New Contracting Out Law Saves Money and Improves Service to the Public
2007-02
On July 1, 2005 the Personnel System Reform Act of 2002 (PSRA) went into effect.[1] One provision allows state agencies and universities to competitively contract for services provided in the past by state employees. National research shows that competitive contracting typically reduces agency costs by between 10% to 25%, with increases in efficiency, service and quality.
The PSRA also requires that the Joint Legislative Audit and Review Committee (JLARC) evaluate how effectively state agencies have used competitive contracts. JLARC issued its report on January 4th. Disappointingly, in the 16 months since the bill took effect, only three agencies have actually exercised their authority to open some of their work to competitive bidding.
The PSRA states that agencies must notify any employee who could potentially be displaced 90 days prior to soliciting any bids. The affected employees or unions then have sixty days to offer alternatives to competitive contracts. The remaining thirty days are for the agency to consider the offer. If the agency rejects the alternatives, it opens up the process to bids from private firms or Employee Business Units. An Employee Business Unit is a group of public workers who band together to submit a bid. They are often the public employees who were already performing the same or similar work to begin with, so they often have a natural advantage in the bidding process.
The state agency or institution then awards the contract based on the cost, quality and efficiency of the winning bid. Simply submitting the lowest bid is not enough to win. Aspiring contractors must show they can provide equal or superior service at a lower cost to taxpayers.
The PSRA also contains other requirements. To tap competition, agencies must:
Contracting out success stories
Under PSRA, the legislature gave several agencies roles in implementing competitive contracting, but they did not assign any agency the responsibility of tracking the program’s success. Thus, the JLARC report may not contain every instance where competitive contracting was considered. However, JLARC researchers conducted interviews and surveys with 39 agencies, and these agencies were responsible for 93% of the contracting done by the state in 2006. It should be noted that competitive contracting is not the only contracting the state does. In fact, in the 2006 fiscal year, the state spent $7.4 billion or 32% of state operating expenditures on contracting services. The vast majority of these contracts were not competitive contracts as defined by the law. In fact only three of the 39 agencies interviewed utilized competitive contracts.
Yakima Valley Community College (YVCC). YVCC's experience with competitive contracts is perhaps the most illustrative. Of the three agencies that awarded competitive contracts, YVCC was the only one that displaced any employees and therefore was the only one that had to deal with most of the law’s guidelines. The college discovered that its childcare center was costing roughly $100,000 more than revenues. The School first tried to cut its child care staff from nine full time employees to four. The College found this solution unsatisfactory, as it wanted its childcare program to run at full capacity, so administrators decided to competitively contract.
The displaced employees’ union offered an unworkable alternative to contracting which the College rejected, and the employees decided not to form an Employee Business Unit. The School contracted with Easter Seals, a private childcare provider with over 100 operations across the U. S., including four in Washington. Easter Seals is nationally recognized for providing exceptional care to special needs children, and it requires all of its childcare centers to be accredited by the National Association for the Education of Young Children.
The contract had the desired effect. Easter Seals is running the center at a higher capacity for a much lower cost. The school estimates that over five years the contract will save over $829,000, or about 44%, compared to the way it operated the childcare center before. (The pre-contracting out arrangement would have cost the school $1,873,330 over five years. The arrangement with Easter Seals will cost $1,044,376.)
Washington State Patrol (WSP). The State Patrol received funds from the U.S. Department of Justice to improve its telecommunications infrastructure. State employees usually perform this work, but the State Patrol did not feel it had enough employees to complete the task. WSP compared the cost of hiring more employees to the cost of contracting with a private vendor.
The agency concluded that, while the costs were roughly the same, there was no way to complete the project in an efficient and timely manner without hiring a private vendor. WSP also says that because it was not displacing any employees, there was no need to review in-house alternatives (since none existed) or negotiate with an Employee Business Unit (since none was formed). WSP was able to implement a more streamlined and cost-effective competitive bidding process that resulted in lower cost for the agency and better law-enforcement service to the public.
Central Washington University (CWU). CWU’s collective bargaining agreement stipulates that the University can competitively contract as long as they do not lay off employees or reduce work schedules. The University has considered competitive contracts in six instances, five catering jobs and one fencing project. In every case the contracts went through the bidding process, and, in the end the University decided to contract out four of the catering jobs, and complete the remaining catering job and the fencing project in house.
A fourth institution, Centralia College, considered using competitive contracts, but ended the process before soliciting bids. All three state entities that opened contracts to bidding awarded contracts to private bidders. Only one of those contracts actually resulted in the displacement of employees, and Employee Business Units were not formed in any case. In sum, none of these cases had to deal with all of the PSRA’s regulations. Most of the agencies involved avoided many of the most onerous mandates, none of them had to navigate the unfamiliar landscape of Employee Business Units and one opted out all together.
For over two decades, state and local governments across the country have been opening services traditionally performed by government employees to competitive bidding. The success of these programs has revealed four key benefits of competitive contracting:
There are numerous examples of governments that have reaped these benefits by utilizing competition. Two examples that achieved all four benefits are Massachusetts and Indianapolis.
Massachusetts. After a successful trial of competitive contracts in one county, Massachusetts decided to extend the highway maintenance program across the state. The state saved $7.8 million while service levels increased by $10.2 million. Competition eliminated poor management and empowered employees to suggest better methods.
The ethos of the government also changed. Before competitive contracts, inefficiency and waste were rampant. Workers in one service maintenance division took an average of 23 sick days; nearly four times the allotted amount. However, with the advent of competitive contracts came better oversight, which reduced waste, but perhaps more importantly state workers began pressuring their colleagues to perform their work better. The changes attracted accolades and awards from both public and private institutions.
Indianapolis. The City of Indianapolis decided to open some road maintenance projects to competitive bidding, but discovered that it would first have to clean house. City officials wanted to ascertain how much it currently cost the city to pour a ton of asphalt, so that they could better evaluate bids, but found that no one knew how much it cost. The City hired an accounting firm to figure out the cost and find efficiencies. City officials also realized that management was bloated and sluggish. In fact, the maintenance division employed 32 highly-paid supervisors to manage its 94 line workers.
The mayor laid-off or transferred half of the supervisors. The administration was able to streamline management and transform the culture of the government from one that did not even know its own costs to one that sought efficiencies. These steps helped gain the respect and good-will of the line workers as the City embarked on the bidding process. City employees won the bid by reducing the estimated cost of pouring a ton of asphalt from $407 to $301, or 25%. They also increased their productivity by 68%.
If done right, competitive contracts save taxpayers money by introducing competition and rewarding cost savings, and foster efficiency and quality by allowing government agencies to draw from a specialized, manifold, limitless labor pool. Despite all of the benefits and successes of competitive contracts, they still face a tremendous amount of political inertia. Even in many cases where competitive contracts have been undeniably positive, they were initially met with misgivings.
Competitive contracting in Washington is still in its uncertain infancy. Many agency managers do not know how to begin or what to expect, but successes in other states and now limited experiences in Washington warrant optimism that, if given the chance, competitive contracts could improve services and reduce the tax burden placed on citizens.
In interviews and surveys, agency managers in Washington identified two major reasons for the scarcity of competitive contracting:
Complexity: Agency managers perceive the process as complicated and confusing, providing a disincentive to competitively contract. Many claimed that they are waiting to see how other agencies fare before venturing into competitive contracting.
Collective Bargaining: Agency managers also point out that competitive contracting is a subject of collective bargaining (negotiations between agencies and unions), which is a further obstacle to their successful implementation. The State has collective bargaining agreements with all the various state employee labor unions. Some of these agreements explicitly prohibit competitive contracting, but even when they do not, agency directors expressed concern that unions might sue them if they privately contract.
The findings of the JLARC report validate and underscore the need for competitive contracting. The JLARC findings support the recommendations in the Washington Policy Center book Policy Guide for Washington State, which helps inform policymakers, the media and citizens about key public issues in our state. Regarding improving the effectiveness of contracting out authority, the Policy Guide provides two important recommendations:
These recommendations address directly the reasons agency managers give for not using their contracting out authority more often. If implemented, these changes would lead to more competitive contracting and the people of Washington would enjoy the lower costs and improved service to the public that other state governments are providing.
[1] Revised Code of Washington 41.06.142.