their children to a church-affiliated school"). "In a 5-to-1 decision, the court upheld the state's policy of restricting publicly financed vouchers to nonreligious schools." Id.; see also Marie G. Ortiz, Fewer Apply For Vouchers This Year, CLEV. PLAIN DEALER, Aug. 27, 1998, at 1A (discussing the problems associated with the Cleveland voucher program); A Voucher Printer, AUSTIN AMERICAN-STATESMAN, Jan. 24, 1999, at H2, (discussing the history of voucher programs and debate over the implementation of a voucher program in Texas); Editorial, VOUCHERS: Outrage is Selective, Experiment is Not a Waste, CINCINNATI ENQUIRER, Jan 28, 1998, at A10 (describing the Cincinnati Program as being "successful so far" as test scores and parent satisfaction had risen).
Matters involving these kinds of questions are now in the judicial system. See Jackson v. Benson, 578 N.W.2d 602, 607 (Wis. 1998), cert. denied, 525 U.S. 997 (1998). The Supreme Court of Wisconsin reviewed the constitutionality of the Milwaukee Parental Choice Program ("MPCP"): WIS. STAT. [sections] 119.23 (1999). See Jackson, 578 N.W.2d at 609. A number of plaintiffs filed lawsuits challenging the amended MPCP under the United States' Constitution's Establishment Clause of the First Amendment and the Equal Protection Clause of the Fourteenth Amendment, under the Wisconsin Constitution article I, section 1 and section 18; article X, section 3; article IV, section18; and under the Wisconsin public purpose doctrine. Id. at 609-610. The MPCP was enacted in 1989 and amended in 1993. See id. at 607. Under it, 1.5% of the student membership of the Milwaukee Public Schools (MPS) was permitted, if the students met certain eligibility requirements, to attend any private nonsectarian school located in the City of Milwaukee free of charge. See id.
Under the original MPCP, the legislature limited the students eligible for participation in the original program. To be eligible for the original MPCP, a student (1) had to be a student in kindergarten through twelfth grade; (2) had to be from a family whose income did not exceed 1.75 times the federal poverty level; and (3) had to be either enrolled in a public school in Milwaukee, attending a private school under this program, or not enrolled in school during the previous year.
Id. at 608. Ultimately, the court held that MPCP passed constitutional muster. See id. at 632.
(69) Recent federal laws, rules, and initiatives have given new impetus to federal agencies to operate more effectively and efficiently. See, e.g., The Government Performance and Results Act (GRPA) of 1993, P.L. 103-62 (codified at 31 U.S.C. [sections] 1101 and 39 U.S.C. [sections] 2801) (1993)) (requiring agencies to develop strategic plans, obtain input on desired goals from key stakeholders, and measure and report progress toward achieving those goals); see also GENERAL ACCOUNTING OFFICE, THE GOVERNMENT PERFORMANCE AND RESULTS ACT, 1997 GOVERNMENTWIDE IMPLEMENTATION WILL BE UNEVEN, GAO/GGD-97-109, 23-26 (1997) (establishing the Act as the focal point for setting goals and illuminating areas of improvement). See generally Clinger-Cohen Act of 1996, 40 U.S.C. [sections] 1401 (The Clinger-Cohen Act was originally the Federal Acquisition Reform Act of 1996 and the Information Technology Management Reform Act (ITMRA) of 1996, and was renamed by section 808 of Public Law 104-208, enacted on Sept. 30, 1996). ITMRA introduced new requirements for the selection and management of information technology-related projects. See 40 U.S.C. [sections] 1401. These requirements closely parallel investment practices of leading organizations. In March 1996, the Office of Management and Budget (OMB) revised CIRCULAR A-76, SUPPLEMENTAL HANDBOOK, which sets forth federal policy for using commercial services to enhance federal performance through competition and choice, seek the most cost-effective means of obtaining commercial products and support services, and provide new administrative flexibility in agencies' decisions to retain services in-house or contract them out. See GENERAL ACCOUNTING OFFICE, COST ANALYSIS: PRIVATIZING OPM INVESTIGATIONS, GAO/GGD-96-121R 1-3 (1996) [hereinafter COST ANALYSIS] (referring to the OMB circular, which provides "methodology" and a "list of cost items" to help agencies analyze whether to outsource or not). The Clinton Administration's major management reform initiative, the National Performance Review (NPR), approvingly cites the privatization approach. See also GENERAL ACCOUNTING OFFICE, PERFORMANCE AND ACCOUNTABILITY SERIES: MAJOR MANAGEMENT CHALLENGES AND PROGRAM RISKS, GAO/OCG-99-1, 8 (1999) (discussing the goals the government hopes to achieve through advanced technology and management).
(70) See, e.g., BUREAU OF STATE AUDITS, CALIFORNIA STATE AUDITORS, STATE CONTRACTING: REFORMS ARE NEEDED TO PROTECT THE PUBLIC INTEREST 1 (1996) (noting the fact that "California law places specific requirements on state departments using consultant contracts). California law prescribes many areas in which contracting and competitive bidding are permissible. See generally id. at 2 (describing the areas in which privatization has been used in California, and some of the inefficiencies and misuses that result, as well as taking a stricter and more narrow approach regarding accountability to the public); House Post Audit and Oversight Bureau, Commonwealth of Massachusetts, Interim Report: Review of Essex County Privatization (1994) (concluding that privatization had failed to provide any savings for the county, and that several additional problems emerged, including a lack of documentation and oversight); DENNIS LISK, WASHINGTON INSTITUTE FOUNDATION, COMPETING FOR HIGHWAY MAINTENANCE: LESSONS FROM WASHINGTON STATE (1998), available at http://www.wips.org/Studies/PBHWYMAIN.htm (looking to the Massachusetts highway project for guidance in Washington State and finding that the privatization saved MassHighway approximately $4.4 million). This conclusion is in direct contrast to that reached by the Massachusetts House and Oversight Bureau. See Laurence J. Kotlikoff & Jeffrey Sachs, It's High Time to Privatize, 15 BROOKINGS REV. 16 (1997), http://www.brook.edu/press /review/summer97/pss.htm. (discussing the social security crisis and proposing an alternative called the personal security system, which would eliminate the social security payroll tax); Privatization and the Rate of Return, http://www.brook.edu/es/infocus/sstestd.htm. (providing part of the testimony by Henry J. Aaron before the Senate Budget Committee on Jan. 19, 1999, and concluding that the privatization of social security will raise the cost of administrative expenses and actually lower returns to pensioners).
(71) Outsourcing is a means of using outside suppliers to reduce costs and improve corporate efficiency. Companies all across the United States, in a myriad of industries, are outsourcing their services to increase their profits and to reduce costs, while at the same time improving overall corporate diversification and efficiency. See BOB FARRELL, THEME AND PROFILE INVESTING 73-74 (Merrill Lynch, THEME INVESTING, Vol. XXIV, 1998) (showing prices and ratings for companies involved in outsourcing, and reflecting the attention being paid to those activities); INGE FRYKLUND ET AL., LOCAL OFFICIALS GUIDE, MUNICIPAL SERVICE DELIVERY: THINKING THROUGH THE PRIVATIZATION OPTION 3-44 (1997) (setting out, in detail, guidelines for municipalities to use in making the decision to outsource). Better output for less money is the goal. This theory is being applied to virtually every facet of company operations, including information processing, human resource staffing, database, list and direct marketing services, fleet vehicle management, technical consulting, healthcare processing, logistics, business rental services, and teleservices. See Chi, supra note 43, at 20-29 (describing the attempt to reach the goal of providing better service for less money through privatization, in areas such as correctional services).
(72) City governments have also increased the number and types of services contracted, such as child welfare programs, health services, street maintenance, and data processing. See generally KEON S. CHI, STATE POLICY AND INNOVATION, STATE TRENDS AND FORECASTS: PRIVATIZATION 10 (Council of State Governments 1993) (expressing the opinion that contracting out such services as printing, custodial, and information services is most likely to expand because it may be "less politically controversial").
A 1997 Council of State Governments' survey found that privatization activities had increased by 58.6% in the preceding five years. See KEON S. CHI & CINDY JASPER, PRIVATE PRACTICES: A REVIEW OF PRIVATIZATION IN STATE GOVERNMENT 4 (Council of State Governments, 1997) (noting that a majority of the study's respondents cited cost savings as the reason for the increase); LESSONS LEARNED, supra note 42, at 25-33 (discussing privatization lessons learned by the states of Georgia, Massachusetts, Michigan, New York, and Virginia, as well as the City of Indianapolis, Indiana); GENERAL GOVERNMENT DIVISION, GENERAL ACCOUNTING OFFICE, PRIVATIZATION: QUESTIONS STATE AND LOCAL DECISIONMAKERS USED WHEN CONSIDERING PRIVATIZATION OPTIONS, GAO/GGD-98-87, 6, 8 (1998) (noting that, in each of the six governments examined in a privatization context, a political leader, or group of leaders, played a significant role in implementation and operation).
Recent privatization efforts in the six governments surveyed by the General Accounting Office (GAO) have shown fantastic results and cost savings. See LESSONS LEARNED, supra note 42, at 25-26. Indianapolis, Indiana, Georgia, Massachusetts, Michigan, New York, and Virginia all showed millions of dollars worth of cost savings as a result of their asset sale or outsourcing ventures. See id. at 26-33 (demonstrating that privatization could be achieved through various methods, such as outsourcing or asset sales). Officials from the six governments provided GAO with the information, and whether it may be the sale of hotels to the running of security at military facilities, or the state maintenance of autos, these projects were unqualified successes. See id.
(73) See James Bennet, Unbowed, Clinton Presses Social Security Plan, N.Y. TIMES, Jan. 20, 1999, at A1 ("President Clinton proposed tonight that the Federal Government invest for the first time in the stock market to strengthen Social Security."); Stephen Fidler & Deborah McGregor, Greenspan Attacks Clinton Plan: Fed Chairman Warns Against Investing Welfare Funds in Stock Market Because of Dangers of Political Interference, FIN. TIMES (LONDON), Jan. 21, 1999, at 1 (discussing Alan Greenspan's opposition to President Clinton's State of the Union proposal to invest surplus money in the stock market); White House: Only 5%-6% of Social Security Would be in the Market, WALL. ST. J., Jan. 21, 1999, at 1, http://interaactive.wsj.com/archive/retrieve@4cgi?/potok /text/autowire/data/BFCO-.../1999&HI (stating that using social security funds in the stock market would only use "about 5% or 6% of the total funds available to Social Security"); see also Alex Berenson, Wall Street and the Politics of Status Quo, N.Y. TIMES, Aug. 13, 2000, at 1 (noting that Governor George W. Bush's economic plan includes giving individuals "a chance to invest some of their Social Security taxes in the stock market"); Alison Mitchell, Political Memo, Bearing to the Middle, Keeping to the Right, N.Y. TIMES, Aug. 5, 2000, at All (discussing Republican presidential nominee George W. Bush's proposal to "divert some social security payroll taxes to private investment accounts").
(74) See, e.g., Ronald S. Lauder, Executive Summary, in NEW YORK STATE SENATE COMMITTEE ON PRIVATIZATION, PRIVATIZATION FOR NEW YORK vii-xxvii (E.S. Savas ed., 1992) (describing how competition will strengthen the state of New York by privatizing services and allowing New York to "compete for better services").
(75) See Michael Janofsky, States in Fine Fiscal Health, But a Revenue Threat Looms, N.Y. TIMES, Dec. 31, 1998, at A12 (reporting that the National Governor's Association was wary of losing state revenue to internet sales, highlighting a growing concern that may make privatization more attractive because of a reduction of the tax base used to pay for municipal services).
(76) See id. (depicting a chart, derived from information compiled by the National Governors' Association and the National Association of State Budget Officers, illustrating the budget surpluses that states now enjoy).
(77) See James Bennet, Clinton Calls for a Great Debate on Surplus and Social Security, N.Y. TIMES, Feb. 4, 1999, at A25 (discussing President Clinton's position regarding the budget surplus: "before spending any of the surplus, policymakers [must delineate a] `plan to preserve and strengthen Medicare'"); Richard W. Stevenson, The Budget: How to Spend a Long-Sought Surplus, N.Y. TIMES, Jan. 4, 1999, at C10 (discussing allocation possibilities for the budget surplus, such as shoring up Social Security, increasing education spending, or paying down the national debt); Richard W. Stevenson, The Nation: Obligations; The Deficit's Gone, But Not the National Debt, N.Y. TIMES, Jan. 31, 1999, sec. 4, at 3 [hereinafter The Nation] ("Eliminating the deficit is hardly the end of the Government's financial troubles, however, and it marks the beginning of a new debate over how fiscal policy should be used to shape the nation's future."); Richard W. Stevenson, The Surplus: $4.4 Trillion Windfall And Parties Square Off, N.Y. TIMES, Jan. 21, 1999, at A21 (discussing the debate between the major political parties as to how the "excess money streaming into Washington" should be allocated: by "invest[ing] in the future" per President Clinton, or by cutting taxes, as the Republicans propose); The New Surplus Era, N.Y. TIMES, Feb. 3, 1999, at A18 ("Policy makers in Washington are finding it hard to cope with the new political reality of surpluses."); see also David E. Rosenbaum, News Analysis; Will Issues Be Answer?, N.Y. TIMES, Aug. 19, 2000, at A1 (discussing the different approaches to spending the federal surplus between Vice President Al Gore and Texas Governor George W. Bush). Gore would pay down the national debt, expand health insurance coverage, add prescription drug benefits to Medicare, and raise education spending. Id. Bush would use the surplus to create private investment accounts within Social Security, eliminate estate tax, end the marriage penalty tax, and reduce overall income taxes. Id.
(78) See The Nation, supra note 77 (noting that, at the end of fiscal year 1998, both major political parties voted to increase spending by some $20 billion).
(79) For example, Social Security is often a target for politicians. In the past few years, several changes have been suggested because of upcoming funding shortages. When the federal government no longer has budget surplus, government officials more seriously consider cutting benefits. See Dan Froomkin, Social Security: The Clock is Ticking, WASHINGTONPOST.COM Feb. 25, 1999, http://washingtonpost.com/wp-srv/politics/special /security/security.htm. (discussing some likely options in an overhaul of social security, including cutting benefits and raising taxes).
(80) See Matthew Miller, The Capitalist: A Stake in Every Pot, N.Y. TIMES, Jan. 31, 1999, [sections] 6, (Magazine), at 16 (discussing the sources of income inequality, such as inflation, failed urban schools, welfare "`reform,'" inadequate healthcare, and the stagnant wages of less-educated workers); Lester C. Thurow, Op-Ed, The Boom That Wasn't, N.Y. TIMES, Jan. 18, 1999, at A17 (noting that median family incomes have remained the same since the 1970s, yet the average wife is working more than fifteen more weeks per year, and that eighty percent of the male labor force is being paid below former wages); see also Louis Uchitelle, Economic View: A Surplus Built on Bricks of Income Inequality, N.Y. TIMES, Feb. 28, 1999, at 4 (noting that the surpluses are also a product of income inequality, as the wealthiest Americans have benefited most from the stock market windfall, acquiring a greater proportion of the wealth through stock options and capital gains, and, consequently, also paying the highest income tax rates). See generally FRANK LEVY, THE NEW DOLLARS AND DREAMS: AMERICAN INCOMES AND ECONOMIC CHANGE 2 (1998) (noting the slow growth of American wages after 1973).
(81) See Uchitelle, supra note 80 (reporting that "Republicans, pushing for tax cuts, cite the budget surpluses as justification for collecting less from the citizenry").
(82) There are consultants, accounting firms, investment bankers, and others who seek to actively promote privatizations. See, e.g., Is Education Wall Street's Next High-Flyer Industry?, available at http://www.aft.org/privatization /alert/winter97/article1.html (noting that private teaching companies' stock substantially increases when they get their foot in the public system's door, illustrating that education is a prime target for the investing industry).
(83) See Janet C. Fisher, Note, Reinventing a Livelihood: How United States Labor Laws, Labor. Management Cooperation Initiatives, and Privatization Influence Public Sector Labor Markets, 34 HARV. J. ON LEGIS. 557, 580 (1997) (arguing that "nonunionized private firms could provide what inefficient, unionized public bureaucracies could not"); see also Lauder, supra note 75, at viii (describing a retired blue collar worker who provides a chauffeur service for a cheaper price than the transit authority as a "better, safe, and reliable service").
(84) E.g., DynCorp, Inc., whose revenues were $1.2 billion in 1998 and $1.35 billion. See Hoover's Online: Company Capsule: DynCorp., Inc., http://www.hoovers.com/annuals/8/0,2168,40138,00.html (visited Nov. 29, 2000). DynCorp, Inc. "offers technical, managerial, and professional services" to government and industry. See id. DynCorp, Inc. is a privately held firm and the "U.S. government, [its] biggest client, accounts for about 95% of sales." Id. As an example of its activities, DynCorp was recently awarded a three-year contract to operate data service facilities in one of three regions to process approximately 78.1 million forms for the Census Bureau. See DynCorp Teams with TRW to Win $187 Million Census 2000 Contract, http://www.dyncorp.com/news/index.asp (stating that DynCorp will "provide data capture services for the year 2000 census").
Another example is Serco Group plc, which "is an international task management contractor to government and industry, providing comprehensive engineering and support services." See Serco Group PLC: Preliminary Results for the Year Ended 31 December 1999, Serco News, http://www.serco.com/uk/archive.htm; see also Hoover's Online: Company Capsule: Serco Group plc, http://www.hoovers.com/co/capsule/8/0,2163,90378,00.html (reporting that the company has contracted to manage the United Kingdom's "Atomic Weapons Establishment" and has its sights set higher still). In 1999, Serco launched a 1 billion [pounds sterling] fund, which will be used to "acquire existing public infrastructure" projects that Serco will then operate. See Serco Group PLC and Nomura International's Principal Finance Group Establish 1 Billion [pounds sterling] Fund to Invest in Public Infrastructure, Serco News, http://www.serco.com/uk/ archive_1999.htm (noting that "[t]here is an international trend towards the outsourcing of facilities management in both the public and private sectors"). The fund will initially focus on the United Kingdom, but in due course Serco expects to widen its scope to look at opportunities elsewhere. See id. The fund is designed to significantly strengthen Serco's position in the public-to-private arena. See id. The initiative is designed to permit Serco to be in a much stronger position within the bidding consortium for any such contracts. See id.; see also Goldman's Booty, ECONOMIST, Apr. 3, 1999, at 49 (discussing Goldman Sachs' lucrative 20-year contract with the Department of Social Security (DSS) to operate DSS's properties and noting that other such deals are in the pipeline for the Inland Revenue and Customs and Excise properties).
(85) See, e.g., LOCKHEED MARTIN CORPORATION'S ANNUAL REPORT (1998) (on form 10-K for the fiscal year ending December 31, 1998). The company operates in many areas, including the provision of services to state and local governments. Its "customers include systems development, integration and operational support in the areas of welfare reform, municipal services, children and family services, transportation," and telecommunications. Nee Lockheed Martin IMS website, http://www.LMIMS.com (touting a partnership with Easter Seals/MARC in an effort to transition Florida residents from welfare to work).
(86) See, e.g., CORRECTIONS CORPORATION OF AMERICA'S ANNUAL REPORT, FORM 10-K (Dec. 31, 1998) available at Hoover's Online: Company Capsule, http://www.hoovers.com/co/capsule/4/0,2163,53544,00.html. The company is the largest developer and manager of privatized correctional and detention facilities, including seventy-five facilities located in seventeen states and the United Kingdom. See id.; see also, Pam Belluck, As More Prisons Go Private, States Seek Tighter Controls, N.Y. TIMES, Apr. 15, 1999, at A1 (noting that the private prison industry has boomed from one or two facilities in 1984 to 163 facilities in 1999).
(87) See infra note 92-99 and accompanying text (discussing education as the next big market for private investors).
(88) See, e.g., Kathryn Kranhold & Pamela Druckerman, Enron Corp. Plans a $5 Billion Fund For New Projects, WALL ST. J., Feb. 23, 1998, at B2, http://www.interactive.wsj.com (tracing the aggressive growth of Enron Corporation, which now has energy related projects in eleven countries, accounting for $1.2 billion in revenues); see also Anita Raghavan & Steven Lipin, Vivendi is Set to Purchase U.S Filter, WALL ST. J., Mar. 22, 1999, at A3, WL-WSJ 5445331 (reporting on the French company's move to gain a foothold in the United States: a six billion dollar deal "likely to be for cash"); Allanna Sullivan, American Water Works Navigates Acquisition Course--Utility Benefits from New Federal Rules to Buy and Fix Ailing Systems, WALL ST. J., Dec. 7, 1998, at B10, http://www.interactive.wsj.com (noting the growth and struggles of water utilities, such as American Water Works and Voorhees, New Jersey, challenged by new regulations and consolidation, as well as foreign competition of French Vivendi and Suez Lyonnaise des Eaux); Craig Torres, French Water Giant Vivendi Learns Costly Lesson About Privatizations in Latin American Provinces, WALL ST. J., June 5, 1998, WL-WSJ 3496853 (reporting on the political quagmire in which the French company Vivendi found itself when it took over water operations in Argentina).
(89) Increasingly, investors see educational services as a market opportunity. See FARRELL, supra note 71, at 79-80 (listing nearly thirty private companies involved in the educational services market); see also Business: Reading, Writing and Enrichment, ECONOMIST, Jan. 16, 1999, at 55-56 (observing that the public system produces less than optimal results and that the overhead costs borne by school systems is perceived as excessive; investor groups have focused on whether they might be able to produce better results). The education market is being analogized to the pre-HMO health care market: both are seen as systems where costs are not controlled by competition and quality controls are lacking. Id.; GERALD ODENING ET AL., EDUCATION INDUSTRY: EQUITY INVESTMENTS FOR 2000 AND BEYOND 3 (Salomon Smith Barney, Industry Report, 1998) (comparing the potential of the current societal shift from industry-centered economy to knowledge/information-centered economy to the past shift from an agrarian to an industrialized economy). The initial attraction for investors is its sheer size. Id. Education in the U.S. accounts for nearly ten percent of the gross domestic product, or approximately $600-700 billion. Id. at 11-12; MICHAEL T. MOE & R. KEITH GAY, THE DAWN OF THE AGE OF KNOWLEDGE: THE EMERGING INVESTMENT OPPORTUNITY IN EDUCATION 11 (Montgomery Securities, 1995) (showing a pie chart of the various segments of the "Total U.S. Education Market: 1994"). Over the period between 1970-1997, the real per-pupil cost of elementary and secondary education in the United States rose significantly. NAT'L CTR FOR EDUC. STATISTICS, U.S. DEP'T OF EDUC., DIGEST FOR EDUC. STATISTICS 1997, 132-33 (1998) (diagramming, in figure 12, the "[c]urrent expenditures per pupil in average daily attendance in public elementary and secondary schools" in 1970-71 and 1996-97). United States spending on education may be seen as amongst the highest in the world. See NAT'L. CTR. FOR EDUC. STATISTICS, U.S. DEP'T OF EDUC., THE CONDITION OF EDUCATION 1998, http://www.nces.ed.gov. Increases in expenditures, however, have not produced better student performances. See NAT'L CTR. FOR EDUC. STATISTICS, U.S. DEP'T OF EDUC., DIGEST OF EDUCATION STATISTICS 1997, at 133 (showing the general decline in Scholastic Aptitude Test (SAT) scores from 1966 to 1997); see also NAT'L CTR. FOR EDUC. STATISTICS, U.S. DEP'T OF EDUC., EDUCATION INDICATORS: AN INTERNATIONAL PERSPECTIVE, http://www.nces.ed.gov (showing that the United States is falling behind in math achievement scores, but is equal to or better than most other G-7 countries, in science proficiency). No consensus exists as to why performance has not improved despite the availability of additional resources. A body of academics views the mismanagement of resources as a direct result of the absence of competition in the school system and prescribe competition in order to remedy this critical structural fault. See, e.g., Caroline Minter Hoxby, How Teachers' Unions Affect Education Production, 80 Q. J. ECON. 671, 712 (1996) (noting that "teacher's unions may be a primary means whereby a lack of competition among public schools translates into more generous school inputs and worse student performance").
(90) See Johnson et al., supra note 61, at 1 (collecting information and data to assist municipalities in the decision to transition toward privatization).
(91) "The U.S. Environmental Protection Agency estimated that at least $138.4 billion must be invested to bring the nation's water systems up to Federal water quality standards." FARRELL, supra note 71, at 39; see also ENVIRONMENTAL PROTECTION AGENCY, Interim Enhanced Surface Water Treatment Rule, EPA 815-F-98-009 (1998), http://www.epa.gov/ogwdw/mdbp/ieswtr.html (stating how this rule will increase the average household's monthly water bill); RCRA/CERCLA DIV., OFFICE OF ENVTL. GUIDANCE, ENVIRONMENTAL INVESTMENTS: THE COST OF A CLEAN ENVIRONMENT, available at http://www.tis.eh.doe.gov (reporting that the annualized costs for environmental protection activities show an increase from 0.9% of the United States' gross national product (GNP) in 1972, to 2.1% of the GNP in 1987).
(92) See Mike Allen, Hartford Hires an Innovator To Head Its School System, N.Y. TIMES, Feb. 18, 1999, at B8 (documenting the state takeover of Hartford High School, which was stripped of its accreditation, and the efforts of its new school chief, Anthony S. Amato, an innovative school administrator from Manhattan); Abby Goodnough, On Politics: A Request From Camden: Take Our Schools, Please, N.Y. TIMES, Mar. 29, 1998, at 14NJ (reporting that New Jersey Governor Christine Whitman was cool to Mayor Milan's request to seize control of the Camden schools); Maria Newman, New Jersey Finds No Simple Solutions in School Takeovers, N.Y. TIMES, Mar. 21, 1999, sec. 1, at 37 (reporting on falling student test scores and corruption as motivating factors in the New Jersey state school takeovers in Jersey City, Newark, and Patterson); Documents Seized on Hartford Schools, N.Y. TIMES, July 14, 1998, at B4 (reporting on a state investigation of "financial mismanagement of the troubled Hartford school system"); Hartford School District in Default Over Rent, N.Y. TIMES, Oct. 17, 1998, at B6 (reporting on Hartford School District's default of $230,720 in back rent and utility bills as further evidence of financial mismanagement); Hartford Schools Chief Replaced by State Board, N.Y. TIMES, May 20, 1998, at B6 (reporting on the resignation of Hartford School's superintendent and her replacement by the state deputy commissioner as interim superintendent); Hartford Schools Chief Reported to be Resigning, N.Y. TIMES, May 18, 1998, at B5 (reporting on the pending resignation of Superintendent Patricia Daniels, the sixth Hartford School Superintendent in ten years).
(93) See CENTER FOR EDUCATIONAL REFORM, CHARTER SCHOOL RANKS SWELL; SCHOOLS AND ATTENDANCE ABOVE FORMER PROJECTIONS (2000), http://www.edreform.com (noting that charter school attendance has increased 19.5%, showing a growing acceptance of alternative schools).
(94) See Claudia Rahola, California to Decide on Controversial Education Reform, AGENCE FRANCE-PRESSE, Oct. 24, 2000, 2000 WL 24743324 (discussing the $4,000 vouchers given to parents to send their children to private institutions because of the poor condition and quality of the public school system).
(95) See Editorial, School Reform Blooms, WALL ST. J., May 5, 1999, at A22, 1999 WL-WSJ 5451311 (noting that New Mexico's governor says "more money isn't the answer" to improving the quality of the public schools; however, a public poll showed that there is a split of public opinion on the voucher issue).
(96) See Terrence Stutz, Critics Dispute Bush's Role in Improving Texas Schools: Aide Defends Governor on Teacher Pay, Student Progress, DALLAS MORNING NEWS, Apr. 20, 2000, at 1A, 2000 WL 17632005 (reporting on a variety of educational issues in Texas, including Governor Bush's support of a voucher program).
(97) See id. (reporting that, in Florida, a student who receives failing grades for two years will be eligible for a voucher program, which would subsidize his attendance at private schools).
(98) The growth in legislation permitting charter schools reflects real public concerns about the cost and quality of education. See CENTER FOR EDUCATIONAL REFORM, supra note 94 (showing that the nationwide number of Charter Schools for the fall of 1999 was 1,689, Arizona with 352 and California with 239, but New York with only 5). Concerns about the cost and quality of education are likely to propel ongoing efforts to restructure the education services sector. The public's enthusiasm for vouchers should give pause to teachers' unions. See Tim W. Ferguson, Monopoly Busters, FORBES, Dec. 28, 1998, at 80 (reporting on the strong interest in Silicon Valley for public-funded school vouchers for non-public schools, an interest fueled by the high-tech sector's need for a strong education sector, especially in the areas of math and science); supra notes 95-98 and accompanying text (discussing the school voucher programs in various states and how they have been at the center of political debate).
(99) See Reading, Writing and Enrichment, supra note 89, at 55-56 (noting that the Edison Project, which currently manages fifty-one private schools, is "certainly fulfilling its promise to keep down costs").
(100) See infra Part II (discussing the costs and benefits of privatization).
(101) See supra notes 32-35 and accompanying text (discussing the fact that privatization has had a larger impact abroad, where industry is held by governmental interests).
(102) See Reading, Writing and Enrichment, supra note 89, at 55-56.
(103) See, e.g., supra notes 92-99 (discussing attempts to privatize education and noting that alternatives to public education have arisen because of the dissatisfaction with the present system).
(104) WILLIAM SHAKESPEARE, THE TAMING OF THE SHREW Induction, sc. 1.
(105) See, e.g., AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES, AFSCME PRIVATIZATION RESOURCES, STOP PRIVATIZATION!, http://www.afscme.org [hereinafter STOP PRIVATIZATION] (offering resources to help mobilize in opposition to privatization).
(106) See infra notes 111-21 and accompanying text (stating that, in the privatization process, unions are often excluded from participating).
(107) See infra notes 111-21 and accompanying text (discussing unions' traditional reaction to proposed privatization as oppositional and detailing the privatization of the Investigations Service of the Office of Personnel Management as an illustration of this).
(108) See, e.g., infra notes 112-21 and accompanying text (discussing a situation where OPM went private, through an ESOP, but there was little employee participation); see also infra Part VIII (recognizing this traditionally weak role and offering guidelines for a stronger union showing).
(109) See infra notes 116-21 and accompanying text (examining the privatization of OPM and resulting weak employee position, despite the use of an ESOP in the privatization).
(110) See infra notes 116-21 and accompanying text (underscoring the superior savvy of management in a privatization situation).
(111) See, e.g., STOP PRIVATIZATION, supra note 105 (noting the mobilization of opposition through an anti-privatization task force).
(112) The Investigations Service of the OPM performed "background investigations of federal employees, contractors, and applicants to provide [other federal agencies with] a basis for determining (1) an individual's suitability for federal employment and (2) whether an individual should be granted a clearance for access to national security information." COST ANALYSIS, supra note 69, at 2.
(113) See GENERAL ACCOUNTING OFFICE, GENERAL GOVERNMENT DIVISION, PUB. NO. GAO/GGD-98-46, FEDERAL DOWNSIZING: AGENCY OFFICIALS' VIEWS ON MAINTAINING PERFORMANCE DURING DOWNSIZING AT SELECTED AGENCIES (1998), LEXIS, GAO Rep. Library [hereinafter FEDERAL DOWNSIZING] (discussing lessons learned by officials, such as maintaining open communication and involving employees in advance planning).
(114) See Stephen Barr, OPM Wants to Sell Background Check Operation to Agency Employees, WASH. POST, June 11, 1995, at A04 (noting that "[t]he White House announcement [concerning the privatization of OPM's Investigations Service] came after the midterm elections that gave Republicans control of Congress and intensified the budget-cutting competition between the GOP and the administration"); Janice Lachance, Clinton's Better Government, BANGOR DAILY NEWS, Oct. 8, 1997 (noting that the privatization of the OPM's Investigations Service is part of Clinton's reinvention of government initiative).
(115) See Michael Glanzer, When Governments Privatize: Economic Issues That Union and Management Lawyers Should Consider at the Onset, Presentation at the New York State Bar Association's Labor and Employment Law Section Fall Meeting (Oct. 2-4, 1998), at 218 (noting several opposition factors, including that the union would not be recognized post-privatization).
(116) See id. (reflecting the fact that there is often only minimal participation by employees in the economics of the company).
(117) See SCOTT S. RODRICK, AN INTRODUCTION TO ESOPS 1-4 (Nat'l Ctr. for Employee Ownership, 3d ed. 1998) (noting that "[c]ompanies set up ESOPS for a variety of reasons, including buying out existing owners, borrowing money to acquire new assets, and providing a reward system that fits today's participative management styles"). These incentives and "other applications receive substantial tax benefits." See id.
(118) See Glanzer, supra note 115, at 218 (observing that the union had unsuccessfully tried to prevent privatization); see also Barr, supra note 114 (explaining that ESOPs are not meant to give employees control of the company, but simply to provide a way to buy stock and gain a stake in the company).
(119) See Glanzer, supra note 115, at 218 (noting that, in the USIS situation, the union was not recognized after privatization, despite its opposition to it).
(120) See id. (noting that the union was not recognized post-privatization).
(121) See id. at 219 (noting that the only clear savings attributed to privatization were in pension reductions).
(122) See COST ANALYSIS, supra note 69, at 2-3 (detailing the GAO's evaluation of the purpose of the OPM's analysis).
(123) See id. at 9 (noting the projected savings from privatization were expected to range from at least $60,000,000 to as high as $120,000,000).
(124) Seeid. at 9-12 (noting, among other things, that OPM's consultant's report may not have been based on comparable assumptions).
(125) See id. at 10-11 (explaining how the, GAO evaluated OPM's study using OMB A-76 cost comparison criteria). The GAO report concluded that when the costs of in-house operations are compared to the costs of outsourcing, it is assumed that the comparison is conducted on a "level playing field." Id at 10. The report noted that the cost benefits of privatization may have been overstated because "the estimated costs associated with the assumption that OPM would continue operating the investigative function reflect historical inefficiencies and are not necessarily reflective of current operations and costs or potential cost improvements." Id. at 1.1.
(126) See id at 11 (noting that estimated privatized USIS costs, unlike OPM costs, were based on a "proposed efficient organization" that was not burdened by such historical inefficiencies).
(127) Seeid. at 11-12 (explaining that this plan did not reflect accurate costs, because of inflated 1994 figures).
(128) Id. at 12.
(129) See id. (discussing OPM estimates of corporate tax revenues of over $9 million over a possible five-year contract term, and $17 million beyond that).
(130) See id. (noting that the benefit of the tax revenues expected to be received by the government totaled $26,685,000 when combining current and new products).
(131) See id. (stating that the OMP's report projected that tax revenues for current products would decrease from approximately $2,941,000 in 1996, to $520,000 in 2000, while, conversely, tax revenues from new products would increase from approximately $17,000 in 1996, to $695,000 in 2000).
(132) See id. (projecting tax revenues for new products would be $695,000 and revenues for current products would be $520,000 in 2000).
(133) See id. at 11 (explaining that, in June 1995, the GAO noted "several deficiencies" in the management of OPM's investigation activities). Additionally, the GAO noted: the OPM Inspector General reported in 1994 that OPM had been unable to accurately forecast the investigative workload and adjust staffing levels accordingly, which contributed to an operating deficit. The Inspector General also reported that the Investigations Service had been burdened with an excessive share of OPM's overhead charges. According to the report, these factors led to an operating deficit and the need for the Investigations Service to raise prices in order to eliminate that deficit. Id. at 4.
(134) See id. at 12-13 (explaining that "if the profitability of USIS were to be lower or higher than estimated, the tax revenues to be received by the government would be correspondingly lower or higher than projected in the study").
(135) See id. at 13 (noting that "the tax revenues relating to new products might be lower than projected in the study if the new products replaced existing private sector products on which taxes were already being paid to the government").
(136) See id. (noting that "[i]f USIS won business away from these competitors, any taxes that USIS paid from this business would replace taxes that its competitors would have paid").
(137) "The second reason for uncertainties pertaining to tax revenues concerns USIS' ability to parlay its position as OPM's exclusive contractor into new, nonfederal government markets." Id.
(138) See id. at 13-14 (explaining that OPM's request for authorization in 1994 was denied by OMB because, in accordance with the Intergovernmental Cooperation Act, background investigative services are not "`specialized or technical services"' and, therefore, could be provided by the private sector).
(139) See id. at 14-15 (analyzing the costs and benefits of pension plans and concluding that they would result in savings).
(140) See id. The pension savings would occur because "the amount of an employee's annuity is based on the average of his/her high-3 years of pay, [and] this amount would be lower for those OPM employees who were terminated from federal employment at the time of privatization, because they would no longer receive federal pay raises." Id. at 14. Pensions costs would also be reduced because "the annuity as a percentage of the average high-3 would be lower because an employee's completed years of service would be fewer upon termination than if the employee had continued his or her employment with OPM." Id.
(141) See id. at 14-15 (explaining the methodology used to calculate estimated pension savings, which recognizes the lower salaries resulting from privatization because of the averaging of employees' salaries over the last three years and the elimination of federal pay raises).
(142) See id. at 15.
(143) The GAO report noted that the OPM study depicts the pensions savings as "occurring in the first year of privatized operations, although the study also recognized that such savings would actually be realized over a period of years." Id. at 15. The GAO report concluded that "the recognition of these savings in the first year of operation is not consistent with the treatment ... of other cost elements, such as corporate income tax revenues and savings achieved through lower prices for investigations." Id.
(144) See id. at 15-16 (noting the loss would largely be attributed to severance payments paid to employees leaving federal employment).
(145) See id. at 15.
(146) In a letter commenting on a draft version of the GAO report, the director of the OPM stated that the "OPM will manage the collection of data and records in a manner that allows no compromise to our standards of excellence." Id. at 18. In 1998, the GAO noted that "[w]ith a total staff of about 40 individuals, OPM's Investigations Service currently limits its functions to policy, agency oversight, contract management, processing of Freedom of Information and Privacy Act requests, adjudicating cases, and the making of suitability determinations." FEDERAL DOWNSIZING, supra note 113, at 38.
(147) See ELLIOT SCLAR, THE PRIVATIZATION OF PUBLIC SERVICE: LESSONS FROM CASE STUDIES 7-9 (Economic Policy Institute, 1997) (describing Albany's less than spectacular success at achieving savings through privatization).
(148) See id. at 7 (noting that the American Federation of State, County, and Municipal Employees District Council #61 and Blue Collar Workers Union Local 1961 represented the mechanics and helpers who were displaced by the privatization of garage services); see also Jay Jochnowitz, Alderman, Union HeadFace Off, TIMES UNION, Aug. 11, 1994, at B9, (noting "[t]he union and the city have been at odds over privatization since [the former mayor's] administration contracted out for vehicle maintenance, eliminating an in-house unit in the Department of Public Works").
(149) See SCLAR, supra note 147, at 8-9 (concluding that "[u]ltimately, contracting did not prove to be the competitive, money-saving process hoped for by the former department of public works commissioner").
(150) See id. at 9 (explaining the impossibility of definitively identifying the "full fiscal impact of contracting out vehicle maintenance" because of Albany's highly decentralized system).
(151) See id. at 7 (discussing the union's report on examples of overcharging and double billing by outside contractors).
(152) See id. (reviewing the required auditing remedies). In a 1995 report to the City of Albany, the firm concluded that "Albany was overspending for fleet maintenance by about 20%: in 1994 the city spent about $1.6 million when it should have spent around $1.3 million." Id.
(153) See id. at 1, 8 (noting that assessing the merits of privatization is frequently more complex than originally anticipated, which translates into extra costs to administer the contracting practice, monitor work, and evaluate performance).
(154) See Sarah Metzgar & Jay Jochnowitz, Albany to Revamp Vehicle-Care System, TIMES UNION, Sept. 21, 1994, at B3 (reporting that "Mayor Jerry Jennings has decided to revamp the maintenance system for public works and police cars, scrapping a program set up two years ago by [the former mayor]"). City officials recognized a pattern of overcharging, duplicate billing, and questionable work. See id. In order to address these problems, the mayor proposed a new plan described as "a blend of privatization and public operation of the system." Id. Under the new plan, the city's vehicle maintenance needs would be met by one private garage under the supervision of the Albany Public Works Department. See id.
(155) See Glanzer, supra note 115, at 218-35 (reviewing various union options, including opposition, internal restructuring, contracting out of management, and using an ESOP joint venture).
(156) See, e.g., LESSONS LEARNED, supra note 42, at 14 (noting that employee involvement was not only important for initial efforts at privatization, but also to "set the tone for future privatizations").
(157) For example, the City of Indianapolis and its privatization efforts, which involved negotiations led by a local union, became a national model. See SCLAR, supra note 147, at 10. The union was able to convince the mayor that restructuring was a better choice than privatization. See id.; see also infra Part III (discussing that the involvement of the union early in the process gave the employees the, opportunity to compete with the private firms).
(158) See Nancy E. Hoffman, When Governments Privatize: Economic Issues that Union and Management Lawyers Should Consider at the Onset, Presentation at the New York State Bar Association Labor and Employment Law Section Fall Meeting (Oct. 2-4, 1998), at 179, 201 (stating that significant changes in the culture of the workplace will occur).
(159) Unions also might want to be cautious about aligning themselves with state interests. With the lessons of the twentieth Century now available, it is clear that governments have not always been friendly to, or shared, the goals of unions. See Roy J. Adams, Regulating Unions and Collective Bargaining: A Global, Historical Analysis of Determinants and Consequences 14 COMP. LAB. REV. 272, 278-80 (1993) (tracing the historical development of government policy toward unions, which generally moves "from suppression to tolerance or encouragement" with economic development and modernization). The United States, however, has recently shifted back to suppression by means of neglect." Id. at 280. For example, President Reagan "broke a strike, of air traffic controllers and outlawed their union." Id.
(160) See id. at 204 (giving examples of situations where union members were able to maintain their jobs at health care facilities and stop the privatization).
(161) See id.; see also infra note 190-95 (noting that in order to contract out services, the government must bargain with the unions since contracting out services affects employees' rights).
(162) WILLIAM SHAKESPEARE, MACBETH act 5, sc. 3.
(163) In order to forestall privatization efforts, some unions have sought to focus on cooperative efforts with their governmental employers. See Gary Enos, Four Words that Can Wake a Sleeping Bureaucracy: "We May Go Private, "GOVERNING MAGAZINE, Nov. 1996, at 40 (discussing how the "anxiety" of a possible privatization changed the previously bad habits of a public-sector monopoly). The Mayor of Indianapolis stated that if the IFS "didn't shape up, he was ready to take all vehicle repairs to private vendors." Id.; see also Glanzer, supra note 115, at 217 (stating that active internal restructuring is one of the many alternatives that unions may use to provide services comparable to that of the private-sector); Hoffman, supra note 158, at 204 (discussing the presentation by County State Employees Association (CSEA), an affiliate of AFSCME, which cited a number of recent privatization circumstances where the union sought to address the issue through various approaches); see also infra notes 166-80 and accompanying text (citing an example in which a union in Indianapolis cooperated with the city to allow restructuring to occur successfully). Summarized below are a few of the examples cited in the CSEA presentation.
A nursing home case from Greene County, New York provides an interesting example because the union was able to avoid a privatization by proposing and arguing the merits of expanded service. See Hoffman, supra note 158, at 204. The nursing home was running an undisclosed deficit, and the county's initial decision was to privatize it. See id. As a result of CSEA's research, the county was convinced to expand operations by adding "adult living and dementia units to its already existing skilled care facility." Id. The precise financial and operational arguments offered by the CSEA were not disclosed.
In another example, the union assisted in raising financing to retain union employment. See id. The Dutchess County, Webutuck School Board in New York "faced financial problems in transporting special education students ... and believed it had no alternative but to contract with a private company to provide such transportation. CSEA worked with the School District on a bond proposal to purchase [and operate the] new buses." Id. The bond issue passed and the School District now operates its own bus company with union employees. See id. Again, the specific financial and operational agreements offered by the CSEA were not disclosed.
Reporting on similar circumstances, the CSEA presentation noted the following example as representational of a union's response to privatization. As a result of fiscal constraints, the City of Portland, Maine "sold off 48 pieces of heavy equipment" in 1981. Id. One hundred twenty-eight public works employees, thirty-eight percent of the city's workers, suffered retrenchment. See id. In 1990, budget problems resurfaced, but the city and AFSCME Local 481 adopted a different approach to locating cost savings, for example, the Department of Public Works published an informational calendar. See id. Working through a labor-management committee, the City was able to identify and implement significant savings. See id. at 204-05. The report did not indicate if the savings program avoided retrenchments.
One cited example was quite curious: the case of Westchester County in New York. The county's hospital and nursing home were operating at a $25,000,000 deficit per year by 1996, and the county announced that it was either going to privatize or close the facilities. See id. at 204. After some consideration, CSEA urged the county to consider having a public benefit corporation take responsibility for the two facilities. See id. The county implemented the plan for a public benefit corporation in 1998. See id. "The employees retained their status as public employees, were still represented by CSEA, and because the current contract was utilized during the transfer of authority over the facilities, all accruals and seniority [were maintained]." Id. It was not clear from the report how the transformation to a public benefit corporation eliminated or reduced, if at all, the operational deficit. Public benefit corporations often are required by statute to recognize unions and negotiate collective bargaining agreements. See id. at 183. While the CSEA may have succeeded in preserving employment for a certain time period at these facilities, unless the underlying operational problems (e.g., whether work was being processed efficiently) or market issues (e.g., whether patients were being served and the facility attracting the right type of patient) are resolved, one can wonder whether the union's success can be long-standing.
(164) See Glanzer, supra note 115, at 221 (observing one of the outcomes of allowing restructuring to occur).
(165) See LESSONS LEARNED, supra note 42, at 9 (showing how involving the union at an early stage and changing the focus from competing solely against private firms to include managed competition won employees a chance to compete, which they did successfully).
(166) See SCLAR, supra note 147, at 7, 10 (discussing how the privatization effort in Indianapolis differed from the process in Albany, New York, where the city opted to privatize its municipal vehicle maintenance program).
(167) See id. ("When [Stephen] Goldsmith originally ran for mayor, he did so on a highly visible, pro-privatization platform [and his] well-publicized one-time remark that he could run the entire city with only four contract managers quickly became widely quoted as his signature stand on municipal management."); see also Prepared Testimony of Mayor Stephen Goldsmith Before the House Education and The Workforce Committee Oversight and Investigations Subcommittee Subject: Innovative Workplaces for the Future, FED. NEWS SERV., June 24, 1998, LEXIS, Nexis Library, FED. NEWS SERV. [hereinafter Prepared Testimony] (noting that Mayor Goldsmith "was elected in 1992 on a platform of privatizing city services").
(168) See SCLAR, supra note 147, at 10 ("During [Mayor Goldsmith's] campaign, he often cited the IFS as an exemplary candidate for privatization.").
(169) See Prepared Testimony, supra note 167 (noting that Mayor Goldsmith realized that there was a large service backlog and vehicles "could be lost in the system for months or even years"). The Mayor also noted that "[o]ther departments that depended on IFS hated the system." Id. See also Enos, supra note 163, at 40 ("The department over the years had become a poster child for government waste.").
(170) See SCLAR, supra note 147, at 10-11 (stating that the union was prepared to fight the privatization).
(171) See id. ("District Council 62, the AFSCME umbrella organization that includes Local 3131, had made it clear that it was prepared to use all its resources to fight any of the city's privatization efforts."); see also Enos, supra note 163, at 40 ("City employees were on guard against privatization because Goldsmith had discussed it in his 1991 mayoral campaign, and some union members were prepared to fight it at any cost.").
(172) See Enos, supra note 163, at 40 (explaining that what Goldsmith wanted was competition: "[t]he process of moving from public-sector monopolies to private-sector monopolies really wasn't going to [help]").
(173) See SCLAR, supra note 147, at 11 (noting that "[the administration] offered [the union] a genuinely `level playing-field' for city teams to compete against private vendors"). The unions felt that they could compete with private vendors but "they were also concerned about the larger implications of yielding ground in the philosophical debate over privatization." Id. The Goldsmith Administration believed that reform of the IFS could be accomplished by permitting the union workers to compete with private vendors. See Prepared Testimony, supra note 167 (noting that "[o]nce in office, [the Mayor] began to realize that it is competition, not privatization, that improves service."); see also Enos, supra note 163, at 40 (concluding that "lilt soon turned out that Goldsmith was not a simple-minded privatizer [and that what] he really believed in was competition").
(174) See SCLAR, supra note 147, at 11 (stating that "the municipal operations shrank itself  from 119 workers down to 84"). It is important to note, however, that the internal restructuring approach does not have to arise in a competitive bidding context. Indeed, the union might be better served if it were to pursue such restructurings when it becomes aware of concerns by the applicable political leadership or management.
(175) See Enos, supra note 163, at 40 ("Almost immediately, the Fleet Services administrator and Local 3131 of the American Federation of State, County and Municipal Employees devised a four-year plan to make the city's operation more efficient and keep it out of private hands."); Ellen Perlman, Stephen Goldsmith: Busting the Government Monopoly, GOVERNING MAGAZINE, Dec., 1995, at 27 (noting that "in the race to beat out three national private competitors, IFS dramatically cut costs, slashed overhead and improved service").
(176) SCLAR, supra note 147, at 11 (deciding to go forward if four preconditions were met by the city, which included participation rights, "the opportunity to submit several practice proposals," redesign rights, and assistance in "freeing up union members from the bureaucracies").
(177) Id.; see also Perlman, supra note 175, at 27 (noting that, while some union members were moved to the private sector as a result of the restructuring of the IFS, no union workers lost their jobs).
(178) See Enos, supra note 163, at 40 (stating that the city employees' bid for the vehicle maintenance contract "was lower than that of any private vendor"); see also Gerry Lanosga, City Garage Workers Win Contract: Employees Beat Tree Companies in Bidding, INDIANAPOLIS NEWS, Feb. 21, 1995, at D01 (noting that the city employees beat three private vendors and won a three-year vehicle maintenance contract); SCLAR, supra note 148, at 11 (confirming, according to the IFS, that "it knew how to run the operation").
(179) See SCLAR, supra note 147, at 11 (stating how the employees "agreed to forego a previously negotiated 3% pay increase").
(180) See id. at 12 (showing that the budget costs were reduced from $13,246 in 1991, to $9,437 in 1996).
(181) See infra notes 180-88 and accompanying text (analyzing the adjustments made in quantifying the data in Professor Sclar's table).
(182) SCLAR, supra note 147, at 12.
(184) See id. (noting that, in the first year of restructuring, turn-around time had improved by ten percent).
(185) Id. at 13.
(186) See id. at 12 (explaining how these meetings increased from two meetings per week in 1991, to three meetings per week in 1995, and remained an important part of the program).
(188) See id. (stating that "the city is also getting more service from each of its vehicles at a lower cost per vehicle").
(189) WILLIAM SHAKESPEARE, HAMLET act 3, sc. 4.
(190) The GAO has defined contracting out as follows:
Contracting out is the hiring of private-sector firms or nonprofit organizations to provide a good or service for the government. Under this approach, the government remains the financier and has management and policy control over the type and quality of services to be provided. Thus, the government can replace contractors that do not perform well.
LESSONS LEARNED, supra note 42, at 44.
(191) Sec Dieter Bos, An Alternative to Privatization: Coping with Managerial Slack in Public Firms, in PRIVATIZATION AT THE END OF CENTURY 53, 53-68 (Herbert Giersch ed., 1997) (describing various types of income-based incentive programs for managers in order to avoid managerial slack).
(192) See Glanzer, supra note 115, at 224 (setting out the various benefits to contracting out of management functions).
(195) See id. (noting that the government's focus on management will allow the union to operate without fear of replacement, while increasing productivity under better compensation and benefit plans).
(196) For information on the Buffalo Water Board's decision see URBAN WATER COUNCIL, U.S. CONFERENCE OF MAYORS, PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL WATER AND WASTEWATER SYSTEMS, CASE STUDIES OF SELECTED CITIES, CITY OF BUFFALO, N.Y. (visited Mar. 23, 2000) http://www.usmayors.org/USCM/urbanwater/documents/buffalo.htm (stating that without a contract operator, the operation and maintenance budget would be $14.4 million) [hereinafter PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS].
(197) Nee Thomas J. Dolan, Revamp on Tap Officials, Unions Reach Accord on Water, BUFFALO NEWS, May 19, 1997, at IA. Dolan reported that
Buffalo officials and union leaders agreed today on a compromise plan to have a private company manage the city Water Authority that leaves all workers in place and reduces rates at least 4 percent for next year.... It came after representatives of the four city unions said they will negotiate changes in their work rules with the private contractor, American Anglian.
Id.; see also Harold McNeil, Two Firms Eyed to Take Over City System, BUFFALO NEWS, Mar. 25, 1997, at 1B (stating that the "administration of Mayor Masiello is seeking to save money and reduce water rates 10 percent by contracting with a private company to run the city's aging water system. Water rates have increased 38 percent over the last five years."); Harold McNeil, Union Accuses Masiello of Betrayal Over Water Study, BUFFALO NEWS, Jan. 9, 1997, at 5C [hereinafter Union Accuses Masiello] (stating that the "mayor certainly encourages the unions to submit a proposal that would show how they can be competitive with a private operation, but he's not in favor of the city paying for it").
(198) See Dolan, supra note 197 (reporting that the proposed management agreement would guarantee full-time employment for water employees for at least five years, increasing productivity).
(199) See Union Accuses Masiello, supra note 197 (noting that the union wanted the city comptroller to propose to the mayor that the city found a fund to calculate the value of such improvements, but that the proposal was not made).
(200) See Anglian Water's web site http://www.anglianwater.co.uk for a discussion of American Anglian, a joint venture with American Water Works Company that won the contract to manage the water system for Buffalo, New York. American Anglian may also have been influenced, in part, by the prospect of obtaining a meter installation contract, which was, at the time, also under consideration by the Buffalo Water Board; the contract was awarded to American Anglian in 1997. See id. (noting that part of the agreement enables American Anglian to convert "thousands of homes to metered supplies within five years").
(201) See American Water Works' American Anglian Unit Awarded Contract to Manage Buffalo Water System, BUS. WIRE, Aug. 25, 1997 [hereinafter American Water Works] ("American Water Works Co.... announced Monday that its American Anglian Environmental Technologies affiliate has been awarded a $50 million, five-year contract by the Buffalo (N.Y.) Water Board to manage the city's water system, which serves a population of 325,000 people.").
(202) See PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, supra note 196 (noting that the Water Board and American Anglian believed the agreement would save costs, resulting in an eight percent rate reduction for its customers).
(203) See id. (noting that American Anglian's responsibilities include "treatment, pumping, distribution, metering, billing and collections ... customer service ... [and] attaining all water treatment requirements").
(204) See id. (noting that, under the contract, the Buffalo Water Board, along with the Buffalo Water Finance Authority, is responsible for capital improvements over $10,000).
(205) See id. (noting that four labor unions representing the water workers have agreed to negotiate changes in their work rules); see also American Water Works, supra note 202 (noting that the city employees would retain their union representation after privatization). American Anglian also indicated that they would "offer comprehensive training programs which will provide employees an opportunity for increased skill levels while enhancing personal opportunity, improving performance and operational safety." Id.
(206) PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, supra note 196.
(207) See id. (noting that American Anglian was permitted to "reduce the work force by attrition").
(208) The agreement also specified that "[a]dditional increased payments to American [Anglian] will be tied to [changes in] the Consumer Price Index." Id. 209 See id.
(211) This table is based on interviews the author conducted with individuals involved in the efforts in Buffalo, New York.
(212) "Under the contract with American Anglian, [sic] existing unionized employees retain their representation." American Water Works, supra note 201; see also PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, supra note 196 (noting that "[e]mployees will continue to receive current compensation and benefits"). But see Phil Fairbanks, A Water Bailout? Firm Struggles With Privatizing City's System, BUFFALO NEWS, Feb. 15, 2000, 1A, LEXIS, Nexis Library, BUFFALO NEWS File ("Union leaders blame the company for low morale and say a series of broken promises has turned rank-and-file employees against the company."); Another Chance for Good Management, BUFFALO NEWS, Feb. 20, 2000, 2H ("Some city and union leaders are not happy with the job the company has done, citing problems that include collections, metering, worker morale and minority staffing.").
(213) See Fairbanks, supra note 212 (noting that there was an eight percent rate cut in 1997 and that "the U.S. Conference of Mayors cited Buffalo's water contract as a successful public/private partnership and gave the city its Outstanding Achievement Award"). There are, however, indications that American Anglian (now known as American Waterworks) is losing money and some critics have complained about service, particularly the metering program. See id. (explaining that, as a result of the restructuring, the company is losing money instead of the city losing money). Additionally, American Waterworks is seeking an extension of the contract in order to mitigate losses. See id.
(214) For a description of other circumstances where governmental entities have contracted out the management and operation services in a manner similar to the Buffalo Water Board, see PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, supra note 196. I have provided some examples below.
In 1995, the City of Sioux City entered into an agreement with USFilter/EOS to operate and maintain the city's wastewater treatment plants and lift stations. See URBAN WATER COUNCIL, U.S. CONFERENCE OF MAYORS, PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, CITY OF SIOUX CITY, (visited Mar. 23, 2000) http://www.usmayors.org/USCM/urbanwater/documents/siouxcit.htm. Under the agreement US/Filter/EOS is "responsible for the industrial pretreatment program including monitoring fifteen industries with monthly billing." Id.
In 1996, the City of Jersey City entered into an agreement with United Water Resources to operate and manage the city's water system. Under the agreement, United Water is "responsible for all aspects of the city water system, including: management of the city's 3,000 acre watershed and treatment facility." URBAN WATER COUNCIL, U.S. CONFERENCE OF MAYORS, PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, CITY OF JERSEY CITY, (visited March 23, 2000) http://www.usmayors.org/ USCM/urbanwater/documents/jerseyci.htm.
In 1994, the City of West Haven entered into an agreement with Professional Services Group (PSG) to operate, maintain, and manage "the City's 12.5 MGD wastewater treatment facility, 13 pump stations, and 135 miles of collection sewers." URBAN WATER COUNCIL, U.S. CONFERENCE OF MAYORS, PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, CITY OF WEST HAVEN, CONNECTICUT, (visited Mar. 23, 2000) http://www.usmayors.org/USCM/urbanwater/documents/westhave.htm. PSG was also required to offer employment to all city employees who had been employed full-time at the wastewater treatment facility before privatization. Id.
In 1997, the City of Bridgeport entered into an agreement with PSG to operate and manage the city's wastewater plants. The Bridgeport Water Pollution Control Authority (WPCA), however, remains responsible for administrative duties and continues to monitor debt. URBAN WATER COUNCIL, U.S. CONFERENCE OF MAYORS, PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, CITY OF BRIDGEPORT, CONNECTICUT, (visited Mar. 23, 2000), http://www.usmayors.org/uscm/urbanwater/documents/bridgept.htm. "The WPCA currently budgets $10.6 million for services provided by the agency, and under this contract, PSG is able to offer the same services to city ratepayers for $2 million less per year, a savings of 20 percent." Id.
In 1989, the City of Cranston entered into an agreement with PSG to operate and maintain the city's wastewater treatment plant. URBAN WATER COUNCIL, U.S. CONFERENCE OF MAYORS, PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, CITY OF CRANSTON, RHODE ISLAND, (visited Mar. 23, 2000), http://www.usmayors.org/uscm/ urbanwater/documents/Cranston.htm. "The original 5 year [operating and maintenance agreement] was estimated to have saved the City over $4 million." Id.
In 1996, the City of Hawthorne entered into an agreement with Cal Water to manage its water system. Urban Water Council, U.S. Conference of Mayors, Public/Private Partnerships in Municipal and Wastewater Systems, City of Hawthorne, California, (visited Mar. 23, 2000), http://www.usmayors.org/uscm/urbanwater/documents/hawthorne.htm. "All six employees of the Hawthorne water system were hired by Cal Water and receive pay and benefits at least equal to those received from the City." Id.
In 1997, the Evansville's Utility Board entered into an agreement with EA2 to manage the City's wastewater treatment plant. PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, CITY OF EVANSVILLE, ILLINOIS, (visited Mar. 23, 2000) http://www.usmayors.org/uscm/urbanwater/documents/evansville.htm. The city was able to reduce a proposed 1997 water rate hike by one-third and "now projects savings up to 30 percent of $19 million in operating costs over the next ten years." Id.
Since 1980, the City of Taunton entered into an agreement with EOS and them with OMI to operate and maintain is wastewater treatment plant. PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, CITY OF TAUNTON, MASSACHUSETTS, (visited Mar. 23, 2000) http://www.usmayors.org/uscm/urbanwater/documents/taunton.htm. "Although employees and wage levels were protected when the City originated contract operations with EOS in 1980, employee wage levels could not be protected during transition to a second contractor." Id.
In 1993, the City of Newark entered into an agreement with PSG to manage its water system that includes a 36,000 acre watershed in northwest New Jersey, transmission and distribution systems, and a $4.8 million treatment facility completed in 1993. URBAN WATER COUNCIL, U.S. CONFERENCE OF MAYORS, PUBLIC/PRIVATE PARTNERSHIPS IN MUNICIPAL AND WASTEWATER SYSTEMS, CITY OF NEWARK, NEW JERSEY, (visited Mar. 23, 2000) http://www.usmayors.org/USCM/urbanwater/documents/newark.htm. "[T]he City expects to realize approximately $2.5 million in operational savings. PSG has also saved the City of Newark over $100,000 on matters related to the operation and upgrade of the treatment facility." Id.
(215) WILLIAM SHAKESPEARE, THE TEMPEST act 5, sc. 1.
(216) See Glanzer, supra note 115, at 230 (noting that unions should seek the participation of government agencies in privatization and/or on union management committees). See generally Erin M. Gee, Comment, The Application of the Doctrine of Successorship to the Privatization of Government Services, 32 CAL. W. L. REV. 167, 168 (1995) (stating that "[g]overnment employees performing public functions are often covered by collective bargaining agreements, and the number of unionized government workers is growing").
(217) AFSCME, When Public Services Go Private: Protecting Members and the Union, COLLECTIVE BARGAINING REP. (Summer 1997), http://www.afscme.org/wrkplace/cbr397_1.htm [hereinafter When Public Services Go Private] (noting the agreement between the City of Indianapolis and the private contractor provided "`[i]t is also expected that the selected Contractor will recognize the existing union and bargain accordingly as required by applicable Law'").
(218) See id. (noting that Michigan Council 25 and the City of Detroit agreed that, should privatization occur, collective bargaining would be protected and that `"[t]his agreement shall be binding upon the successors and assignees of the parties hereto'").
(219) See Craig Becker, With Whose Hands: Privatization, Public Employment and Democracy, 6 YALE L. & POL'Y REV. 88, 89 (1988) (noting that "[t]hose who endorse privatization discount the right of private employees to organize, bargain collectively, and strike," and, therefore, would be unlikely to grant the union veto power).
(220) See When Public Services' Go Private, supra note 217 (noting that "[r]equiring the contractor to recognize and bargain with the union, but not adhere to the terms of the old agreement, is a worthy fallback position").
(221) See id. (noting that "Federal Government Circular A76 requires contractors to offer federal employees adversely affected by the contracting the right of first refusal to jobs with the contractor").
(222) See http://www.afscme.org for information on various protections that the American Federation of State, County, and Municipal Employees (AFSCME) has developed. The information is illustrative but is probably not reflective of all the views AFSCME has on this subject.
One approach suggested is the insertion of a successors and assigns provision in the collective bargaining agreement. Id.; see also When Public Services Go Private, supra note 217 (quoting a successors and assigns provision). It is open to question whether this kind of provision would provide adequate legal protection requiring recognition of the union and negotiation of a collective bargaining agreement in many privatizations.
A second approach suggested is through request for proposals (RFPs), which are the devices by which governments seek bids for the provision of certain services. See When Public Services Go Private, supra note 217 (noting two versions of the approach). While this certainly encouraged the bidders to address the union query whether it compelled them to do so. The RFP issued by New Haven's Wastewater facility required something a bit stronger, mandating that the bidding companies agree to the following neutrality provision: "[t]he company recognizes the employees' rights to organize and shall not oppose any attempts to organize employees." Id. Again, such an approach is more helpful than not having such a provision, but the provision's usefulness to the union will vary greatly depending on its negotiating leverage. Some of the significant drawbacks to this approach are addressed in the main body of the article.
Another approach is to address the issue through Impact Bargaining, where successorship and other protections and improvements for a bargaining unit are obtained in the course of negotiating the impact of privatization. See id. (providing a example where this approach netted protection, plus improvements for the workers of the University of Cincinnati hospital).
The final suggestion of AFSCME is really a legislative approach. State and local laws establishing public benefit corporations (PBCs), public authorities, or similar entities have included provisions requiring the continued recognition of existing unions. Nee id. (citing New York State as an example where PBCs have been legislated).
Another approach, taken by the Laborers' International Union of North America (LIUNA), with the County of Riverside, California, is to prohibit, in the collective bargaining agreement, any action by the county through the electorate to seek contracting out without authority from the union. See LIUNA News, LIUNA Negotiates Strong Contract for Riverside Employees, News Releases (April 13, 1998), available at http://www. liuna.org/Pages/public.affaris/newsreleases/NR4-13-98.html (calling for the formation of a labor management committee to deal with certain issues in the workplace) [hereinafter LIUNA News]; Supervisors Table Charter Discussion, PRESS ENTER., Aug. 5, 1998, at 303 ("[T]he union insisted on a pact that gave labor the ability to block charter provisions that would expand privatization.").
(223) See Gee, supra note 216, at 169 ("Under the doctrine of successorship, when a new employer takes over a unionized business and certain conditions are met, the new employer may be considered a successor employer and thus may inherit certain obligations of the former employer.") (footnote omitted).
(224) See id. at 170-72 (noting that the courts have required successor employers to negotiate with employees under their previous collective bargaining agreement, "since employees and their unions usually do not have a voice in corporate ownership negotiations, the well-being of the employees may become incidental to the considerations of the negotiators").
(225) A typical United Steelworkers successorship clause might read as follows: The Company agrees that it will not sell. convey, assign or otherwise transfer any Plant or significant part thereof covered by a Labor Agreement between the Company and the United Steelworkers of America that has not been permanently shut down for at least eight months to any other party (Buyer) who intends to continue to operate the business as the Company had, unless the following conditions have been satisfied prior to the closing date of the sale:
(a) The Buyer shall have entered into an Agreement with the Union recognizing it as the bargaining representative for the Employees within the existing bargaining units,
(b) The Buyer Shall have entered into an Agreement with the Union establishing the terms and conditions of employment to be effective as of the closing date,
(c) If requested by the Company the Union will enter into negotiations with the Company on the subject of releasing and discharging the Company from any obligations, responsibilities and liabilities to the Union and the Employees, except as the parties otherwise mutually agree.
This provision is not intended to apply to any transactions solely between the Company and any of its subsidiaries or affiliates, or its parent company including any of its subsidiaries or affiliates; nor is it intended to apply to transactions involving the sale of stock, except if a Plant or significant part thereof, which is covered by the Labor Agreement, is sold to a third party pursuant to a transaction involving the sale of stock of a subsidiary.
Email from Roy Murray, Representative, United Steelworkers of America, to Johanne M. Laroque-Sullivan, Member, Albany Law Review (Nov. 10, 2000, 2:18 PM EST) (on file with Albany Law Review).
(226) See supra note 218 (discussing the successorship agreement between Michigan Council 25 and the City of Detroit).
(227) WILLIAM SHAKESPEARE, KING LEAR act 5, sc. 3.
(228) See generally JARED KAPLAN ET AL., BUREAU OF NATIONAL AFFAIRS, TAX MANAGEMENT PORTFOLIO, ESOPs (1992) (providing a detailed explanation of ESOPs, containing technical explanations of legal issues, required legal forms, and a list of ESOP regulations and statutes).
(229) See RODRICK, supra note 117, at 14 (noting that ESOPs allow corporate ownership to be spread "as broadly as possible" among employees).
(230) See New Study Shows ESOPs Improve Performance in Public Companies, supra note 65, at 1 (noting that publicly traded companies with ESOPs have seen an increased return on assets, which stands to improve the compensation levels, benefits, and job security of its employees).
(231) See RODRICK, supra note 117, at 26 (noting that "employees tend to be very conservative shareholders").
(232) See infra notes 253-54 and accompanying text (discussing the traditional goals of unions and their employees).
(233) See RODRICK, supra note 117, at 4 (noting that an ESOP "allows participants to share in the growth of their company, just as the company's original owners have... [and] can be a valuable component in a worker's retirement plan").
(234) See New Study Shows ESOPs Improve Performance in Public Companies, supra note 65, at 12 ("[C]ompanies that do an initial public offering and offer stock ownership to most or all employees are more likely to survive than companies with narrower ownership.").
(235) See id. (noting that "[e]ighty-five percent of the companies reported increased access to company information for employees, including financial information, business unit strategies, corporate strategies, and information about customer expectations").
(236) See RODRICK, supra note 117, at 31 (focusing on obtaining the agreement of management, organizing a buyout with a parent company or subsidiary, and securing a feasible program for the issuance of new shares and/or transferring new shares into the ESOP).
(237) See id. at 31 (arguing that the feasibility study should include valuations of the stock pre- and post-transfer, and consultation with an attorney possessing ESOP expertise).
(238) See id. (listing several options for funding, including company contributions, loans, or the conversion of an existing benefit plan).
(239) See Samuel Goldreich, AFSCME, Doctors Unite to Push Unionized Health Care, WASH. TIMES, Aug. 28, 1997, at B12 (stating that, typically, the AMA is against the concept of collective bargaining).
(240) See id. (noting Congress passed new anti-trust restrictions that ban collective bargaining, unless the doctors "are employed by hospitals or health plans").
(241) See id. (reporting that the "new" organization would provide increased leverage with the HMOs).
(242) See Meg Green, Pennsylvania Lawmakers Weigh Bargaining Rights/or Doctors, BEST'S INS. NEWS, Sept. 1, 2000, WL 9/1/00 BSTW (discussing California's similar bill that died in committee, and the inability of doctors to join unions).
(243) See Marianne Kolbasuk McGee, Governments Opt/or Outsourcing--IT Organizations at All Levels Hire Outside Firms to Improve Operations, INFORMATIONWEEK, Mar. 22, 1999, LEXIS, Nexis Library, INFORMATIONWEEK File [hereinafter Governments Opt for Outsourcing] (citing expanded services and improved customer services as motivating factors in the states' decisions); see also Marianne Kolbasuk McGee, Rock Regan: Political Considerations Complicate IT Issues, INFORMATIONWEEK, Nov. 1, 1999, LEXIS, Nexis Library, INFORMATIONWEEK File [hereinafter Rock Regan] (reporting that the bid was approved, in part, because of the possibility that other agencies would benefit from the technology).
(244) See Rock Regan, supra note 243 (arguing that the plan failed because of the disagreements over pricing and service-level guarantees).
(245) WILLIAM SHAKESPEARE, HAMLET act 1, sc. 5.
(246) See infra notes 247-66 and accompanying text (discussing the process unions should follow in a privatization situation and how this process differs from traditional collective bargaining principles, yet still protects the union's self-interest).
(247) WILLIAM SHAKESPEARE, THE TEMPEST act 2, sc. 1.
(248) See RICHARD I. AARON, BANKRUPTCY LAW FUNDAMENTALS 12.02 (1990) (noting that Chapter 11 allows a debtor in possession of the company to operate the company under government protection while the owners, secured creditors, and general creditors approve a reorganization plan); Gee, supra note 216, at 167 (noting that privatization transfers governmental assets and operations in order to reduce costs and increase productivity). In general, both concepts transfer power and assets among interested parties with an eye toward efficient and profitable operation.
(249) See JAMES A. DOUGLAS ET AL., MODERN CORPORATION CHECKLISTS, Checklist 20.16 (3d ed. Supp. 1992) (highlighting six rules for a corporation to follow while in the midst of a restructuring).
(250) See id. (citing, in addition to cost cutting, improved efficiency as a goal of restructuring).
(251) See Rock Regan, supra note 243 (observing that unions opposed a privatization plan because "it would mean state workers would become employees of a commercial company and could lose their jobs"); see also Babette A. Ceccotti, Worker's Rights in the Context of Corporate Change: Representing Unions in Chapter 11 Cases, Presentation at the AFL-CIO Lawyer's Conference (May 1999) (on file with Albany Law Review), at 1 (stating that "[l]abor has learned... the bankruptcy system is not always a strategic weapon of destruction").
(252) See Governments Opt for Outsoureing, supra note 243 (highlighting a Chicago privatization plan that allowed city employees who joined the commercial company to maintain their seniority status).
(253) See Rock Regan, supra note 243 (noting that previous attempts at privatization in Connecticut "had gone sour, including a multimillion-dollar contract between la private company] and the state's Medicaid agency").
(254) See Goldreich, supra note 239, at B12 (discussing AFSCME's strategy, which "will support efforts to change federal antitrust restrictions, which ban collective bargaining" by independent doctors).
(255) See Harold M. White, Jr. & Rita Lauria, The Impact of New Communication Technologies on International Telecommunication Law and Policy: Cyberspace and the Restructuring of the International Telecommunication Union, 32 CAL. W. L. REV. 1, 12-13 (1995) (discussing the restructuring of the International Telecommunications Union to meet the challenges of changing technology and consumer competition, particularly management participation in some union activities); see also Michael Glanzer, Corporate Protections: The Mechanics of Building a Union Early Warning System in Collective Bargaining Agreements, 50 LAB. L. J. 289, 291 (1999) (discussing that, "[f]ew of these contracts have provisions addressing union concerns in the case of significant corporate transactions that effect union interests"); Ceccotti, supra note 251, at 12 (discussing an asset purchase agreement case where the unions attempted to collect from the debtor "wage bonus payments due under the [collective bargaining agreement]").
(256) See infra notes 263-68 and accompanying text (noting that the union's negotiators should focus on the intricacies of the corporate structure and deal with all members of the corporation, not simply the management).
(257) See AARON, supra note 248, [sections] 12.02 (noting the government participation in reorganization in the form of bankruptcy proceedings).
(258) See id. (noting the involvement of secured creditors, general creditors, and owners in reorganization and the participation of governments, unions, and private corporations).
(259) See id. [sections] 12.03 (noting that all parties have a personal stake in the outcome and must recognize the overall consequences of their positions in both privatization and reorganization).
(260) See HARRY H. WELLINGTON & RALPH K. WINTER, JR., THE UNIONS AND THE CITIES 62-63 (The Brookings Institution, 1971) (noting that a private employer is organized for the maximization of profits, while a traditional public employer is organized for the delivery of services); see also Ceccotti, supra note 251, at 3 (discussing the role of assumption and rejection of collective bargaining agreements in Chapter 11 cases).
(261) See WELLINGTON & WINTER, supra note 260, at 62 (arguing that municipalities must avail themselves of the profit-making structure of the corporation and wider range of choices available to private management).
(262) See Ann C. Frost, Explaining Variation in Workplace Restructuring. The Role of Local Union Capabilities, 53 INDUS. & LAB. REL. REV. 559, 561-64 (2000) (arguing that the ability to access information and communicate with management were crucial to two unions' success in a workplace restructuring).
(263) See supra notes 165-90 and accompanying text (discussing the internal restructuring required for a union to reduce costs and provide comparable services).
(264) See Glanzer, supra note 115, at 230 (noting the high level of complexity and the many participants from diverse backgrounds involved in restructuring/privatization as compared to traditional union bargaining).
(265) Id.; see also FRYKLUND ET AL., supra note 71, at 11 (noting the City of Thornton plan mandates contacting other "public and private organizations," consulting outside sources to determine the cost of privatization, and possibly soliciting bids from various private corporations); RODRICK, supra note 117, at 89 (suggesting employment of a qualified law firm to draft the plan).
(266) See E.S. SAVAS, PRIVATIZATION: THE KEY TO BETTER GOVERNMENT 4-11 (1987) (discussing four different types of privatization pressures "behind the privatization movement: pragmatic, ideological, commercial, and populist").
(267) WILLIAM SHAKESPEARE, HAMLET act 3, sc. 1.
(268) See Becker, supra note 219, at 89 (noting advocates of privatization "discount the right of private employees to organize, bargain collectively, and strike"). "The underlying presumption ... is that workers in the private sector will remain unorganized." Id.; see also Glanzer, supra note 116, at 215 (highlighting the traditionally weak position of unions and employees in the privatization process).
(269) See Glanzer, supra note 115, at 231.
(270) See Becker, supra note 219, at 91 (arguing that union participation is not sought because "the standard rationales for privatization--improving efficiency and eliminating red tape--reduce to cutting labor costs").
(271) See Samuel Estreicher, Freedom of Contract and Labor Law Reform: Opening Up the Possibilities for Value-Added Unionism, 71 N.Y.U.L. REV. 827, 829 (1996) (noting the most important conditions include lowering the cost of organization and greater leverage at the bargaining table). Professor Estreicher offers a variety of proposals to reform current labor laws. See id. at 842-43. One helpful suggestion relates to reexamining restrictions on contractual relations for which there is no good justification. See id. at 842-43. The suggestions indicate a deep understanding of the practical problems encountered in labor relations. The article principally focused on the private sector, but the same concerns arise in the public sector; albeit in different forms. See id. It may be difficult for the union to negotiate about privatization itself, and even more difficult for the union to marshal appropriate resources to create viable alternatives without some assistance from the employer. See id. Often a maze of laws designed for good public purposes impedes providing such assistance. See id.
(272) See Glanzer, supra note 115, at 231 (noting essential conditions for a union to focus on during the privatization process, including gathering data, access to internal information, and focusing on union financial concerns).
(276) See e.g., SCLAR, supra note 147, at 11. Setting specific preconditions to its participation, including:
[t]he right to participate from the beginning of the process, and name the employee team members.
[p]rovision by the city for advance training for those participating, and the opportunity to submit several practice proposals prior to actually bidding.
[t]he right to look not only at personnel but also at all aspects of a job, including overhead, and redesign it as the team saw fit.
[a]ssistance by the administration in freeing up union members from the bureaucracies that stymied their ability to provide services competitively.
(277) See id. at 6 (showing how private organizations are perceived as having more efficient capabilities).
(278) See id. at 7-9 (discussing one governmental entity's inability to effectively monitor a contract and services because it would be "cumbersome under the city's present accounting system, and that the city would have to `re-engineer' its voucher and data processing system in order to maintain the needed vigilance").
(279) See infra notes 282-98 and accompanying text (discussing in detail the dangers of a lax review of privatization proposals).
(280) See Marie Hardin, Gwinnett, Residents Oceans Apart on Discharges, GA. TREND, July 1, 1999, at 2, WL 12638633 (reporting on a county bid to discharge waste water into Lake Lanier that to some represented a "serious threat to one of Metro Atlanta's major sources of drinking water" and to others, was "an environmentally sound strategy that will help the state conserve its water supplies"). See also Stephanie Grace, S&WB is Scrambling to Meet Repair Deadline Agency Faces Huge Fines if Job Isn't Done in Time, NEW ORLEANS TIMES PICAYUNE, Dec. 28, 1999, at Al, 1999 WL 29021183 (recognizing a forty-five percent cut in operating costs that resulted from the privatization of Atlanta water services). But see Janet Ward, Going With the Flow, AMER. CITY & COUNTY, Nov. 30, 1999, at *4, 1999 WL 12109456 (reporting on the complaints received by a private company that assumed municipal water responsibilities).
(281) PRICE WATERHOUSE LLP ET AL., IMPLEMENTATION PLAN FOR PRIVATIZATION/REENGINEERING OF WATER, WASTEWATER AND SEWER SYSTEMS (1998) [hereinafter IMPLEMENTATION PLAN]; PRICE WATERHOUSE LLP ET AL., OPERATIONS ASSESSMENT OF WATER, WASTEWATER, AND SEWER SYSTEMS (1997) [hereinafter OPERATIONS ASSESSMENT].
(282) APOGEE RESEARCH, supra note 41.
(283) See Infrastructure Privatization, 57 Fed. Reg. 19,063, 19,065 (May 4, 1992) (encouraging privatization through an executive order that provides incentives for the scheme). This order changed the allocation of proceeds from the sale or lease of municipal facilities built with federal funds. See id. at 19,064. Specifically, Section 3(c) dictates that state and local governments will be reimbursed first from any transfer price. See id. Only then, and if, any proceeds remain, will the federal government be reimbursed. See id. Further, if the proceeds remain, the state and local governments will keep them. Id. See also Rev. Proc. 97-13, 1997-1 C.B. 634 (1997) (changing the I.R.S. policy to permit contracts by private operators with municipal facilities to extend up to twenty years). This policy encourages privatization because the previous contract term limit of five years was impractical for private operators, as profits may not be realized within that time.
(284) See IMPLEMENTATION PLAN, supra note 281, at Forward, 1 (stating that the plan's purpose was to "improve efficiency and service delivery.., through privatization and reengineering"); OPERATIONS ASSESSMENT, supra note 281, at 5, Letter from John E. Salo, Senior Vice President, Brown & Caldwell, to Larry Wallace, Chief Operating Officer, City of Atlanta (Oct. 12, 1997) (stating that the plan presents cost-saving alternatives).
(285) See OPERATIONS ASSESSMENT, supra note 281, at 5.7 (listing several strategies for saving labor costs, such as modifying job descriptions, using cross-training, and alternating shift schedules, but there is no economic justification provided). These strategies, however, are not analyzed with respect to the instant situation.
(286) See id. at 1.3 (listing the savings of the various alternatives, such as contracting operations and reengineering or outsourcing, in Table 1-1).
(287) See id. (finding that, while all of the proposed alternatives cut down projected rate increases, placing the entire system under management will keep the rate increases under the projected rate of inflation).
(288) See id. (containing only conclusory estimates and statements).
(289) See id. at 1.2-1.3 (listing proposed alternatives, such as system management, contract operations, light reengineering or outsourcing, and heavy reengineering or outsourcing, and noting that "projected rate increases can be cut in half by implementing practically all of the alternatives except light reengineering").
(290) See id. at Figure 8-2 (comparing the projected savings for the respective privatization efforts, and comparing those savings achieved to the savings required).
(292) Id. at 8-9 (listing "Required Additional Revenue and Implied Rate Increases" in Table 8 2).
(293) See id. at Figure 8-1 (estimating the annual savings for hiring a company to individually operate one facility (i.e. contract operating), and thus contract operating out all the facilities in a system).
(294) See id. (showing little increase under the "Heavy Reengineering Outsourcing" option from 2000-2001).
(295) See id. at 8.1 (describing a system by which certain functions are given over to private contractors, while others are kept according to their need).
(296) See Richardson v. McKnight, 521 U.S. 399, 402 (1997) (affirming the United States Court of Appeals for the Sixth Circuit's decision that privately employed prison guards do not receive immunity from civil suits, even when performing the same services as their publicly employed counter-parts). This case illustrates the point that privatization entails costs not applicable to the government, i.e., the costs inherent in defending section 1983 civil rights law suits, along with the possible damage payments. Id. at 402-04. Justice Scalia addresses this point in his dissent, stating that "[t]he only sure effect of today's decision ... is that it will artificially raise the cost of privatizing prisons." Id. at 422 (Scalia, J., dissenting).
(297) See APOGEE RESEARCH, supra note 41, at 1 (asserting four options for capitalizing on an investment fund, including reengineering, managed competition, asset sale, and a combination of reengineering and asset sale).
(298) See id. at 8 (noting that by reengineering, a public sector operation can realize more savings because "they do not have to make a profit or pay taxes on that profit").
(299) See id. at 3 (noting that this fact is not unique to Pennsylvania, but is occurring on a worldwide level, where governments evaluate how the private sector "can help deliver equivalent management services at less cost or enhanced services without increased costs"); see also COST SAVINGS INITIATIVE TEAM, CITY OF YORK WASTEWATER TREATMENT PLANT: COST SAVINGS INITIATIVE, Forward (1998) (stating that privatization in areas of public administration is on the rise with and annual growth rate of ten percent).
(300) See APOGEE RESEARCH, supra note 41, at 10 (showing a savings under each of the proposed six "strategies" that would be implemented under any plan). The report, however, later adds a disclaimer, stating that "If]or all strategies, actual costs and savings may vary to some degree based on timing and other factors." Id. at 11.
(301) See id. at 22 (describing the distributed savings approach as "not as strong as the reengineering alternative").
(302) See id. at 21 (recognizing that contract operators routinely seek fees from ten to fifteen percent of the prior year's budget).
(303) See id. at 22 (portraying managed competition for contract operations as an inferior choice because the administrative costs exceed the savings brought on by operating more than one plant and by reduction in overhead); see also COST SAVINGS INITIATIVE TEAM, supra note 299, at 3-9 (mapping out a reduction in staffing levels as an alternative strategy to contracting out to private entities, resulting in a projected savings of $303,600, while maintaining municipal control over operations).
(304) See APOGEE RESEARCH, supra note 41, at 26-27 (taking an objective analytical approach in presenting various models).
(305) See id. (showing that original cost minus depreciation gives a facility sale price of $40,199,000 in 2000, replacement cost yields $63,000,000, while DCF produces only $35,817,000).
(306) See id. at 27 (explaining the discounted cash flow method and benefits of privatization).
(307) See id. (explaining that the ten percent figure assumed the minimum rate of return necessary to attract a private buyer, leading to the conclusion that the higher the figure has to be, the lower the value of the asset).
(308) See id. at 28 (stating that a change in ownership from public to private would eliminate the plants' support from the state, resulting in a $650,000 per year loss).
(309) See id. at 30 (noting that a federal repayment requirement will decline in future years).
(310) See id. (stating how it is in the best interests of the City of York to delay selling to increase operating savings).
(311) See id. at 15-16, 30 (finding that under reengineering only, the city could expect to capitalize a fund in the dollar range of $3,550,000 to $4,160,000, while the net sale proceeds and immediate reengineering with a delayed asset sale would capitalize a fund of $12,748,000 for the city).
(312) See id. at 26-27 (discussing the values and calculation methods for each of the three basic asset valuation methodologies for the York wastewater treatment plant); see also supra note 305 and accompanying text (showing that an average that uses original cost minus depreciation, and replacement cost less trended depreciation figures is necessarily skewed).
(313) See APOGEE RESEARCH, sulfa note 41 (noting the privatization could result in a $1.7 million loss).
(314) See COST SAVINGS INITIATIVE TEAM, supra note 299, at 58 (noting that public utilities have to address "the possibility of being turned over to the private sector" because of decreasing federal subsidies).
(315) See id. (noting that the Cost Savings Initiative Team identified 100 obstacles restricting the city's ability to be financially competitive).
(316) See Stroehmann Bakeries v. NLRB, 95 F.3d 218, 221-23 (2d Cir. 1996) (holding that Stroehmann was under no obligation to respond to the voluminous requests for financial information submitted by the union to inform bargaining, such as primary competitors, product information reports, customer lists and sales accounts, accounts payable journals, general ledgers, employees and compensation, as well as any applications for loans, lines of credit, or mortgages),
(317) See David W. Orlandini, Employee Participation Programs: How to Make Them Work Today and in the Twenty-first Century, 24 CAP. U. L. REV. 597, 613-14 (1995) (discussing the Labor-Management Cooperation Act, which "established a grant program to encourage employers to organize and establish cooperative employee involvement programs... [and] permits employer payments to joint labor-management committees that were established to improve labor management relations, communication, organizational effectiveness, economic development, or decisions affecting employees' jobs"); see also 29 U.S.C. [sections] 175 (1994) (creating a National-Labor Management Panel, whose purpose is "to advise in the avoidance of industrial controversies" and to assist with mediation).
(318) See 29 U.S.C. [sections] 175(a) (1994) (providing for the establishment of labor management committees, which are "organized jointly by employers and labor organizations" for the purpose of, among other things, improving "organizational effectiveness, enhancing economic development or involving workers in decisions affecting their jobs").
(319) See Glanzer, supra note 115, at 227-28, 230 (noting that the technical, financial, and legal issues require the union to join with a strategic partner, or financial partner, or other non-traditional union ally to educate the union about the features of privatization plans and propose alternative models).
(320) See infra notes 325-30 and accompanying text (discussing how unions offer employee protections for job security by limiting outsourcing and sub-contracting; restricting mergers and acquisitions; circumscribing to downsizing and asset sales, and providing no furlough protection for specific time periods).
(321) See infra notes 329-41 and accompanying text (noting that unions, through ESOP or joint ventures, have negotiated corporate governance protections, such as membership on the board of directors, participation on board committees, and influence over fundamental corporate transactions, e.g., the United Air Lines and the Northwest Airlines agreements).
(322) The union may elect to share in the value created through conventional collective bargaining mechanisms, which tend to be profit or gain sharing schemes. For example, this approach is reflected in the Indianapolis Fleet Services case, cited in the main body of this article. See supra notes 166-90 and accompanying text (discussing the internal restructuring of IFS, which was successfully negotiated by the union as an alternative). In that case, under the terms of the union's proposal, the employees agreed to forego a previously negotiated three percent pay increase. See SCLAR, supra note 147, at 10-13 (noting that "the city's internal reorganization of vehicle maintenance ... has proven to be an important national model for public-sector restructuring"). In exchange, they were granted twenty-five percent of any first-year savings below the proposal price, and thirty percent of any savings in the second and third years of the contract. See id. These incentives were to supplement their regularly scheduled pay increases. See id. The principal advantage of this approach is that a union becomes familiar with the structure of these types of schemes and is likely to have internal expertise to develop these kinds of proposals. Its disadvantage is that it may not result in a detailed financial analysis allowing a union to capture a fair share of the value created.
(323) See supra note 322 (discussing negotiations of financial incentives and the possibilities of developing profit sharing, stock options, the issuance of common or preferred stock, and contingent value rights).
(324) See Cooperative Relations: Human Service to Children, Poor Said to Improve with Partnerships, Gov't Employee Relations Rep., Dec. 30, 1996, at 1760, WL 34 GERR 1760 (discussing employers who choose not to use union workers, opting to take the "`low wage' path").
(325) See Collective Bargaining: Unions Seek Company Investment as Method to Boost Job Security, Daily Labor Rep., Apr. 26, 1996, at C1, WL 4/26/96/ CCD d4 (discussing mergers and acquisitions that required investment clauses to provide for more job security and how capital investment, provided partly by employee contributions, enhances job security, discourages companies from closing, and protects companies from takeover).
(326) See Unions: SEIU Announces Campaign Against Three Giant Health Care Companies, BNA Corp. Counsel Daily, Apr. 26, 1996, at D4 (discussing the "whistleblowing campaign" of the Service Employees International Union (SEIU) to combat corporate downsizing and protect union jobs).
(327) See United Flight Attendants to Talk About ESOP, Daily Lab. Rep., Jan. 24, 1994, at 14, 17, WL 1994 DLR 14 d17 (reporting on the concern of the Association of Flight Attendants (AFA) about safeguarding furlough protection in their negotiation of an Employee Stock Ownership Plan (ESOP) offered by United Air Lines (UAL)).
(328) Various unions have had to address the issue of employee participation in the corporate governance. This kind of participation has usually come as part of a company's restructuring, an event not dissimilar to a privatization in that the enterprise's relationship with creditors, equity holders, labor, and others is transformed in that one event. See UAL CORP. UNITED AIRLINES, INC., PROXY STATEMENT (June 1994) [hereinafter UAL CORP. PROXY STATEMENT]; UAL CORP. UNITED AIRLINES, INC., ANNUAL REPORT (Dec. 1994) [hereinafter UAL CORP. ANNUAL REPORT]; NORTHWEST AIRLINES, INC., PROXY STATEMENT (Mar. 1997) [hereinafter NORTHWEST PROXY STATEMENT]; NORTHWEST AIRLINES, INC., ANNUAL REPORT (Mar. 1997) [hereinafter NORTHWEST ANNUAL REPORT].
(329) See UAL CORP. PROXY STATEMENT, supra note 328 (explaining that the twelve-person board of directors will have two levels of union participation). Two directors will be union representatives, and there will be four independent directors initially selected by the unions--subject to the approval of the shareholders and the board of directors. See id.; see also NORTHWEST PROXY STATEMENT, supra note 328 (explaining that each of the three participating unions will appoint an initial director, and when a vacancy exists for the union director position, the original union that appointed the director will nominate a successor who must be voted for by all of the employee holders of the "Series C" stock).
(330) See UAL CORP. PROXY STATEMENT, supra note 328 (explaining that each board committee must have at least one union director--with some exceptions). The Labor Committee and the Transaction Committee are the two committees that will not have union directors. See id. See also NORTHWEST PROXY STATEMENT, supra note 328 (explaining that each committee will include one employee director).
(331) See UAL CORP. PROXY STATEMENT, supra note 328 (setting forth a quorum requirement that prevents any one faction from obtaining any undue control, a supermajority clause for any "extraordinary matters," and a class shareholder vote allowing votes to be cast by United's common stock shareholders); see also NORTHWEST PROXY STATEMENT, supra note 328 (allowing all three union directors--plus two independent directors--to block certain decisions, including: restructuring, budget plans, mergers, consolidations, sales of a substantial portion of the assets, allocating dividends, joint ventures, filing for bankruptcy, and the appointment or dismissal of the president or chief executive officer).
(332) See UAL CORP. PROXY STATEMENT, supra note 328 (detailing the provisions of the United Agreement, which established a "12 person Board of Directors with two levels of union representation").
(333) See id. (stating "[t]wo directors are directly selected by the participating unions-one each by the ALPA [Airline Pilot's Association] and the IAM [International Association of Machinists and Aerospace Workers] through special series of employee director stock held only by the respective union"). "The Board also contains four `Independent Directors' ... initially selected by the IAM and ALPA subject to the approval of the Board and shareholders of the existing Company." Id.
(334) See id. (requiring super-majority votes by either "(1) a vote of three quarters of the Board including at least one of the Union Directors, or (2) 75 percent of the voting stock present and voting at the meeting of shareholders").
(335) See id. (providing also for supermajority board votes on a "transaction in which a stockholder becomes an `interested stockholder' under Delaware corporate law (which is subject to a 2/3 shareholder vote excluding the votes of the interested shareholders)").
(336) Northwest Airlines' protection for pilot's union ended, however, when labor sold out its equity. See NORTHWEST PROXY STATEMENT, supra note 328.
(337) See id. (providing also for supermajority board votes on "[a]ny sale or transfer of (i) a substantial portion of the Company's route authority; [a]ny sale, transfer or relinquishment of operational control over (i) Wings or any subsidiary or (ii) any material portion of the assets or business thereof; and [a]ny material transactions involving the acquisition by Wings of any subsidiary of an entity with annual revenues in excess of $100 million").
(338) Northwest Airlines' situation is instructive, although, by mutual agreement, the deal changed, and the provisions ended when labor sold out its equity. See Northwest Airlines Completes Restructuring, AFX NEWS, Aug. 9, 1993 (noting the corporate restructuring that gave employees their equity in the company); David Phelps & Neal St. Anthony, Northwest Plans Public Stock Sale,' Airline Seeks to Sell 25% Stake, STAR TRIB. (MN), Jan. 19, 1994 (reporting labor's position on the stock sale, and providing chronology of events);.
(339) See Northwest Airlines Corp., SEC Form S-8 Registration Statement No. 333, Feb. 11, 1998 (reporting a proposed sale to the public of employee stocks, with unions acting as trustees for the sale on behalf of the employee participants); UAL CORP. PROXY STATEMENT, supra note 328 (setting forth a supermajority clause for any "Extraordinary Matters" including: amendments to the certificate of incorporation, mergers, consolidations, amendments to by-laws, entry into new businesses, the sale or lease of assets for gross proceeds of more than $200 million, and redemption of rights under the Shareholder Rights Plan).
(340) See UAL CORP. PROXY STATEMENT, supra note 328 (noting that transactions involving "interested stockholders" are subject to a 2/3 shareholder vote).
(*) Michael Glanzer is an investment banker that advises union clients. He was graduated from Columbia College in 1978 with an A.B., and New York University School of Law in 1982 with a J.D. The article is dedicated to Leslie Gardner, without whose support the article and much more would not have been possible.
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|Title Annotation:||public-sector unions facing privatization|
|Publication:||Albany Law Review|
|Date:||Dec 22, 2000|
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