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Wednesday, March 23, 2011

Why We Can't Have Nice Things: chapter 3,104

Posted By on Wed, Mar 23, 2011 at 11:41 PM

Yes, there's been another lapse of blogging here. I'll make up for it with an unreadably long post today, and the promise of shorter posts in the days to come. 

But first, some thoughts on the demise of the late, and not-very-lamented, line-warranty program offered by the Pittsburgh Water and Sewer Authority. On paper, the program was sweetness and light -- created to protect Pittsburgh homeowners, whose city is plagued with aging infracture, from the steep cost of sewer and water-line repairs. But the program was distinguished by a controversial "opt out" provision, in which  customers were automatically enrolled in the program, and had to pay a $5 monthly fee. Worse, the firm retained to provide this warranty, Utility Line Services, was riddled with conflict-of-interest problems. 

The first reaction to the program's death, naturally, is celebration. Business-as-usual and special interests in Pittsburgh took it on the nose, thanks to Judge Stanton Wettick's deeming the plan illegal.

But although the bad guys may have lost, that doesn't mean the good guys -- or ratepayers -- have won. I actually think this is a sad story, one that says a lot about how truly fucked up this city is.  

Naturally, any story involving sewers suggests a metaphor for Pittsburgh's civic life. But the metaphors here are especially apt. Because the story of the line-insurance program, in all its promise and peril, sums up Pittsburgh's political scene right now. It's the story of a city whose populace is afraid of change, and whose leaders too often botch the job of delivering it.


There's a huge irony at the heart of Wettick's ruling. He didn't strike the line-warranty program down because of all the things that made it controversial. Instead, he said the line-insurance was a good, workable solution ... and that is why it had to die.

When news of the PWSA $5 charge first surfaced, city councilor Doug Shields and others objected vociferously to the the fact that customers were involuntarily enrolled in the program -- and had to take the time to un-enroll themselves from it. This was, Shields and other critics contended, against a city ordinance prohibiting "negative option billing." That ordinance prohibits providing "goods or services without any prior agreement of or a request from the recipient and then ... attempts to collect payment from the recipient."

Such a practice does seem blatantly unfair -- we expect to be asked if we want a service before being told to pay for it. And we assume that we, not some utility company or a government agency, know what's best for us. If we want line-insurance protection, then we'll buy it ourselves, thank you very much. 

Thing is, though, as I wrote a year ago, there's an ample body of reseach to say that we actually don't know what's best for us -- or, more precisely, that even when we know what's best for us, we may need encouragement to act on the knowledge. "Opt-out" provisions can provide that incentive, and many serious thinkers believe they should be used more often.

A good example is your employer's 401(k) program. Rates of participation in the retirement plans increase substantially when employees are enrolled automatically. And while they have the option of dropping out, few of them do so. We all know that saving for retirement is a good idea, but it's an abstract good. And some people have a hard time taking concrete steps in the here-and-now for an abstract benefit down the road. An opt-out retirement plan takes care of that for them. The net result? More people saving for their retirement, and fewer impoverished retirees burdening society.

Cass Sunstein, who serves as Barack Obama's regulatory czar, espouses just such approaches, as part of what he calls "choice architecture" -- creating polices that don't infringe on individual liberty, but do shape the context in which we decide how to exercise our freedom. (On the off chance you're interested -- this is the guy Glenn Beck likes to scream about -- Sunstein discusses this stuff in a book he co-authored, Nudge: Improving Decisions About Health, Wealth and Happiness.)

Sewer-line insurance, arguably, is a similar example of where a failure to act today can have catastrophic consequences in the future: It can cost many thousands of dollars to fix a sewer line. But because that possibility exists only in an abstract, theoretical future, it's easy to ignore.

By requiring customers to opt out, PWSA could plausibly say it was helping protect them against a danger that might otherwise deplete their savings. And because opt-out guarantees widespread participation, it would spread the risk out over the entire PWSA service area. That helps ensure a very low monthly premium. 

Wettick's ruling didn't consider that, exactly. He merely brushed aside concerns about "negative option billing" by noting that the city code applied to individuals and business entities -- not to government agencies. The code, he notes, specifically allows for taxes and fees levied by government.

Wettick did, however, acknowledge that the line-insurance program might well be serving the best interests of customers -- whether they recognized it or not. After all, he noted, the program "provides greater protection to the property owner and at less cost as compared to the warranty programs" of two competing firms. So much so, he argued, that "no PWSA customer is likely to continue in (or opt into) [private-sector] warranty programs because they offer less protection at a higher price."

In fact, it's obviously no coincidence that the two firms who offer those competing products, Dominion Products and Services and the Manchester Group, also sued the PWSA. And it was their complaint-- the complaint of self-interested for-profit entities, not ordinary ratepayers -- that overturned the law. 


Dominion and Manchester argued that by law, authorities aren't supposed to compete with private-sector business. An Wettick -- with what sounds like some reluctantance -- agreed.

As Wettick's ruling notes, the state's Municipality Authorities Act limits the kinds of services a government agency can provide. One portion of the law bars such entities from doing anything to "unnecssarily burden or interfere with existing business by the establishment of competitive enterprises." Another bars government agencies from "duplicat[ing] or compet[ing] with existing enterprises serving substanitally the same purposes."

From this, Wettick makes a somewhat surprising conclusion: Government can't be permitted to do things better than a private business. 

I recognize that it is likely that no business enterprise can provide the benefits to PWSA and to its customers that are provided by the PWSA Opt-Out Line Warranty Program. However, the apparent purpose of [state law] is to protect existing business enterprises from losing business to an enterprise created by a municipal authority. Or, in other words, the apparent purpose is to prevent a municipal authority from competing with existing business enterprises by providing a better service or a better product. (Emphasis mine)

We're all used to the claim that "government should be run more like a business." But by Wettick's reasoning, doing so might actually be against the law in some cases. After all, Wettick notes, state officials apparently believe in the goal of "keeping government small."

So if you liked the line program -- and believe it or not, some people did -- you have some consolation. Sure, you may have to spend more for private-sector line-insurance, and the insurance you get may not be as good. But at least you're being protected from socialism

And who can put a price on that?


OK, that was a cheap shot. Obviously, a government agency has access to a whole range of taxpayer support that a private enterprise can't rely on. (Unless it's a Downtown department store or a major-league sports team.) So, yes, a for-profit corporation indeed could have legitimate fear of government competition.

Except in Pittsburgh. Where government is its own worst enemy.

Because there's an obvious elephant in the room which Wecht's (editor's note: uh, I mean Wettick's) ruling-- and this blog post, so far -- have barely mentioned. And that is that while the idea of this program might be sound, the implementation was an absolute clusterfuck.

For starters, even a thinker like Sunstein -- who believes government can play a role in shaping our choices -- doesn't believe in being sneaky about it. Here he is in Nudge:

If government alters [rules] it should not be secretive about what it is doing ... [W]e need to be worried about incomptence and self-dealing on the part of Nudgers. If the Nudgers are incompetent, then they could easily do more harm than good by directing people's choices. And if the risk of self-dealing is high, then it is right to be wary of attempts to nudge. There are some who think that any decision made by a governmet official is likely to be incompetent and corrupt. 

A significant number of Pittsburghers fall into that camp -- and with good reason. The cases of "self-dealing" on the part of city officials are too numerous -- and too familiar to anyone reading this blog -- to go into.

The line-insurance program itself was a particularly egregious example. Of course ULS turns out to have personal and business ties to the PWSA's executive director. And of course the guy who gets the job of doing the repair work happens to be a Democratic committeeperson. That's just how we do things in Pittsburgh.

At this point, I wouldn't be suprised if the whole program turns out to have been some massive Ponzi set-up, with too little money being set aside for line repairs, and too much going into ULS's pockets. (I'm not alleging such a thing, just saying that given the troubling history here, it wouldn't surprise me at all.)

Making things worse: There was no notice on the front end about this program -- $5 charges just started popping up on people's bills. And on the back end, opting out was a cumbersome, months-long process. If the PWSA sought to antagonize its customers on purpose, it couldn't have done a better job. 

Add to that our city's (frequently deserved) reputation for fearing change, even with programs that aren't tainted by conflicts of interest. Well-intentioned programs too will meet with intense resistance. Just ask Alan Hertzberg, a former city councilor who tried to implement an innovative, but highly controversial program to fight "suburban flight."

The program, which had been used successfully in Chicago, enrolled homeowners in struggling communities in a kind of home-insurance program. Homeowners would have their homes assessed, and then be insured for the full value of the home -- even if neighborhood decline damaged property values in the years to come. 

The program carried a one-time fee for the assessment and a $20-a-year premium. In exchange for a small payment upfront, it offered residents protection from a catastrophic decline in the value of their property. By giving them a reason not to panic and flee to the suburbs, it helped shore up the community. But for his troubles, Hertzberg attracted a firestorm of criticism, and his program attracted a lawsuit.

You'd think the PWSA board might have learned from that example. Hertzberg was replaced on council for a time by Dan Deasy -- who as a state rep now chairs the PWSA board. Deasy is joined by city councilor Patrick Dowd. Not only is Dowd a former history teacher -- who should know what happens when you ignore the lessons of the past -- but he's also long been an advocate of by-the-book process and transparency.

I talked to Dowd this morning about the line-insurance program. On the on hand, he still thinks opt-out is "a great idea." On the other, he acknowledges he made mistakes in pursuing it. 

"The judge's ruling says that opting out is completely allowed -- and that it's a good program," Dowd notes. "The thing that's really distressing to me is that there are people living across the city who have no coverage now -- and the coverage they can get won't be as good."

But what about the total lack of notification? The fact that homewoners didn't know this program existed until $5 charges started appearing on their bills?

"If I made a mistake, it's that I was too anxious to get the program out of the box and solve the problem," Dowd admits. "I was listening to the people who were crying -- people all over my district were paying thousands of dollars to fix their lines. It's fair to say I moved too quickly because I thought the solution was the right one ... And obviously, I wasn't getting great advice from our executive director."

Indeed, Dowd says that once he and other board members learned of the conflicts of interest, "We agreed that the minute we had cause to terminate the contract, we would. And then we'd rebid it."

Wettick's ruling seems to preclude that possibilty, however. He writes that the line-insuarance program would still run afoul of state law even if the PWSA hired an existing business to cover and repair sewer lines. Such a move would "displace the status quo," he writes, in which such services are contracted directly by homeowners.

To address that, Dowd says, "I've asked Dan Deasy to look at [state law] and see if there is a possibility of exempting [Pittsburgh] so that we could offer that program. Then we could come back and try it again."

I won't hold my breath. This is a change-resistant city, and these are paranoid times. As we've seen, there are plenty of people lined up against the opt-out policy ... and the PWSA's ineptitude has ensured that there won't be many people lined up for it. "Opt-out" is now associated in people's minds with the worst kind of backroom dealing, though it need not have been that way at all. 

What's the result? Dominion and Friends stand to get some additional revenue, while customers may well end up with inferior coverage. To my mind, that isn't a defeat of the city's special interests ... that's  a victory of one set of special interests over another.

The rest of us just get an object lesson. Which is this: Even when Pittsburgh gets the right idea, we get the wrong execution.

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