A Very Tangled Web: Public and Private Redux
A Cautionary Tale
Terre Haute is a mid-sized town on the western border of Indiana. In 2007, it held municipal elections, and voted in a new mayor, Duke Bennett. Bennett had defeated the former mayor, Kevin Burke. Shortly after the election, Burke sued to have Bennett declared ineligible to serve, citing the provisions of Indiana’s Little Hatch Act prohibiting government employees from engaging in certain political activities. The trial court issued a somewhat convoluted ruling in which it affirmed the applicability of the statutes involved, but found that the election essentially had “cured” the problem, as Bennett by that time had taken office, and no longer held the position that had rendered him ineligible. Burke appealed.
The Indiana Court of Appeals reinstated the suit, ruling that Burke had been ineligible to run and was therefore not entitled to assume office. The appeals court did not stop there, however; it also ruled that Burke could not be declared the winner of the election either, since voters had not been informed that Bennett was ineligible. Bennett has appealed, and at this writing, the dispute is pending in the Indiana Supreme Court.
The case raises significant issues of federalism and even more significant (and troubling) evidence that the line separating public and private is rapidly becoming indecipherable, lost in a tangle of outsourcing, contracting, public-private partnerships and the like.
The facts as the Court of Appeals described them were as follows: In 2005, Bennett had begun employment as Director of Operations at Hamilton Center, a local nonprofit established primarily for the purpose of providing behavioral health services. In 2007, the Center opened a Head Start program, for which it received a grant from Health and Human Services. (In 2007, the amount of the grant was $861,631.) Of that amount, $125,789 was for the Head Start program’s proportionate share of overhead, which included security, maintenance, liability insurance and similar generally accepted overhead costs. Bennett was responsible for providing and managing some of those overhead services, not simply for the Head Start program, but for all of the various programs conducted at Hamilton Center locations. The Court found that $2,041—or 1.84% of Bennett’s salary and benefits for 2006-2007—were attributable to the federal grant to Head Start.
On November 4, 2008, Bennett won the mayoral election, and on November 19th, Burke sued to have him declared ineligible under the provisions of 42 U.S.C. 9851, the pertinent portion of which applied the Hatch Act to Head Start Grant recipients.
“Any agency which assumes responsibility for planning, developing and coordinating Head Start programs and receives assistance under this subchapter shall be deemed a State or local agency. An agency that operates a Head Start program and receives federal grants to assist with the program is treated as a local government agency funded through Federal grants or loans, meaning that the agency and its employees’ political activities are subject to the restrictions of the Hatch Act.”
The trial court had analyzed this language and concluded that while Bennett had indeed been ineligible to run for mayor, neither Burke nor anyone else had tried to have Bennett disqualified prior to the election. It also, explicitly, found that “the violation was not willful or intentional,” and that the issue hadn’t been raised during any of his three prior election bids. And the trial court further noted that
“No evidence indicates Bennett willfully flouted the Act. No one from Office of Special Counsel informed him that he was precluded from running. No one from Hamilton Center told him the Act precluded him from being a candidate. His role with Early Head Start was essentially non-existent. Hamilton Center did not consider Bennett an employee of Early Head Start. Bennett approved work orders for minor repairs on two facilities.”
After analyzing the operation of Indiana’s election laws and Hatch Act provisions under the circumstances of the case, the trial court had concluded that Bennett could serve as Mayor, since his election had removed him from employment at the Center and had thus “cured” any defect.
The appellate court disagreed. After an exhaustive analysis of case law and relevant state and federal statutes, the Court held that Bennett had been an employee of a nonprofit agency that the law deemed to be a state or local agency, that the nonprofit status of that agency was irrelevant, and that—despite the negligible proportion of his pay that came from the Head Start grant, his employment was “in connection with” an activity “financed in whole or in part by loans or grants made by the United States.”
The ruling that Bennett had been ineligible to run and was ineligible to serve ended up being cold comfort to Burke, however, because the Court went further and declared the office vacant. Burke could not assume the office because the voters had not had access to all relevant information when they cast their ballots. (This part of the ruling raises a number of interesting questions about voters’ right to information, but analysis of that part of the ruling is inapposite here, and must therefore await a different inquiry.)
How Did We Get Here?
The original Hatch Act was passed in 1939, restricting certain political activities by federal employees, and the use of public funds for partisan or electoral purposes. It also forbid officials paid with government funds from using their positions to promise jobs, promotions, financial assistance, or any other benefit intended to coerce campaign contributions or political support. The act took its name from the Senator who sponsored it in reaction to disclosures that WPA officials were using their position to advantage the campaigns of local Democrats. (The original name of the legislation was “An Act to Prevent Pernicious Political Activities.”) In 1940, the original measure was broadened to include state employees paid wholly or partially from federal funds.( In 1994, the restrictions were eased somewhat; however, those changes are not relevant to the analysis in this case.)
Ever since its passage, the legislation has been controversial: proponents claim that it is necessary in order to keep government officials from coercing their workers to do partisan campaigning, while opponents believe the Act denies those workers the ability to exercise their First Amendment liberties. In the wake of the original Hatch Act, states have passed so-called “Little” Hatch Acts that apply similar restrictions to state government employees.
Whatever the merits or drawbacks of this particular piece of legislation, the real problem arises by reason of the sea change in the world of public administration since its passage. The term “governance” has all but replaced the older, more concrete “government;” it has come to be viewed as a more accurate descriptor of contemporary state structures, where—among other things—an ever-increasing percentage of the work of the state is outsourced to for-profit, non-profit and faith-based organizations. (Frederickson, 1996; Kettl, 2000; Milward and Provan, 2000; Pierre and Peters, 1998; Salamon, 1989; Hill & Lynn, 2005).
The reasons for this growth in “government by proxy” are varied, but among its roots are distrust of government and an often-reflexive preference for markets and/or civil society. What many of those holding that reflexive preference fail to recognize is that contracting-out is not “privatization,” properly understood—that is, the choice of private surrogates to deliver services on behalf of government agencies obscures but does not alter the fact that government is choosing, directing and paying for those services, and is thus ultimately responsible for them.
The relationship between governmental units and their surrogates has been the subject of a copious literature, much of which has focused on the wide variety of issues raised by these cross-sectoral partnerships. Understanding the complexity, diversity and significance of those issues is helpful if we are to fully appreciate the implications of the Terre Haute Mayoral election.
The Problem(s) of ‘Governance’
There are undoubted benefits to government that accrue through contracting, outsourcing and other public-private partnerships. Those benefits include flexibility, the ability to hire expertise not available in-house, the ability to address short-term needs without adding permanent employees to the payroll and many others. But the practice also raises a number of thorny issues, some of which should have been anticipated, others that are more surprising.
Constitutional and Ethical Issues
The “New Public Management” paradigm envisions the substitution of new forms of collaboration and management for the traditional hierarchical and bureaucratic chains of command. These new delivery methods, however, cannot and should not mean the abandonment of our constitutional values, nor of the constitutional norms of liberty, equality, and fairness. Nor should they obviate public actors’ obligations to meet the standards for government behavior that stem from the constitution and are incorporated in public law. (Jensen & Kennedy, 2005). As Donald Kettl has observed (1993, p. 40), the government “is not just another principal dealing with another agent.” The skepticism about government performance that prompted development of privatized governing arrangements should not be mistaken for a lack of concern over how public authority is deployed.
Public administration scholars, unlike their law school colleagues, have paid very little attention to the constitutional implications of government by proxy, and that is a troubling omission, because the issues here are foundational. Public administration in the United States is grounded in a very specific constitutional philosophy, one that begins by placing certain limitations on actions that may be taken by the state. The Bill of Rights prohibits government from engaging in behaviors that would be constitutionally and legally appropriate if done by a private-sector actor. Efforts to keep government responsible and accountable—politically, fiscally, ethically and constitutionally—thus depend upon the ability to identify government and to recognize when it has acted. “Governance” may be robbing citizens and public managers alike of the ability to make that crucial threshold identification. (The situation in Terre Haute would certainly suggest that to be the case.)
Public officials too often fail to recognize the importance of the State Action Doctrine, which defines invasions of constitutional rights as acts taken by government. Actions taken by the private sector may or may not be lawful, but by definition cannot be unconstitutional. Fortunately, there are a few public administration scholars—notably John Rohr and David Rosenbloom—who have emphasized the importance of the normative role played by the constitution. As Rohr (1990) wrote in an introduction to Constitutional Competence for Public Managers (Rosenbloom, 1992, 2002; Rosenbloom and Piotrowski, 2005; Rosenbloom, Carroll & Carroll 2000)
[W]e are witnessing the gradual reintegration of constitutionalism and public administration. I say reintegration because of the obvious connection between public administration and constitutionalism in The Federalist Papers. So integral was administration to the intent of the framers that the authors of The Federalist Papers made more frequent use of the word administration and its cognates they did of the words Congress, President or Supreme Court. (p. xiii)
The book itself makes explicit the connection between “public values” and the “daily decisions and operations of public managers.” (p. xvi)
Political theorists and public administrators alike emphasize the importance of legitimacy to public administration. Legitimacy requires fidelity to constitutional norms. As Michael Spicer has noted, “in the absence of consensus surrounding the role of government, bureaucracy becomes increasingly seen simply as a tool by which some groups gain benefits and privileges at the expense of others.” (Spicer, 1995, p. 4). A legitimate exercise of authority, no matter how coercive, is different in kind from the exercise of raw power unrestrained by adherence to constitutional norms and values, and it is seen differently by members of the polity. That difference is especially critical to those on the “front lines” of state and local government, who must make and implement policies that are anything but abstract to the citizens they affect.
The central question of both political philosophy and public administration is “What is the role of the state, and how should that role be managed?” What, in other words, are the convictions that should animate public service, and how should that service be defined? The United States Constitution rests upon very specific understandings of human nature, the role of the state and natural and human rights. Those particular understandings and the philosophical commitments that flowed from them led the founders to sharply limit the power of the state. To put it another way, the original American concept of liberty was in the negative: liberty was seen as an individual’s right to be free from state control or interference, subject only to the equal rights of others.
In order to limit government, however, one must first define it. And such definition is becoming increasingly problematic. The two elements of the usual definition—exclusive jurisdiction over a particular geographic area (an important element of sovereignty) and a monopoly on the legitimate use of coercive power—are arguably integral to popular understanding of the concept of statehood, or government. But both elements are undergoing redefinition.
Distinguishing Between Public and Private
Collaboration among the sectors is certainly not new, but over the past few decades, as contracting and other forms of collaboration have increased, scholars have documented increases in organizational overlap and interdependence and sectoral blurring in general (e.g. Cooper, 2003). Non-profits, for example, are becoming more “business-like” and commercialized (Weisbrod, 1998). Nonprofits and private organizations alike have become almost entirely dependent upon government funding, which calls into question their very identities as “nonprofit” associations or “private” enterprises (Bozeman, 1987).
Numerous approaches to distinguishing among organization types can be found in the literature but none capture the full complexities and dimensions of organizational archetypes (Rainey, 2003). Dahl and Lindblom (1953) produced one of the earliest typologies, constructing a continuum with government-controlled agencies on one end of the spectrum and market-controlled enterprises on the other. They used organizational characteristics—including objectives, incentives, and authority—to determine an organization’s position on that continuum. Interestingly, Dahl and Lindblom found that some organizations defied classification; i.e., corporations partially owned by government.
A very different approach to classification emphasizes ownership and funding (Walmsley & Zald, 1973), and yet another, proposed by Blau and Scott (1966), focuses on whether organizational outcomes benefit those who share ownership of the entity or whether the benefits accrue to the public’s interests. (Other scholars have pointed out that it is not always a simple matter to define that public interest (Mitnick, 1980). Bozeman (1987) observes that every organization has some degree of “publicness;” he then attempts to capture this attribute in two dimensions: political authority and economic authority.) Ironically, despite the lack of consensus on how to define organizational types and which organizational characteristics should be relied upon in making that classification, there is no shortage of research comparing the effectiveness of public and private actors. Such comparisons have included schools (Chubb and Moe, 1990). hospitals (Savas, 2000), and airlines (Backx, Carney, & Gedajlovic, 2002), among others. It is not an exaggeration to say that there is a robust “cottage industry” of scholars attempting to chart the shifting dimensions of our public-private divide.
The changing definitions of public and private have not been caused solely by the growth of contracting out, of course; in industrialized nations, and perhaps elsewhere, the growth of the global economy and the worldwide penetration of the Internet are also increasingly challenging traditional notions of territorial jurisdiction. In America, the steady expansion of government since the New Deal has already required us to rethink the relationship between government power and fundamental rights. But the advent of widespread contracting, where a growing number of services are paid for by government but delivered by contractors, has raised a host of new questions, including but certainly not limited to the following:
· Are partnerships with businesses and nonprofit organizations creating a new definition of government?
· How can we claim that private organizations are inherently more efficient if we can’t distinguish public from private organizations?
· Is contracting extending, rather than shrinking, the state?
· Does the substitution of an independent contractor for an employee equate to a reduction in the scope of government, as some proponents apparently believe?
· If we are altering traditional definitions of public and private by virtue of the new governance—turning for-profit and non-profit organizations into unrecognized arms of the state—what is the effect of that alteration on a constitutional system that depends upon the distinction between public and private as a fundamental safeguard of private rights?
· If the constitutional system is being altered, what are the implications for political theory and public management?
· What about traditional notions of ethical behavior? i.e., to whom does the contractor owe a duty of care? Of loyalty?
In other words, what happens to constitutional rights when the comingling of public and private becomes so pervasive that citizens can no longer tell who is exercising authority? What happens when no one—not even the courts—can tell where public starts and private stops?
Constitutional accountability is not the only area complicated by the increasing incoherence of our governing structures and blurred sectoral boundaries. Political accountability is similarly compromised. Political accountability requires visibility and transparency; it requires an ability to recognize the locus of decision-making, and the identity of the office or officer in charge. To put it another way, voters can’t “throw the bums out” if they can’t tell who the bums are.
In their seminal book “Nonprofits for Hire,” Smith and Lipsky explored the issues raised for nonprofit organizations when they entered into partnerships with government agencies (1993). Among the many outcomes they explored was the effect of these relationships on governmental accountability. As they noted, “Government accountability to citizens is undermined when responsibility for admission, treatment and outcomes seem to be in the hands of private organizations (p. 209). The inevitable confusion over who is in charge is exacerbated in many cases where the services in question are being delivered to disadvantaged and/or marginalized populations. As Smith and Lipsky also pointed out,
“ These are private workers who are representing the state to citizens, but under the sponsorship of nonprofit agencies whose connections to government and to the average citizen may be very tenuous. At best, citizens would have a difficult time knowing when a matter was agency policy, and when it was government policy. Thus workers in nonprofit agencies buffer public policy to citizens and obscure the realities of public policies, because policies are mediated by nonprofit agencies” (p. 14).
There are sound reasons for favoring transparency in government: transparency generates trust by providing clear lines of authority; it invites citizen oversight and facilitates the monitoring of government agencies by the public and the media. Conversely, a lack of transparency breeds distrust, and an inability to determine lines of authority undermines political accountability. These are not abstract concerns. The increasingly impenetrable maze of contractual and legal ties among public agencies and their private sector “partners” has been a significant and growing deterrent to the sort of political accountability envisioned in our constituent documents.
Recognizing the need for clarity if we are to hold government constitutionally or politically accountable is one thing; fashioning rules or formulas for doing so has proved to be considerably more difficult. The jurisprudence of state action is as incoherent and tangled as the reality of “governance” relationships. As one commentator has wryly noted, the Court’s ‘sifting’ and ‘weighing’ in state action cases “differs from Justice Stewart’s famous ‘I know it when I see it’ standard for judging obscenity mainly in the comparative precision of the latter ” (Brest, 1982, pp. 1296-1330). On one hand, the mere fact that a regulatory agency exercises oversight of a licensee and has thus implicitly approved the licensee conduct at issue has been held insufficient to attribute an action to the state (Jackson v. Metropolitan 1974). On the other hand, where government intentionally funds an unconstitutional program conducted by private actors, the Courts have generally—but not always—found state action (Norwood v. Harrison 1973). Agencies looking to the courts for guidance are likely to be disappointed.
By far the most scholarly attention given to the evolving modes of delivery for public services has centered on contracting and oversight problems. One way to categorize this literature is to differentiate between before-the-fact and after-the-fact concerns. As one would expect, before-the- fact issues involve the initial decision on whether or not to contract, typically referred to as the “make or buy decision”. There is also a growing literature on effective contract negotiation and management, concerns that arise after the decision to contract out has been made.
The prevailing assumption is that the private sector can produce goods and services more efficiently, i.e. more outputs for less inputs (Averch, 1990). In this view the principal objective of government is “budget maximization” (Downs, 1967; Niskanen, 1971). Government oversupplies (produces more than would be socially efficient) at greater than minimal cost (Fernandez, 2009). This technical and allocative inefficiency is due to the lack of favorable market conditions. Therefore, the theory goes, government outsourcing can reduce the cost and size of government and improve service delivery (Cooper, 2002; Osborne and Gaebler, 1992; Savas, 2000).
An opposing argument points out that cost savings are frequently less than anticipated (e.g. Greene, 2002), and sometimes do not materialize at all. Several researchers have noted that contracting has obscured our ability to quantify government employees; a civil service head count no longer provides an accurate picture of the size of government (Light, 1999), because although the number of workers receiving government paychecks may have declined, the total number of people actually working full-time for government has increased (Gutman & Willner, 1976; Smith & Lipsky, 1993). Thus, the more accurate measure is one that relies on the total cost of service delivery (Rosen, 2005).
As several researchers have noted, both sectors bring strengths and weaknesses to service delivery. That is, the price system in free economic markets can control economic and production decisions, but political authority is a more inexpensive means of social control (Dahl & Lindblom, 1953). According to this view, political hierarchies and economic markets are two alternative mechanisms for controlling political economies. The basic idea is that it is easier to direct people to obey the law than to work out a compensation system for doing so.
Market failure theory is consistent with this perspective (Weimer & Vining, 1999). It holds that there are certain conditions that make it impossible for the market to operate efficiently. Some goods/services are properly classified as “public goods” because their characteristics make it impractical or impossible to exclude non-payers (“free riders”) from their benefits. A favorite example is a lighthouse. Some may choose to pay for the service, but even the free riders will enjoy the benefits of the light. Similarly, the market is inefficient when a transaction between two parties affects (or spills over to) non- parties. When, for example, pollution associated with the production of a good cannot be confined to the parties who pay for the service, even those who were not parties to the bargain will be affected, in this case negatively. Other goods and services have natural monopoly characteristics (i.e., the telephone until approximately 1984), in which case the market will also be inefficient. And finally, the market cannot operate efficiently in cases of informational asymmetry; when buyers and sellers lack full knowledge of the effects of a transaction, they cannot make informed decisions. These instances are among the traditional justifications cited for government regulation.
As the practice of contracting has become more pervasive, a separate literature has developed to address after-the-fact management concerns: How shall the contract be designed? How much detail is enough, and how much is too much? Increasing reliance on contracting has led to a burgeoning literature on effective contract management. Indeed, “privatization increases the imperative for public management rather than relaxing or easing it” (Rainey, 2003, p. 417). The policy implementation literature focuses on the effects of resources, political support and other ingredients for successful contracting (O’Toole, 1986; Hall & O’Toole, 2000). Trust matters, too: sociologists have emphasized the role of trust in contracting (e.g. Granovetter, 1985) and economists have focused on trust’s role in reducing both transaction costs (Williamson, 1985) and agency costs (Jensen & Meckling 1976).
Although there is no dominant theoretical approach to determining what leads to successful contracting, several elements are typically highlighted, including the role of competition, monitoring, trust, and public management capacity (Van Slyke, 2003; Fernandez, 2009) As previously noted, a primary argument for the comparative efficiency of the private sector is that goods and services are produced in a competitive environment. A similar argument is that competition among potential suppliers is essential to government contracting (Borcherding, 1977). Indeed, the arguments for privatization over government delivery of public services assume competition (Van Slyke, 2003). Competitive bidding is necessary to reveal the lowest cost (Pack, 1989). Counter arguments also exist: competition can disrupt the delivery of services (Smith and Lipsky, 1993), provide an incentive for reduced quality (Kamerman & Kahn, 1989), or increase transaction costs (Sclar, 2001; Kettl, 1993). How many contracts are awarded to a sole bidder, or to a bidder chosen from a very small pool, has thus far gone undocumented, but anecdotal evidence suggests it is more the norm than the robust competition assumed by this literature.
The argument for the importance of monitoring typically relies on agency theory. In the public sector, there are two agency relationships: the voters (principals) and the bureaucracy (agents), and the bureaucracy and the contractor. The contract must be designed with incentive alignment and risk transfer objectives in mind (Hart & Holmstrom, 1987), because problems arise when the preferences of a principal and agent diverge. As Machiavelli reminded the Prince, contractors (in his case, mercenaries) are only loyal to their pay; their real interests are at odds with those of the State.
The agency problem also implicates the issues of transparency and accountability addressed earlier. Government transparency implies access to relevant information. Citizens can neither act nor vote on what they don’t know. If government is to be fully accountable to its citizens there must be some degree of transparency. Contracting also creates problems for public managers because it complicates lines of authority and control, which also affects accountability. And because contracting adds a new level of complexity for public managers, those managers need a new set of skills, including but not limited to negotiating and bargaining expertise and mediation experience (Kettl, 1993).
Contracting even implicates issues of national sovereignty. In December 2003, The Guardian reported that private corporations had become the second biggest contributor to coalition forces in Iraq after the Pentagon, and noted that the proportion of private contractors had grown markedly since the first Gulf War in 1991, when it was 100 to 1. By 2003, the proportion was ten to one, and nearly a third of the budget earmarked that year for the wider Iraqi campaign, or $30 billion dollars, went to private companies in what the Guardian called “a booming business” of replacing soldiers with highly paid civilians not subject to standard military procedures.
. This “booming” private sector has soaked up much of the expertise that became available as armies downsized after the Cold War, and its emergence has allowed America to wage war by proxy, without the congressional and media oversight to which conventional warfare is subject. Before the prisoner abuse scandal, as noted in the preceding section, most criticism of contracting focused upon perceived financial improprieties, and the public management challenges posed by privatization: lack of oversight, poor record keeping, ties between bidders and political actors, and the award of huge, “no bid” or “closed bid” contracts. Yet fiscal mismanagement and improprieties, while destructive of trust in government and the political structure, are only one aspect of the problem.
In June of 2003, Peter Singer published a book titled “Corporate Warriors: The Rise of the Privatized Military Industry,” in which he explored warfare by proxy (including occasional use of “low profile” forces to solve “awkward, potentially embarrassing” situations). Singer identified three categories of private military contractors: 1) Provider firms offering direct, tactical assistance—anything from training programs to staff services to front-line combat; 2) Consulting firms drawing primarily upon retired senior officers selling their strategic/administrative expertise back to the military; and 3) Support firms providing logistic and maintenance services. A host of legal, policy and management questions are raised by this vastly expanded use of private companies. Among those identified by Singer include whether the ties of these organizations to their countries of origin will weaken as markets become more globalized, and opportunities for profit conflict with obligations of patriotism. Will states lose control of military policy to companies whose first responsibility is to clients and shareholders? How will foreign policy decision-making change when a declaration of war entails “hiring” soldiers rather than deploying young citizens? Will companies pursuing profits lobby successfully for military “solutions” to global conflicts? How will we control the behavior of “private” combatants?
Whatever the eventual answer to these and many other questions posed by these arrangements, Singer argues that governments are surrendering a defining attribute of statehood, the monopoly on the legitimate use of force. If our legal system is increasingly unable to answer the question “when has government acted?” what will happen when we no longer know what a government looks like?
In Terre Haute, Indiana, voters and candidates are unfamiliar with the academic literature exploring the intricacies of these public-private contracting relationships. It is unrealistic—and unfair—to expect otherwise. They, and we, are entitled to a system that is intelligible to people of ordinary intelligence. They, and we, are entitled to know who is in charge of what, and even more importantly, who can be held responsible for violations of their rights as citizens. Whatever the merits or drawbacks of “governance” or government-by-surrogate, a public management that takes citizens’ interests seriously will recognize the considerable burdens and “transaction costs”—financial, ethical and constitutional—that are being incurred solely as a byproduct of complexity.
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Little Hatch Act, 5 U.S.C. § 1501 et seq.
Burke, Appellant-Petitioner v. Bennett, Appellee-Respondent (2008)
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