When two uniformed police officers approached Hector Hernandez as he arrived at the City of Maywood's official Fourth of July celebrations, he feared the worst. The stocky 22-year-old – whose neck tattoo of a Playboy bunny indicates membership of one of the area's notorious Latino street gangs – hasn't exactly relished his previous interactions with the local forces of law and order. Imagine Hector's surprise, then, when the uniformed men held out an outstretched hand, smiled and asked how he was doing. "They said they were new to the neighbourhood, so wanted to say hello and welcome me to the event. I think they even told me to have a nice day," he recalls. "I was like: 'You guys don't normally speak to me unless you're kneeling on my back'. I thought it was some kind of a sting."

But it wasn't. Instead, Hector was being introduced to a brave new era in the life of Maywood.

Over the last few years, the local government in this tiny, blue-collar town about 20 minutes drive from downtown Los Angeles drifted towards bankruptcy. Poverty, gang violence and inner-city deprivation were spiralling. Then last month – in a move that made it instantly famous – Maywood's cash-strapped city council decided to respond to its myriad problems with a revolutionary initiative: it voted to contract out every single public service the city once provided, from the management of parks and libraries, to the book-keeping at City Hall, to the running of its police department.

Today, Maywood is America's (and possibly the world's) first completely outsourced city. Where other local authorities might privatise their traffic wardens or binmen, Maywood's council has gone the whole hog: sacking everyone from school crossing guards and parking wardens, to street maintenance workers, park wardens, librarians and even the clerical staff in city hall. The number of people it now has on its payroll?

A big, fat zero.

In the purge of city employees, which happened at the end of June, about 60 people lost their jobs. Most of those redundancies hit the scandal-ridden police department. In the previous five years, it had had to settle around 30 misconduct lawsuits, for alleged offences ranging from civil rights violations to rape by officers to unlawful killing, with compensation totalling $20m – double the entire city's annual budget.

In their place came the friendly cops that warmly greeted Hector on 4 July. They are members of the LA County Sheriff's Department, which agreed to be paid roughly $4m a year to patrol Maywood's streets, a figure significantly lower than the previous police budget, even before you factor its lawsuits into consideration.

Despite the public money it saved, the outsourcing project was highly controversial. When it was announced, residents feared anarchy would follow; old people thought they would be mugged in the streets; local storekeepers wondered if anyone who would stop them from being robbed; families presumed parks and libraries would close. "You have single-handedly destroyed this city," the about-to-be-sacked city treasurer told council members, during the acrimonious meeting where the outsourcing scheme was unveiled.

One month on, however, the naysayers have gone quiet. Maywood's parks are still open and greener than ever. The leisure centre is overflowing with excited children. City Hall appears to be running smoothly. And almost everyone you meet says that since the city outsourced everything, services have improved and petty crime and gang violence have – on the surface, at least – virtually disappeared.

"I don't see gangsters on the streets any more," said Maria Garciaparra, bringing her children to the library. "I don't see new graffiti. I still have a park for them to play in and this place to get books, so who cares whether the city employs anyone or not? If this works, then down the line, I'm sure plenty of other places will copy it."

Today, depending on your point of view, Maywood represents either a shining example of civic creativity, whose unique experiment in governance should be copied by recession-strapped local governments across the land or a reckless and foolhardy city that has been betrayed by leaders who have sacrificed its soul at the altar of capitalism – and will soon suffer the inevitable consequences.

In the former camp, perhaps naturally, is Aldo Perez, Maywood's new director of Parks and Recreation. He is actually employed by the neighbouring city of Bell, which is now paid to handle Maywood's records management, finances and human resources, under a monthly contract.

The city was previously so dreadful at running its own affairs that he believes locals could only have enjoyed tangible improvements from the great outsourcing.

"When it was first announced, people said that the sky was going to fall and that everything would just stop," he said, while chalking white lines on a baseball field. "In fact, we are busier than ever. For the first time in history, we are running free swimming lessons and they're completely booked up. We had 400 people here on 4 July for baseball and children's activities. Believe me – by outsourcing, we are actually providing people with a better service."

Also singing the new regime's praises is the Maywood's city spokeswoman Magdalena Prado (who also works under contract). She argues, correctly, that the vast majority of locals don't care who cleans their streets, or fights crime, or runs the library – provided the job is getting done. And by any measure, she says, those things have so far improved.

"We are the first city to do this and it's a revolutionary idea," she says. "So while we wouldn't want to be copied by other cities – and used as a model by people who want to lay off employees – I would think that if you speak to the vast majority of people in Maywood, you'll find that they're pretty pleased with the way things are working out."

Being pleased has historically been a rare state of mind in Maywood, a densely-populated industrial city founded in 1924, which measures just a mile and a half across and where employment in traditional industries has declined heavily in recent decades, causing the white middle class to be replaced by migrants. The city's population is officially 30,000, with 95 per cent having Spanish as their first language. In fact, because of illegal immigration, the number of people living in Maywood might be as much as 50 per cent higher.

Like many other hard-scrabble communities, Maywood's local politics have for years been mired in acrimony and corruption. Four years ago, the town made headlines when a clerk, Hector Duarte, was sentenced to a year in jail for soliciting a hitman to kill a council worker who was proposing cutbacks that might have axed his job.

As tax revenues have fallen and demand for services increased during the recent economic slump, Maywood was forced to confront another tough reality – it could no longer afford to subsidise a failing police department which according to a state investigation was: "permeated with sexual innuendo, harassment, vulgarity, discourtesy to members of the public as well as among officers, and a lack of cultural, racial and ethnic sensitivity and respect".

This year, Maywood's insurance provider came to the same conclusion. It cancelled the city's public liability coverage, saying it could no longer afford to pay compensation claims related to police misconduct. Despite an extensive search, no affordable alternative provider could be found. As a result, the council says the outsourcing all of its employees to outside governments and administrations was forced upon it.

"We had no alternative, because without insurance you cannot employ people," is how councillor Fellipe Aguirre puts it. "Am I happy with what happened? Well, at present, people are getting better services and we are saving money. So yes. Will people copy us? Who knows? We are a unique city with unique problems. But I think so far, what we have done is a success."

The future may be a different matter, though. Last week, the city of Bell found itself at the centre of a snowballing corruption scandal of its own. A report by the Los Angeles Times revealed that the city's council members had fiddled the rules to pay themselves salaries of over $100,000 a year, for part time jobs. The city's manager was earning $800,000; its head of police $400,000.