Tag Archives: contracting out

Lessons We Are Learning

The upside of a very down time is that the grifters, clowns and neo-Nazis currently laying waste to American government and our international reputation are (accidentally, to be sure) illuminating longstanding structural weaknesses that have facilitated the damage they’re now doing.

One of those weaknesses is a result of the so-called “privatization” movement–especially as that movement co-opted organizations in the nonprofit sector. When I was still on the university faculty, that co-option was the subject of several of my academic publications.

The privatization movement overall was a response to the belief that government agencies don’t do anything well. (The people who criticise “bureaucratic waste” somehow never notice that similar problems with redundancies and “red tape” are present in any large organization, public or private…) The results of that anti-government bias have been profound–vouchers that send tax dollars to private, mostly religious schools that demonstrably don’t perform any better than the public schools, and the delivery of a wide variety of social services through not-for-profit organizations.

There are several problems with “contracting out,” the practice of paying businesses and nonprofits to provide government services.

With respect to nonprofits, one problem is “mission creep.” Mission creep occurs when a nonprofit organization has become dependent on government dollars, and the government program that they’ve been delivering ends. If the government is launching a different program–one that isn’t really consistent with the nonprofit’s mission–the organization will often contract to provide that service, despite the mismatch with its mission, in order to keep the dollars flowing.

When government benefits are delivered through nonprofit organizations, there is also a significant lack of transparency. Citizens are typically unaware that they are benefitting from a government program. (Remember the guy who shouted “keep your government hands off my Medicare at a Congressman? That was a rather extreme example…)

More troubling is the substantial research showing that the practice of contracting with for-profit and nonprofit organizations to deliver government services “hollows out”–erodes–important government capacities. In addition, managing and monitoring a contract with an outside provider requires skills that differ from those needed in most government work. Those  skills are frequently lacking, increasing the potential for waste (and worse).

The practice of contracting out also masks the growth of government. Delivering services through private or nonprofit entities doesn’t shrink the public sector–it governmentalizes the private sector. Private contractors are a significant portion of the “true” federal workforce, with some studies suggesting that their number exceeds the number of direct federal employees.

Then there’s the state action problem.

In the American legal system, the difference between public and private action matters.  Public or state action is action taken by a unit of government.   The Bill of Rights restrains only government, so it is important to know whether a particular act was public (i.e. governmental) or private.  Government cannot insist upon random drug testing of its employees, for example, although a private employer may legally do so. Public schools cannot insist that students pray, but private schools can. Government cannot ban books, discriminate against women or Wiccans, or deny citizens due process of law. Under certain circumstances, private organizations can do all of those things. The distinction between public and private is absolutely central to American constitutional law and the idea of limited government.

Contracting out can make it difficult to distinguish private from public activity. On the one hand, if a city buys computers or pencils from a private company, that vendor shouldn’t suddenly be considered part of the public sector. But what happens when the city or state engages a private company or nonprofit organization to deliver services that had previously been delivered by government employees? Can the private company engage in practices that would be unconstitutional if the government did them?

All of these issues preceded Trump. But his administration’s efforts to stamp out anything our mad would-be king considers “woke” or “DEI” or critical of him has uncovered a previously unrecognized threat. When nonprofits are dependent on government dollars, they either bend the knee or lose critical funding.

In addition to threats to revoke the tax exemptions of disfavored organizations, the administration has paused distribution of federal grants and loans. Though courts stepped in to block some actions, those initial freezes caused fear and planning uncertainty. Other administration actions have included halting previously-appropriated funding for environmental, health, and community programs, which indirectly hurt nonprofits dependent on those grants.

We need to put “rethinking government contracting” on our list of items to address once we eject the Keystone Kops who are running amok in Washington.

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The Perils Of Privatization

According to the Washington Post, Elon Musk and the Trump Administration are hauling out an “oldie but goodie” and promising that once they’ve hollowed out the federal government’s capacity to govern, they’ll turn any functions they deem necessary over to the private sector. They’ll privatize for “efficiency.”  What could possibly go wrong?

Let me count the ways.

I spent a fair amount of my academic career researching what folks on the Right misleadingly call “privatization.” The first thing you need to know is that calling what Trump and Musk want to do “privatizing” is a misnomer. When Margaret Thatcher sold off government-owned industries to the private sector–where they made or lost money, paid taxes, and were left to sink or swim–that was privatization. In the U.S., the term is used to mean contracts between a government agency and a business or nonprofit organization to provide a government benefit or service. Government continues to pay for that service or benefit with tax dollars, and government remains responsible for its proper delivery.

Sometimes, contracting out makes sense. Sometimes it doesn’t. (It also shouldn’t be confused with procurement— government’s purchase of goods and services from the private market.)

Contracts with units of government are qualitatively different from contracts between private actors, and those differences make it far more likely that the “privatization” contracts ultimately negotiated will be unfavorable to taxpayers. Contracting out first became a fad at the state and local level some twenty-plus years ago, and the results weren’t pretty.

As I wrote back in 2013, mayors and governors who are considering privatization are operating under a different set of incentives than the corporate CEO who is charged with long-term profitability of his business. Long term to a politician means “until the next election.” Typically, the elected official is looking for immediate cash to relieve fiscal stress (and improve his immediate political prospects) and is much less concerned with the extended consequences of the transaction.

Furthermore–although it really pains me as a former Corporation Counsel to admit this–the lawyers who reviewed these deals for local governments tended to be far less sophisticated than  lawyers acting on behalf of the contractors. That’s not because they aren’t good lawyers–most are. But the skills required to advise a municipality or state agency aren’t generally the same skills as those needed by practitioners of business transaction law.

In addition to the existence of unequal bargaining capacities, there is also—unfortunately—the very high potential for “crony capitalism,” the temptation to reward a campaign donor or political patron with a lucrative contract at taxpayer expense. Back in the bad old days, patronage meant that you volunteered for the party and if your party won, you–or maybe your brother-in-law–got a job with the city or state. With “privatization,” patronage meant that you made a meaningful contribution to the party and if it won, you got a cushy contract.

Ideally, the media would act as a watchdog in these negotiations, alerting the public when a proposed contract is lopsided or otherwise unfavorable. But media has never been very good at providing this sort of scrutiny, because news organizations rarely employ business reporters able to analyze complex transactions. (In today’s media environment, of course, we’re lucky if we even know a deal is in the works.)

In that 2013 post, I warned that we shouldn’t be surprised when these transactions turn out to be unfavorable to the taxpayer–and in the years that followed, a great many of them proved to be very unfavorable indeed. (For one thing, it turned out that too many government agencies lacked the capacity to effectively monitor contractors.)

Worse, from an accountability standpoint, when services are delivered by an intermediary, citizens often fail to realize that those services are really being provided by government. That failure has constitutional as well as political implications. Only government can violate an individual’s civil liberties–that’s what lawyers call “state action”–so it’s important that we be able to distinguish actions taken by private actors from those that can be attributed to government. Privatization has significantly muddied that distinction.

Also, when contracting is extensive, it masks the true size of government. Today, there are approximately 3.7 million contract employees in addition to 2.1 million civil servants. Only the latter are being targeted by Musk.

Will the public fall for this replay of an expensive and discredited “reform”? Hopefully, our earlier, extensive negative experience with privatization will prevent folks from falling for this again, but as we know, simple prescriptions sell.

The plutocrats are undoubtedly salivating….

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Hollowing Out The Federal Government

A recent article by two notable scholars of government, Don Kettle and Paul Glastris, reminded me of my old preoccupation with what Americans erroneously call “privatization.” I began to research the issue after watching the very uneven results of then-Mayor Goldsmith’s love affair with the concept. (A search for the term “privatization” through the archives of this blog will return a number of detailed posts on the subject.)

My skepticism begins with the misuse of the term;  unlike actual privatization–which would involve selling off government operations and allowing them to sink or swim in the marketplace (a la Margaret Thatcher), Americans use the term to mean government “contracting out” for goods and services. There are obviously times and tasks where contracting makes sense. My concern is that government isn’t a very good judge of when and what those are. Contracts with units of government are qualitatively different from contracts between private actors, and those differences make it far more likely that the contracts ultimately negotiated will be unfavorable to taxpayers.

And of course there’s the predictable “crony capitalism,” contracts rewarding campaign donors with lucrative contracts at taxpayer expense.

A few years ago, I came across data suggesting that the federal government actually pays the salaries of some 17 million full-time contract workers who aren’t technically government employees.

A number of the problems created by extensive federal contracting are the subject of the linked essay, titled (tongue in cheek) “To AOC: Only you can fix the federal government.”

You and other progressive leaders have bold ideas for how government can help people and save the planet. The Green New Deal. Medicare for All. Free college. A massive investment in public housing. We aren’t in full agreement with that agenda, but that’s not our point. Our point is that to achieve your goals, you’re going to need a federal government as robust as your ideas. And right now, you don’t have it.

Instead, the government agencies you’ll need to carry out your policies are a disaster waiting to happen. Like the infrastructure you and others rightly say needs rebuilding, our federal bureaucracies are a patched-together mess that can barely handle the weight of the burdens already placed on them.

The essay pointed to specific examples, including the GOP’s assault on the Internal Revenue Service.

In 2004, George W. Bush’s administration turned the job of collecting the hundreds of billions of dollars that tax scofflaws owed Uncle Sam over to private collectors, with the idea that they could do a better job than federal workers. The private collectors brought in money—but just $86 million, and most of that was from easy-to-collect cases that began running out after just a few months. Then the IRS brought the work back in-house, and its agents collected almost two-thirds more money in just a few months, and it came from the harder cases the private companies had left behind. Relying on private tax collectors actually ended up costing the federal government money.

But the Republicans weren’t done. They slashed 20 percent of the IRS’s budget and 22 percent of its staff from 2010 to 2018. For people making more than $1 million, the number of tax audits dropped by 72 percent—and the money the IRS collects from audits fell by 40 percent.

Government operations stymied by a lack of skilled in-house personnel include–among other things– the government’s inept handling of refugees and the (mis)management of Medicare and Medicaid ($103.6 billion in improper payments in 2019 alone).

The list goes on. Click through and read the litany, if you want to set your hair on fire…

What the essay makes clear is something that far too few citizens recognize: it isn’t enough to have good policies. Passing a law to do X or Y is only the start; the unit of government charged with administering the law or program needs sufficient resources to do so. Those resources include adequate numbers of well-trained employees and skilled supervision– virtually impossible when contractors are providing the bulk of the services.

We’ve long relied on service contractors beyond the point of reason. We now have contractors who do more or less the same work as civil servants, sitting in the same offices, for years on end, typically at far higher cost, often using government email addresses so it’s impossible for anyone on the outside to know whether they’re dealing with a government official or a contractor. We have contractors who oversee contractors, contractors who write policy for government officials, and federal contract managers who are too few in number and too outgunned in skills to manage it all.

The hollowing out of government’s management capacity is the result of the GOP’s persistent attacks on the civil servants who work for it.

It has to change.

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Reich’s Rules

What American politicians call privatization has been a focus of much my academic work.(If you go to the “Academic papers” section of this blog and search for privatization, you’ll find a lot of entries.)

I phrase it as “what American politicians call privatization” because–as Morton Marcus pointed out to me years ago– genuine privatization is what Margaret Thatcher did in England. She sold off government-owned assets like railroads and steel mills to the private sector, after which they were private. They paid taxes, and either prospered or failed, but government no longer had much to do with them.

What Americans call “privatization” is very different. The accurate term is “contracting out” –and it refers to the decision by government agencies to provide government services through for-profit or non-profit surrogates. That process should not be confused with procurement–no one expects city hall to manufacture its own computers or the myriad other items it requires in order to function. (Admittedly, the line can get blurry: contracting with a private paving company to fill potholes, for example. But few privatization critics are troubled by those long-standing practices.)

It is important to recognize that when a government agency contracts with a surrogate to provide services that the agency is legally required to provide, government remains legally responsible for the proper delivery of those services.

Robert Reich recently enumerated five rules that should govern these decisions. His rules are very similar to those on my class lecture on the subject.  It should be obvious, for example, that government shouldn’t contract out when keeping a service in-house will be more efficient and cost-effective.

Other rules are less obvious, but no less important.

  • Don’t privatize when the purpose of the service is to bring us together – reinforcing our communities, helping us connect with one another across class and race, linking up Americans who’d otherwise be isolated or marginalized.

 This is why we have a public postal service that serves everyone, even small rural communities where for-profit private carriers often won’t go. This is why we value public education and need to be very careful that charter schools and other forms of so-called school choice don’t end up dividing our children and our communities rather than pulling them together.

  • Don’t privatize when the people who are supposed to get the service have no power to complain when services are poor.

 This is why for-profit prison corporations have proven again and again to violate the constitutional rights of prisoners, and why for-profit detention centers for refugee children at the border pose such grave risks.

  • Don’t privatize when those who are getting the service have no way to know they’re receiving poor quality.

 The marketers of for-profit colleges, for example, have every incentive to exploit young people and their parents because the value of the degrees they’re offering can’t easily be known. Which is why non-profit colleges and universities have proven far more trustworthy.

  • Don’t privatize where for-profit corporations face insufficient competition to keep prices under control.

 Giant for-profit defense contractors with power over how contracts are awarded generate notorious cost overruns because they’re accountable mainly to their shareholders, not to the public.

Perhaps the most troubling contracting practices involve the military; contract soldiers are uncomfortably similar to mercenaries, and the growing use of private companies in America’s  various wars and military actions generates a number of very thorny issues, a topic I’ve explored elsewhere.

One of America’s many overdue conversations should address what services we expect  our various levels of government to provide and the nature and extent of the evidence needed to support a decision to outsource service delivery.

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Up In The Air…

Every once in a while, the Indianapolis Star actually carries something we can consider news. (Not often: as I skimmed the paper the other day looking for actual information about the city, municipal and/or state government, area schools, or other coverage that could be classified as news, I came across several sports stories and an article–I kid you not–about a local family being reunited with their lost cat….)

One recent article that was newsworthy raised questions about privatization and a living wage.

The article began by profiling one of the baristas who works at the Indianapolis airport, noting that like most of the airport’s workers, she makes 10.50 an hour, and has to work two jobs in order to make ends meet.

In August, the City-County Council passed a proposal that sets a $13 “living wage” for city and county staff members. There are 365 workers earning $9.13 to $12.98 per hour who work for the city and county that will be eligible for pay increases.

But not everyone who works for the City will see a raise.

Reed, and nearly 100 cashiers, coffee baristas, janitors and service workers at the airport, argue that the city’s recent move to increase municipal workers’ minimum wage to $13 an hour should apply to them, too.

However, because the Indianapolis International Airport — ranked the top airport in the country five-straight years — has outsourced its labor to private companies through public-private partnerships, airport workers will not see those wage increases.

The article noted that airport privatization began with former Republican Indianapolis Mayor Stephen Goldsmith in 1995.  Ours was the country’s first full outsourcing of an airport. Goldsmith declined to comment on the Star’s report, but was quoted on the subject from a previous article:

 “I wanted to market-test whether a private company that specializes in airport management, with access to worldwide technology and best practices, could produce more customer satisfaction, better airline relationships and more net revenue while holding down increases in passenger enplanement costs,” Goldsmith told Governing Magazine in April.

Goldsmith was a major proponent of what is incorrectly called privatization (real privatization occurs when government simply “sells off” a function to the private sector a la Margaret Thatcher in England, and is thereafter not involved). What we call privatization is really contracting out. Government is still responsible for supplying the service, but rather than employing people directly, it hires companies or organizations whose employees provide it on government’s behalf.

One of the arguments for these arrangements–sometimes called “third-party government”–has been that private companies could do the work more cheaply. More recent research suggests the savings are largely illusory when the costs of negotiating and monitoring the contracts are factored in. (Unlike government, private companies bidding on government contracts also have to pay taxes, which adds to their costs.)

To the extent savings are realized, it’s usually because the private sector employees are paid less than their government counterparts.

The public administration literature suggests that actual experience with contracting has diminished its attractiveness to government agencies. Management problems, loss of institutional competence and other unanticipated consequences have taken the bloom off that particular rose, and many services that were enthusiastically outsourced by proponents like Goldsmith are being brought back “in house.”

That national reevaluation isn’t likely to be much comfort to the underpaid airport workers who are doing public jobs that benefit their communities but not making the same wage that they would make if they were on government’s direct, rather than indirect, payroll.

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