Resurrecting Urban America: A Role Model for Montreal

Luncheon on the reforming of Indianapolis with Stephen Goldsmith, Mayor of Indianapolis.

Presentation by Mr. Stephen Goldsmith

M. ADRIEN D. POULIOT: Encore une fois, je vous souhaite la bienvenue au premier lunch d’envergure de l’Institut économique de Montréal. Vous pouvez imaginer que Michel Kelly-Gagnon, qui en est à son premier lunch, doit penser que ça fait 26 lunchs qu’il organise avec tout ce qu’il a appris aujourd’hui.

Alors, franchement, Michel, bravo! Félicitations! C’est ce genre de dynamisme-là qui va se refléter, je l’espère, dans ce que l’Institut économique de Montréal va faire.

Alors, d’abord, je voulais vous mentionner, avant d’introduire le maire Goldsmith, que nous avons, à l’arrière de la salle, comme le disait Michel tout à l’heure, non seulement un dépliant sur l’Institut, mais aussi deux des plus récentes publications de l’Institut, parce que même si l’Institut est en activité depuis seulement quelques mois, nous avons contribué à deux et même trois publications.

Vous le verrez à l’arrière de la salle, à la sortie, il y a une première publication, qui est Fiscalité et croissance, qui a été préparée par Jean-Luc Migué, qui est ici, qui est le président du comité scientifique de l’Institut, avec la collaboration de Michel Boucher, et aussi une étude qui est publiée cette semaine et qui est publiée… c’est un texte de Reuven Brenner, qui est, évidemment, à la Faculté de gestion de l’Université McGill – je vois que Monsieur Crowston est ici – et donc Monsieur Brenner nous a permis d’utiliser ce texte-là.

Monsieur Brenner est aussi membre du conseil scientifique de l’Institut économique de Montréal, et son étude traite de l’impact de l’impôt sur le gain en capital.

Now, for the introduction of Mayor Goldsmith, since Stephen Goldsmith was elected as mayor of Indianapolis, about 8 years ago, he has responded to the challenges of his city with a very dynamic and innovative approach.

Par exemple, son administration municipale a réduit ses dépenses d’exploitation, a coupé la paperasserie administrative, a atteint le déficit zéro, a diminué – j’ai bien dit diminué – les taxes municipales, a augmenté le nombre de policiers patrouillant les rues de la ville et a réussi à investir 1.3 milliard de dollars américains dans le programme d’infrastructures le plus important que la ville ait jamais connu tout en réussissant à gagner la cote AAA des agences de crédit américaines, la ville la plus importante des États-Unis à récolter cet honneur.

Stephen Goldsmith a réussi le tour de force de réduire significativement le coût de la masse salariale de son gouvernement municipal tout en suscitant un appui enthousiaste d’une partie importante des employés municipaux et, notamment, les cols bleus lors de sa réélection.

L’économie de Indianapolis a connu quatre années records pour le taux de création d’emploi et d’investissements et a créé plus de 7 milliards U.S. d’investissements privés depuis huit ans.

L’optimisme et l’enthousiasme se font sentir partout à Indianapolis, particulièrement au centre-ville. La ville est devenue un chef de file dans presque tous les domaines de la régie gouvernementale municipale, que ce soit au niveau de l’implication des groupes de citoyens ou du développement économique, en passant par la déréglementation et une efficacité plus grande de l’appareil bureaucratique municipal.

According to The Economist, Mr. Goldsmith has turned his city into a demonstration model of good ideas in urban government.

Et M. Goldsmith a réussi sa réforme économique sans oublier les aspects sociaux, culturels et communautaires de sa ville. En effet, on peut lire dans la revue Employment Review: «Indianapolis has successfully managed its strong business growth in a way that has not only benefited area businesses, but also its citizens, and he has also promoted local art, culture, and recreation. Other cities could look at Indianapolis as a prime example as to how to balance commerce and community.» Mr. Goldsmith is a lawyer. He studied law and practised in a private law firm for 6 years before becoming the Marion County Prosecuting Attorney, a position he held for 11 years, before becoming mayor of Indianapolis in 1991.

Son implication communautaire et sociale est impressionnante, et je ne nommerai que quelques postes qu’il a assumés récemment: membre du conseil consultatif de la Commission présidentielle sur les enfants disparus et exploités, vice-président du conseil de la Commission présidentielle sur la réforme de législation des États sur les drogues, président du conseil du Indianapolis and Central Indiana Technology Partnership, et président du conseil du Centre for Civic Innovation, Manhattan Institute.

In his free time, he manages to contribute to very prestigious newspapers such as The Jerusalem Post, The Harvard Business Review, The Wall Street Journal, The New York Times, and The Washington Times. He has also written a book called The Twenty-First Century City: Resurrecting Urban America, published in December of 1997 – and you have some of the books here available at the exit.

Monsieur Goldsmith en est à sa dernière année comme maire d’Indianapolis. Il a en effet décidé de se lancer en politique fédérale et il a accepté de devenir le Civic and Domestic Policy Advisor to the Texas Governor’s Presidential Campaign – évidemment, il s’agit de George W. Bush – ce qui ferait de lui, si M. Bush devient président des États-Unis, l’un des hommes les plus influents du gouvernement américain.

Mr. Goldsmith, first of all, let me tell you how much we appreciate your being here and we recognize the trouble you’ve gone through to come here.

Ladies and gentlemen, the Montreal Economic Institute has the distinct, and privilege, and honour of welcoming Stephen Goldsmith.

(APPLAUDS)

MR. STEPHEN GOLDSMITH:

Thank you for this kind introduction. I could have walked here more quickly; actually it’s not that far, and my… when I walked in the room, your kind ovation was most appreciated.

I can tell, Mayor, that you have European traditions not American, as you treat your mayors with great respect and deference. No one in my community stands when I walk in.

I speak with my hands, so I’m going to move this water glass here.

And although I took several years of French in grade school and high school, I have not used it since and I have really not the faintest idea of what you just said about me. And it’s a delight to be here with you, Mayor, and Madame President, and Mayor, and Mayor, and others as well.

Montreal is a great city, and I don’t come with any prescriptions for how it could become greater. I do come to share a few stories about what we’ve done in Indianapolis, and see if they stimulate some thinking among the business and the political community that’s gathered here under the hospices of this important Institute.

We’ve had on occasion, in Indianapolis, as we’ve rethought government, visits from local leaders from around the world. We’ve had 4,000 visitors from foreign countries, and cities in the States, looking at our model. Once, when I was on my way in to see Rudy Giuliani, right after he was elected as mayor of New York, I flew into La Guardia and took a cab. I reached the first set of streetlights – and this is back in a period when New York had not returned today to what it was –, and we stopped, and this is when they had those men they called squeegee men, who washed the windshield, right?

So the cabdriver turned on the windshield wipers, and the squeegee guy was trying to wash the windshield and the cabdriver was trying to prevent it. And the light changed and we drove off, and the cabdriver uttered some comments that they don’t use in Indianapolis, there are particular New York phrases.

But it reminded me of the quality, then in the early nineties, of municipal services, which is, we often did things to people that they didn’t ask for, we didn’t do them very well, and then we demanded collection when we’re done, right. So this…

(APPLAUDS)

… this is not a Montreal story, right? This is a pre-Giuliani New York story, it’s not a Montreal story at all, but it was, in fact, in the early nineties, across the United States, in the large cities – and ours is the twelfth largest – there was some sense of despair.

When mayors were elected in the sixties, seventies, and eighties, they found themselves with substantial pockets of poverty. When they wanted to remove those pockets of poverty, they would increase the tax rates in order to have more money to solve the necessary problems. As they increased the tax rates, people found they could move across the city line, or provincial or state line, where the tax rates often were less, the crime rate often was less, and sometimes the schools were better.

In fact, my office is on the twenty-fifth floor of our city building, and yet, today, on a clear day, I can see dollar bills flood across the city line and land in the suburbs where the tax rates are less and the crime rates less.

That earned mayors then the right to go to Washington to beg for money, the large city mayors. They would land on the doorsteps in Washington and they would say, "Pity us, we represent really tough places, we need federal money in order to succeed."

That would earn you the right to take money back to your city. You would then spend this money. Generally things would get worse not better, which earned you the right to go back and ask for more money.

This continued until probably 1992 or 1993, in that period of time where a new set of American mayors was elected and basically said, "We’re not going to have enough money to buy our way out of poverty," right? There isn’t enough money nationally or locally to spend it fast enough to buy your way out of poverty because you dig yourself into a deeper and deeper hole.

So there has to be a new dimension of self-responsibility, and how do we realign the relationship so that local officials have more authority; so they’re not so dependent on federal authority, but they also have more resources to solve these problems, and they don’t raise taxes?

Right after I was elected the first time, my business counsel came to me, and said, "We’re really happy to have you as mayor, and we are particularly delighted that you promised to lower our taxes, and by the way, here is a bill for a billion dollars of accrued infrastructure deficit," right?

Sewers and bridges and streets and sidewalks and parks and police stations and things that had been put off in tough economic times. So that’s an actual deficit number. So I said, "Go fix it."

Well, this didn’t seem to fit very well, right? I’d promised to raise taxes, and even if I hadn’t promised… I mean I promised to lower taxes. See, my career as Governor Bush’s adviser comes crashing in now. Lower taxes.

(APPLAUDS)

Anyway, so I promised to lower taxes and I couldn’t raise them to do this infrastructure.

So we began the process that looked initially as if it were privatization. I’d actually campaigned on privatization, and in my first day in office, I went to see the people who pick up our trash, who work for the city.

I don’t know what they are in Montreal or your regional government, but in Indianapolis, they are all 7 feet tall, 300 pounds, they’re really big guys. And they’re all union workers, and they expressed a distinct lack of enthusiasm for my privatization plan, and did it in a very hearty way.

So I said, "Okay, I will make a deal. I’ll go out and do a different city job each week, you know, pick up the trash, or cut the grass, or repair the public housing, and we’ll try this for a while, and I’ll listen to your perspective."

And as I did these projects, it was remarkable to me that invariably the work crews with whom I was associated had very good ideas about how to improve their productivity, how to change their routes, or change their equipment, or change their supervisors, whatever the case may be, you know. And it did seem strange that there wasn’t anyone between the mayor and the person doing the work that was listening enough to implement these changes.

So at that point, we moved from a privatization model to a competition model. And although it sounds like a semantic difference, it isn’t. A privatization model assumes that the private employees are inherently superior to the public employee, and the competition model assumes that the private system is inherently superior to the public system because we operate in a monopoly and a bureaucracy, and it doesn’t have the forces of innovation that are infused through a competitive process.

So we switched the model and went back to the unions and said, "All right, we will not out source anything without giving you the opportunity to bid on the work first. We’ll provide you consultants, provide you a ninety-day window, we’ll help with the rest of the details, and let’s go through the bidding process."

The first problem we had in this arena was that, at least in the United States, municipal budgets have nothing to do with management, right? They’re put together for purposes of appropriations, or getting your bonds rated in New York City by rating agencies, but they have nothing to do with management.

I said to the people who were there initially after I was elected, "Would you bring me the city’s financials," you know. I have no idea what you do with them as a lawyer, but it seemed like the thing to ask for.

So they brought me these financials, and they were really high-quality financials. They were on the best quality paper and they had four-colour pictures that would rival any other large corporation in America, but there was nothing in the financials, nothing, that said how much it cost to pick up a ton of trash, or clean a 100,000 gallons of water, or to take a picture of a piece of paper in the Microfilm Department. There was no activity-based costing anywhere.

So the idea that our employees were particularly efficient was a totally abstract idea because it wasn’t routed on any cost that dealt with an activity of government. So to move from privatization to competition, we had to have activity-based costing. We had to know how much things cost to do, and we began this process.

Now, since then, we have competed out 85 public activities, and saved… it’s now up to $450,000,000.00, and I won’t take you through all 85, but let me use two examples, and then move briefly to another subject, and related subject, and answer your questions.

The first thing I did early on was, I wanted to privatize the wastewater treatment plants. Now, let me say, I use the word "privatize" a bit without definition because privatize, in the Thatcher mould, means to sell, privatize in the United States means… it could mean sell, it could mean a turn-key management contract, it could mean different things, so I, in a broad sense, want to privatize the wastewater treatment system.

In 1992, in the United States, this was an entirely socialist industry, it was entirely government owned and operated. There was no private-sector participation, hardly at all, none at the city size of ours.

The city council of the City of Indianapolis announced that we weren’t going to privatize the wastewater treatment plants. In my city, I’m not on the council, and it was a chance for them to remind me that there was more than one branch of government in our city.

So they said, "Okay, we are going to select one of the big five accounting firms, come in and evaluate our wastewater plants to see how efficient we are." And they hired Ernst & Young, and they came in, they said, "Congratulations, Indianapolis! You’re one of the one or two most efficiently-run wastewater treatment plants in the United States. If you really tighten up the management, you can save 5%."

We said, "Okay, let’s try this differently. Let’s ask anybody in the world who is in this business to bid on the right to manage our contracts, our plants over a long period of time." And at that time, in 1992 and 1993, all the major players in this arena were either French or British, right?

And we had a robust bidding, and the winning bidder, a combination of Lyonnaise des Eaux and an Indianapolis company won our bid, but lowered our costs by 40% a year or a $180,000,000.00 over the life of the contract.

Now, let me just go back for a second. We were the most efficiently-run American plant at the time, and our costs were 40% too high, which suggests that if government benchmarks itself against another monopoly, it’s an irrelevant experience, right? Because it’s the marketplace that drives value.

And since then, we have taken those savings and invested them in cleaner water, repaired sewers, provided modifications to the plant, and other things. So I had actually produced $180,000,000.00 infrastructure money from what essentially was the operating costs of government.

I want to give an example where our workers won, but let me fast-forward that last example just for a second. Lyonnaise accepted our union, its management, and accepted a union representation of the workers. It was the first major movement of the AFSCME union in the United States, the government union to a private sector.

We attrited a fair number of middle managers, who have been severely affected in my competition, but five years later, the number of accidents had been cut by 95%; the number of grievances had been cut by 99%, from a 100 to 1 a year; the number of days off through compensation claims had been essentially zeroed out. And what had happened is that the workers were ready to be productive if they were managed in different ways.

And so we broadly now see that the union workers, that actually went to work for Lyonnaise, are better paid and happier, and have more professional opportunities than the union workers they left behind.

I will say, about two years ago, I woke up one day and realized that I had done this wrong, and that I had split the utility down the centre. I had retained the collection… the sewer pipes were still maintained by city workers and the plant was run by Lyonnaise. And if anybody else would have realized that this is one utility and it didn’t make much sense to… it took me four or five years to get to that point, so we announced that we’re going to privatize, out source the maintenance of the sewer, the collection system.

And really what I think is a fascinating example, the union came and said, "We understand how this works and we are going to become partner with Lyonnaise and bid against our own managers."

So here is the question, right? It’s true. Which is the privatized side and which is the public side? We had the city managers thinking they represented the public side, bidding against the union workers, who worked for me, who were bidding with Lyonnaise for the right to manage the pipes, and clearly they won for a number of reasons and dropped the cost again.

Now, let me just use one other example where the city workers won, because I think it reflects some interesting things about how unionized workers and long-time city workers can be more productive in a competitive model.

I then, flushed with victory, determined that I was going to privatize the central garage, the fleet management operation. This seemed to me to be a fairly obvious thing.

In the Indy 500… – we have this race in Indianapolis called Indy 500 – … in the Indy 500, they change the oil and tires on a car in 29 seconds, it took us 29 days to change the oil in a police car in our central garage. So it seemed unlikely that my guys were going to be the best in the class.

So I announced that I was going to privatize, and the union president came in, a different union president came in and said, "No, you promised us. In fact, we have it in writing. We have this ninety-day window in which to bid." And I said, "Okay, we’ll go through this process."

Now, this is a group of city workers who had been doing total-quality management, rigorous total-quality management for six years, I mean, in the real sense.

In the 90 days they had to bid or go out of business, a number of interesting things happened, the first of which was, we were also negotiating collective bargaining agreements, and the president came in and said, "Mr. Mayor, would you mind if we froze our wages?"

Now, I’ve negotiated a number of contracts but none that began like that, right? I said, "Okay, you know, what’s going on?" He said, "Listen, we’re going to play the game and we intend to win, but we also want gain sharing or profit sharing, that is to say if we drive up our productivity and we drive down our costs and you save a lot of money, we want a percentage. So we’re willing to freeze our wages, but we want to profit from our increased labour."

And then they came back with all sorts of additional ideas, they wanted two-thirds of their managers replaced. This was a political tactic because the union guys were all democrat, I’m a republican, and managers were all republican, right? So this was a test of our will, but we got through that. We attrited out and moved the managers.

And the union workers wanted to out source the maintenance of the garage because they realized that the wage rates they wanted to earn were too high for them to be in the custodial business. It was better for them to keep their mechanic jobs and out source the custodial jobs.

And at any rate, they won the bid, but their costs came down by $2,500,000.00 in that 90 days, which was an enormous amount of overhead in an enterprise of that size.

Now, these were the same individuals, right, the same bodies, the same minds, the same individuals who had been working in a bureaucratic, monopolistic, top-down, control-and-command environment, and when the competition was injected, it actually liberated their ability to do their jobs, empowered them to do their jobs better.

So as we’ve gone through these various activities now, what we’ve seen is that the line workers are about the same in number, the middle managers have shrunk considerably, but every time we’ve done one of these, if we are careful about it, the quality goes up.

I mean, anybody can privatize, save money, anybody can save money by making the quality worse. Our goal was to save money and make quality better, and guarantee that in terms of contract performance and fines, and whatever.

Now, just a kind of closure with… – about three minutes, I’m going to take your questions – … the goal never has been just to privatize, save money or compete. The goal has been to free up public capital that was being unnecessarily spent on the operating side and have that available to invest in important civic causes.

And concurrently with this, I went into our poorest neighbourhoods, those who might normally be most suspicious of privatization, and said to them, "Look, your roads can continue to look the way they do, and your parks can continue to appear the way they do, and your sidewalks can continue to crumble, and we can operate as we do operate in the status quo, or you can support our effort and we will do new sidewalks, new curbs, and new parks, and the rest of these infrastructure projects."

And we actually labelled these with signs, "Building better neighbourhoods," because we wanted to connect the public to the… even in Indianapolis, the public didn’t really support privatization. They’re not really against it, but they don’t really care. What they want is a good return on their tax dollar. We had to motivate communities, and this was one way to do it.

We’re applying the same model today to social service activities, job creation, unemployment, and other things. Many of our most exciting competitive out source in contracts are with little neighbourhood organizations, the local neighbourhood group that takes care of the urban park, not for profit, it’s in the job training and placement business.

These are performance-led contracts, their methodology is very similar to the large contracts, but they’re an opportunity for people to participate.

Our city… just kind of walk in, in my last minute into your local controversy, my city, 25 years ago, consolidated the city and the county government. Dick Lugar, who is now senator, was mayor at the time. And so the city went from this size to this size.

Now, what that presents is an issue of what’s the right scale for a city service, what’s the optimum scale of delivery of a city service. And the answer is, it’s different for every city service, right? It’s one size for wastewater, it’s another size for maintaining an urban park, and on and on.

So what our outsourcing and competitive model has allowed us to do is to change the optimum scale for each service. So wastewater is a world-class operation, we have a world-class operator. Maintaining a local park is a local activity where we don’t need that much scale, and scale isn’t always more efficient in government operations.

So what we’ve been able to do through treating many of our included cities as customers and using the outside management talent of the private sector is, to get the best of both worlds, little scale and lots of local pride where necessary, large scale and lots of professionalism where necessary as well.

Again, I just come to share some stories about Indianapolis with really a great respect for Montreal and the Greater Montreal area, what your position in the world and in our area as well, and I’m delighted to be your guest and will be happy either to return to the airport or answer questions, Mr. Mayor and everybody, thank you very much.

(APPLAUDS)