City Of Miamis Bid To Aid Business Tilts Playing Field Against Taxpayers
Written by Michael Lewis on April 28, 2011
By Michael Lewis
Cash-strapped Miami is drafting rules to aid local business that could cost taxpayers more and erode business countywide.
The aim is to vastly expand a yawning 10% procurement advantage that in-city companies already get to match low bids from out of town, including elsewhere in Miami-Dade.
The city commission targets an unheard-of 15%.
Local preferences are common, although we couldn’t find any as high as the present 10%. Usual margins are 1% to 5%.
A jump to 15% would force efficient outside firms to shun Miami bidding.
That wouldn’t be awful if we got real benefits. But studies show that local preferences raise true costs, a flaw that isn’t obvious.
One study finds that, at a 5% preference, the program Miami uses to allow favored local bidders to match someone else’s low bid actually raises costs 3.8%. At the city’s 10% favoritism, Miami overpays far more.
Expand the gap even more between low bidder and favored firm and added costs would soar higher even while Miami tries to cut spending.
Far better the 5% preference the Miami-Dade Expressway Authority uses to shrink the excess between what could be paid and what’s actually spent.
Backers say all local preference does is let a Miami firm that now bids 10% more than a Coral Gables firm, for example, match the low bid. How, they ask, could that cost more?
The 2006 study by Justin Marion of the Department of Economics at the University of California, Santa Cruz, shows how.
A 5% preference, he shows, stops many firms from bidding. Keeping out efficient firms lets the favored few bid far higher than the others would have and still win.
Further, he shows, winning bidders’ profits are also 3.1% lower under the preference because they’re less efficient.
That can’t be good for Miami: paying more to favor firms that may not be as good as someone in Doral or Kendall who could actually make a higher profit while charging the city less.
In such an artificial marketplace, firms that could win on a level playing field see inefficient competitors walk off with contracts at added cost to taxpayers.
Favoritism always costs us more.
Miami-Dade structured one contract so that only one company could comply, winning every year at inflated prices. Once the playing field was leveled, others bid. The original firm retains the contract, but now taxpayers pay less than half as much.
The more you tilt the playing field, the less taxpayers get. Mr. Marion’s study found efficiency loss was 27 cents of each dollar under preferences.
And preferences don’t build jobs. A study found that a 2% preference in Kalamazoo, MI, on a second-chance bid — the format Miami uses — would add just 15 jobs among firms that paid city property taxes.
Kalamazoo’s population is a fifth Miami’s, so costly preferences here could add at most 75 jobs.
Next, what does "local" mean? Miami only requires some operations in a building within city limits at least six months before bidding. That could be one person here from a New York conglomerate.
The Miami-Dade Expressway Authority is far stricter. To be local, those who own 60% of the business must reside here; the main office must have been here, including a majority of employees and principals, for one year; and 60% of all employees must live here.
If you’re going to have local preference, the authority’s rules make sense, Miami’s don’t.
Kenneth Robertson, Miami’s purchasing chief, told commissioners two weeks ago that only one solicitation award had been reversed in two years for local preference.
But that actually shows a very large impact: non-local companies don’t often bid when others get a 10% advantage, and many firms not based here can slip in under the city’s very loose rules.
Those are twin dangers: efficient non-local companies won’t bid, and porous rules make anyone who wants to rent a desk "local."
The bottom line: trim the preference margin and tighten rules for who is local, don’t expand the margin and with it surplus spending. In trying to help business, the city is missing the mark while raising taxpayer costs.