|Wisconsin Legislative Council 11|
Legislative Green Sheet: Privatization of State Services
Privatization or the contracting out of services often is seen by managers as a way to save taxpayer dollars and stay within a budget. The temptation to contract out is even greater in these tough economic times both because of staggering budget cuts and because private contractors aggressively seek to do business with the state.
The tendency to contract out state-provided services has escalated over the years because it is easier to hire contractors than it is for an agency to ask for additional state employee jobs. Indeed, in this era of crushing budget deficits, agency heads have been ordered to reduce the state workforce. Many state employee jobs have been eliminated or ordered to remain unfilled over the years. As of July, 2010, there are some 4,000 vacant state positions.
Long term, state government staffing has shrunk from 68,000 employees in 2002 to 65,544 in March 2010, a 3.6% cut. In the 2009-11 biennial budget the state cut general fund spending by $727 million, which included 16 days of furloughs for state employees, amounting to an across-the-board wage reduction of over 3%.
Recent U.S. Census Data (from the Wisconsin Taxpayers Alliance and the Wisconsin Council on Children and Families) shows the following about state and local government employment in Wisconsin:
Yet even before the era of budget shortfalls, politicians took aim at state workers. Many politicians are more concerned about the public’s perception over the size of state government, despite the fact that government in Wisconsin is decidedly smaller than the vast majority of other states. As a consequence, the legislature often has made decisions that cater to the mantra of anti-government right-wingers and talk radio, instead of making sound decisions about what might be the best way to deliver good quality services in the most efficient and cost-effective manner.
AFSCME has witnessed countless budget debates in the legislature’s budget-writing Joint Committee on Finance only to see decisions made to reduce funding and cut state employee jobs, but with the clear expectation that the services would continue to be provided. How has that turned out? Many state workers are doing the jobs that two or three workers had done in the past. We’ve seen management resort to hiring limited term employees (LTEs) as well as contracting for services with private vendors.
AFSCME maintains that when it comes to providing the basic services to citizens, it is usually more cost-effective to use state employees than it is to hire outside contractors or consultants.
The Perils of Contracting Services
Contracting out almost always costs more than its backers claim because indirect and hidden costs are ignored during the bidding process. These include the cost of contract monitoring and administration, conversion costs, charges for "extra" work, and the contractor's use of public equipment and facilities. The Government Finance Officers Association estimates that such costs can add up to 25% to the price of a contract.
Contracting for services also ignores a basic fact – that when it comes to service delivery, the contractors are in business to make a profit. They build profit into their bids. They do this by hiring low-wage workers without benefits, creating increased cost to the government for safety net services like Badger Care health insurance, food stamps, and child care subsidies. And they export state taxpayer dollars out of Wisconsin and many times, out of the country, by sending those profits back to the home office and the shareholders. In this way, both the state worker and the taxpayer lose.
The quality of service can deteriorate when profit is the prime motivation in service delivery. The profit motive can be an incentive to "cut corners," especially when contract specifications are vague or poorly defined. Flexibility erodes because public employees routinely perform tasks above and beyond their official job descriptions. Those duties usually are not factored into contract specifications.
Dependence on contractors increases as in-house expertise and capacity is diminished when state jobs are eliminated. We have seen this happen within the state Department of Transportation (DOT). This loss of leverage can lead to price gouging by contractors in future negotiations. Contractors often "low ball" their initial bids to persuade managers to award them the job. We have seen many times that once a contractor gets a foot in the door, they raise their prices and sometimes the manager in charge has little choice but to continue with a service provider when they have no place else to turn mid-project.
Contracting also jeopardizes and diminishes public accountability. When citizens have complaints about a contractor, it is harder to have the complaints resolved because there is no direct connection between the service provider and the payer – that is, the taxpayer. Private companies can avoid public scrutiny, unlike government entities, which are required to operate in an open arena. These conditions create opportunities for corruption, such as bid-rigging, bribery and kickbacks.
Contracting out services usually results in higher costs to taxpayers and a loss of state employee jobs. It also does virtually nothing to help improve service delivery and find ways to save money. Innovative and responsible government leaders know that joint labor/management partnerships are the best way to truly improve service delivery and save money. Public resources are most efficiently and effectively deployed when front-line workers and managers ¬¬- who have a stake in their communities - work together for the public good.
AFSCME Has Worked to Reform the State’s Contracting Practices
In 2005, AFSCME led the effort to unmask the hidden costs of contracting out of state services. An exhaustive review of state DOT contracts revealed the state was grossly overpaying for services, contracting for redundant services and making payments far exceeding the estimate of the original contract. Those revelations, along with information regarding state information technology projects and contracts that were coming in well beyond time and well above budget, led to a bi-partisan effort to review and reform the state contracting out process. That culminated in the passage of 2005 Wisconsin Act 89.
Act 89 requires state agencies to conduct a “Uniform Cost Benefit Analysis” (UCBA) before entering into any contract that exceeds $25,000. The law allows us to find out and compare the costs of using state workers compared to private contractor. Act 89 created a mechanism that accounts for all overhead, administration and other costs and compare the true “apples to apples” costs.
Five years after Act 89 was enacted, the law continues to confirm what we have long suspected. Last year, AFSCME Council 24’s Outsourcing Committee analyzed 23 state DOT contracts and UCBAs and found that in 22 of the 23 instances, state employees would have been more cost effective than the contractors who got the jobs. Considering that the DOT enters into hundreds of consulting contracts each year, it can be estimated the DOT’s contracting practices have cost state taxpayers nearly $23 million in over-priced consulting contracts alone.
We have sought every opportunity available to share the findings of the overview of DOT contracts with legislators. Our efforts gained traction and we helped persuade State Senator (and AFSCME endorsed congressional candidate) Julie Lassa and State Representative Andy Jorgensen to develop Senate Bill 447 and its nearly identical companion bill, Assembly Bill 792, which seek to reform Wisconsin’s contracting out practices.
SB 447 and AB 792 are comprehensive in scope and targeted many aspects and consequences of contracting out state provided public services. We were pleased that the legislation addresses many AFSCME concerns. For example, the bills prohibit state agencies from replacing vacant state employee positions with contracted work during hiring freezes or furloughs. The legislation also requires that, before entering into or approving a service contract, it must be shown that:
• No current state employee is able and available to perform the services called for by the contract.
• The service would be performed more economically by contracting out than by using state employees
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