A large body of research and experience shows that public sector outsourcing often backfires. Rather than resulting in savings for taxpayers, governments too often get bilked, paying more money to private vendors, in some cases for inferior services. To rub salt in the wounds, private companies may pay lower wages and benefits, completing the lose-lose-lose trifecta – bad for taxpayers, bad for government, bad for workers.
Given the evidence, it’s refreshing to find bipartisan lawmakers – Republican Rep. Aaron Kaufer from Luzerne County and Democratic Senator John Blake, also from northeast Pennsylvania – advancing companion bills (HB 1914 and SB 795) that would put the brakes on counterproductive outsourcing by school districts. Pennsylvania’s public-school districts can’t afford to throw away resources in these financially constrained times. School districts also employ tens of thousands of support professionals – bus drivers, cafeteria workers, school custodians, secretaries, and others – whose livelihood is critical to their families and their communities.
In the wake of the introduction of the Blake and Kaufer bills, Keystone Research Center has put together a summary of the research most directly applicable to school district outsourcing in Pennsylvania.
While some observers take on faith that private = better, the economic reasons that outsourcing often has negative consequences are straightforward – and show up again and again and again.
First, changing contractors or bringing work back in house has a “transition cost,” so that government entities cannot easily “change their mind” or get a new private provider if they’ve made a mistake. Transition costs are high, for example, once school districts contract out transportation services and sell their bus fleet. Bringing work back in house then requires a capital outlay for a new bus fleet. Given the leverage that contractors have once the deal is done, it’s no surprise that contracting out increases the cost of school transportation services in Pennsylvania – by $224,000 when you control for other factors that impact costs. In Pennsylvania school districts, transportation companies also appear to bid low to get their foot in the door, but then raise their costs rapidly in the five years after privatization. Outsourcing of food services in Pennsylvania does not appear to increase costs. But it doesn’t lower them either.
Second, many private sector markets are not competitive – there may be only a few providers of even basic services (such as food or transportation services), especially in smaller communities.
Third, contracting out and monitoring contractors themselves have costs.
Fourth, private companies want to make a profit, and their margins may eliminate or outweigh any efficiencies or cost reductions.
Fifth, when contracting does save money, the savings often come out of the pockets of workers who already have modest wages and benefits as public employees.
Since contracting out often fails to deliver, many public entities end up reversing themselves and bringing work back in house. But cash-strapped and managerially stretched school districts are less likely to do that than larger units of local government, because of those transition costs. That’s why it’s so important to get the outsourcing decision right the first time – which brings us back to the Kaufer and Blake bills.
To avoid counterproductive outsourcing of non-instructional pubic services by Pennsylvania public schools, their bills would require:
- a solicitation of proposals publicly accessible online and at the school administrative office;
- a minimum three-year projection of costs after outsourcing;
- a public hearing to present the selected proposal and receive public input;
- information on legal or regulatory violations by the private company and criminal records of its employees;
- hiring preference at contractors for school employees whose employment was terminated due to outsourcing and who held the same or substantially similar position when employed by the district; and
- a guarantee that schools may terminate outsourcing if costs exceed those projected.
Our research brief also summarizes the results of Pennsylvania and national opinion polling on outsourcing. Pennsylvania voters overwhelmingly support common sense transparency when schools outsource services. By margins of nearly 2:1 to over 3:1, Pennsylvanians favor contractors having open meetings and open books, school district transparency about spending on outsourcing, allowing employees to submit their own cost-savings plan as an alternative to outsourcing, and cancelling contracts that don’t deliver promised savings or quality gains.
Justice Louis Brandeis once said that “sunlight is said to be the best of disinfectants.” When it comes to outsourcing support services by school districts, Justice Brandeis was right. Providing additional transparency when school districts consider outsourcing, and an escape route if savings do not result, can reduce the number of cases in which districts regret outsourcing because it increases taxpayer costs, compromises the quality of educational support services, or undercuts the quality of jobs for members of the local community.