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Backgrounder #1022 on Federal Budget

March 10, 1995

March 10, 1995 | Backgrounder on Federal Budget

Cutting the Deficit and Improving Services By Contracting Out U


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1022 March 10, 1995 CUTTING THE DEFICIT AND IMPROVING SERVICES BY CONTRACTIN G OUT INTRODUCTION c Contracting out government services to the private sector offers the new Congress the winning opportunity to make substantial cuts in federal spending-as much as $9 bil lion per year-without reducing essential constituent services. In deed, if properly imple mented, an aggressive program of contracting out at the federal level could even lead to improved service at significant budgetary savings, reproducing improvements routinely achieved by states and municipalities.

Contracting out is the process in which government hires, by way of competitive bids qualified private businesses to perform essential services on its behalf. Typically, govern ments have used contracting out to provide routine support services such as data process ing, tr a sh pickup, landscaping, building maintenance, motor pools, printing, and library management. However, there is no reason why more sophisticated and complex services could not be contracted out. For example, the Defense Department has demonstrated that con t ractors can perform successfully in a number of sensitive and sophisticated areas vi tal to national defense. Recently a number of communities have contracted out functions once deemed uniquely governmental, such as prisons (73 sites in sixteen states) an d the management of both individual schools (Baltimore, Maryland) and an entire school sys tem (Hartford, Connecticut with excellent results. With many recently elected mayors and governors committed to aggressiye privatization and contracting out strategi e s in an effort to offer the best service at lowest cost, it is likely that this trend toward the privati zation of more sophisticated functions will continue l 1 "Essential" is emphasized here with the understanding that any "unessential" services ought t o be terminated.

I Typically, the main reasons for contracting out include 0 Substantial budgetary savings over what it costs government workers to 8 The availability of specialized skills not typically found in a government Concentration of the government s workforce on those responsibilities 0 The introduction of market competition into the provision of government perform the same service workforce, that are uniquely governments, and services.

Unlike private business, which must compete with many competit ors on a day-to-day basis and therefore must offer consistently good services at low prices, the federal work force operates as a protected monopoly in most of its activities. Efforts to interject com petitive practices into the system have met with consi d erable resistance from the federal workforce, including both workers and managers, who believe that contracting out threat ens their job security and compensation, despite studies which show that no more than 5 percent of the affected workers are at risk o f losing their jobs. In response to these con cerns, Congress frequently has introduced legislation that directly or indirectly prohibits agencies and departments from contracting out some specific function or bureau, be it the work of three individuals a t an isolated government weather station or two thousand clerical workers at a major claims processing facility.

As a consequence of this resistance and subsequent congressional prohibitions, con tracting out at the federal level has merely scratched the surface of potential opportunity.

As much as $9 billion could be saved each year if the process were applied in a compre hensive and systematic fashion to the basically commercial functions now performed by federal workers. tablishing well-defined manageme nt procedures and clear objectives to guide the federal establishment to a level of competitive contracting substantially higher than anything yet attempted. Key elements of such a plan would include elimination of needless prohibi tions, timely completio n of comprehensive inventories of federal agencies commercial positions and functions, and well-defined goals for subjecting these positions to the com petitive review process To realize these potential savings, Congress and the White House must cooperate i n es THE BIPARTISAN SUPPORT ON CONTRACTING Contracting out became formal federal policy in 1955, when the Eisenhower Admini stration issued Bureau of the Budget Bulletin 55-4, affirming that the Federal govern ment will not start or carry on any commercia l activity to provide a service or product for its own use if such product or service can be procured from private enterprise through or dinary business channels. Used sporadically in the decades thereafter, it was not until 1987, when the Reagan Administr a tion issued Executive Order 12615 and established the Privatization Office in the Office of Management and Budget (OMB that contract ing out became a required feature of government departments and agencies-albeit only briefly. In 1989,20,000 federal posit ions-an annual record-were subject to the formal 2 competitive review process under the A-76 program, named after the OMB Circular guid ing the process of competitive contracting.

Although the Reagan Administrations privatization effort was allowed to laps e during the Bush Administration, in 1993 Vice President Albert Gore gave the competitive proc ess a strong endorsement in the report of his National Performance Review Every federal agency needs support services-accounting, property management, payroll p r ocessing, legal advice, and so on. Currently, most managers have little choice about where to get them; they must use whats available in-house. But no manager should be confined to an agency monopoly. Nor should agencies provide services in-house unless t he services can compete with those of other agencies and private companies.

In the same chapter, the Vice President specifically urged competitive contracting (or private/public partnerships) for many responsibilities and programs of the Government Printin g Office, Department of Housing and Urban Development, General Services Ad ministration, and National Oceanic and Atmospheric Administration; for non-core func tions of the Department of Defense; and for the Labor Departments Job Corps Civilian Conservati o n Centers 2 THE POTENTIAL SAVINGS With the bipartisan support it lacked in the past, and with congressional and executive branch agreement on its importance, the federal government could achieve the level of savings routinely obtained by other levels of g overnment. Thus, a very specific and com prehensive program of contracting out should be a major component of this years budget resolution and the accompanying appropriation bills.

Although honored more in the breach than in practice, the limited number of contract ing out initiatives actually taken already have led to substantial savings as thousands of federal jobs and services have been transferred to more efficient private-sector providers.

Based upon experience to date, contracting out saves money reg ardless of whether the private sector or government wins the contract-the threat to contract out alone can spur improvements in efficiency. Since 198 1, approximately 1 12,000 full-time equivalent FIE) employees, mostly in Defense, have been subject to th e A-76 competitive review process, yielding cumulative savings of $7 billion and current annual savings of about $1 billion.

Notwithstanding the governments long and successful experience with contracting out, however, and despite the existence of numerous executive orders and bulletins advo cating its use, numerous reviews and analysis by OMB indicate that as many as a million of the three million civilian federal workers still are performing commercial types of du ties and should be subject to the A-76 r e view process 2 Vice Resident AI Gore, Creating a Government That Works Better Costs Less: Report of the National Performance Review, U.S. Government Printing Office, September 7,1993, p. 57 3 Governed by procedures detailed in OMB Circular A-76, Performan c e of Commer cial Activities, federal contracting out essentially is a process in which the cost of activi ties performed by the existing federal workforce is compared with that proposed by quali fied private-sector bidders. In all cases, the federal workf orce is given an opportunity to restructure its operations and submit its own competitive bid. Moreover, it is given a 10 percent cost advantage and thus can lose only if the private bidder offers more than a 10 percent savings over the federal bid.

Still, despite this built-in federal advantage, in recent years private contractors have been winning about 50 percent of the bids (compared with about 70 percent in the 1980s Savings have averaged between 20 percent and 30 percent compared with pre vious costs. Moreover, when government workers win and retain the service, generally it is by achieving an average savings of between 15 percent to 20 percent compared with their previous cost of providing the service. Expressed another way, competitive review saves, on average 9,000 per year for each government employment position reviewed.

With annual estimated savings of $9,OOO per FTE formally reviewed by the A-76 proc ess, potential budgetary savings of up to $9 billion per year could be attained if the pro gram were fully used.

Fear of Job Loss. Although demonstrably successful, the contracting out program has diminished in scope since the peak reached in 1988-19

89. One reason for the limited ap plication of contracting to government programs has been th e fear that it will lead to mas sive layoffs of government workers. Not surprisingly, the chief opponents are govern ment employee unions and government managers, who fear losing their jobs, and the elected officials who represent them. But studies of act u al contracting experience indi catethat only 5 percent of affected federal workers lost their jobs. The remaining 95 per cent found jobs elsewhere in governinent, joined the private contractor, or retired. 3 TARGETS OF OPPORTUNITY As noted above, as many a s one million federal positions may be amenable to commer cialization and contracting out. The most recent edition of OMBs Circular A-76 pro vides a comprehensive list of positions and functions that should be reviewed and subject to competitive bidding. T hese include automated data processing, data transcription, train ing, food service, facilities/grounds/utilities maintenance, mail processing, architecture and civil engineering, library management, laundry and dry cleaning, warehouse and stock handling, accounts management, and loan processing. 4 3 4 National Commission on Employment Policy, Privatizution and Public Employees: The Impuct of City and County Contracting Out on Government Workers, May 1988, p. 17.

See for example, U.S. General Accounting Of fice,Public Private Mix: Extent of Contracting Out for Real Property Management Services in GSA. GAO/GGD-94-126BRY May 1994, for a discussion of the savings achieved in the contracting out of certain building management functions 4 In addition to these op p ortunities, however, other areas of potentially considerable sav ings exist throughout the government. Among them EXAMPLE #1: Maintenance and management of government motor pools and transportation services. According to the most recent GAO report on the s ubject the federal motor vehicle fleet (passenger vehicles and light trucks) totaled 37538 1 vehicles as of July 1992 and entailed an annual expenditure of approximately $1 bil lion for acquisition, operations, maintenance, and disposal. Greater use of pr i vate livery services and contractor management and maintenance of motor fleets could lead to considerable savings, perhaps as high as $200 million to $300 million per an num, if past patterns hold planes and helicopters, dedicated to non-military purposes , including between 200 to 300 craft used for passenger travel. Performing essentially the same service as corpo rate jets, much of this fleet could be sold if government officials were required to utilize regularly scheduled airlines, private air-forwardi n g companies, and contrac tors providing aviation services for more specialized needs. These civilian aircraft have been a persistent source of misuse and waste, as indicated by recent media reve lations concerning high White House officials and their golf game, as well as Air Force Generals and their pet cats. The latter incident, involving a flight from Italy to the United States, cost the taxpayer $120,000 but was said by Pentagon officials to have broken no laws many municipal and non-profit hospitals h ave achieved substantial savings-and im provements in quality-by contracting with private hospital management companies.

Despite their reputation for poor service, however, the staff and management of Veterans Administration hospitals have been protected f rom competition by a vari ety of federal laws and regulations. Until recently, for example, legislation estab lished an employment floor of 157,000 for total VA personnel, so using outside man agement personnel would have forced the VA to add rather than r educe hospital staff. Other laws explicitly prohibit the contracting out of activities of the Depart ment of Medicine and Surgery. And while the government workforce is given a 10 percent cost preference in all other federal contracting, in VA that prefer e nce was 15 percent, and the private bidder was required to add the government's review costs to his own when submitting the bid, until 1994 when Congress, recognizing the exces sive costs these restrictions imposed on veterans' programs, agreed to place t h ese re strictions in abeyance for five years. This should be made permanent parks can be effected by contracting out many routine services now performed by costly uniformed personnel. Uniformed Park Service employees provide janitorial 5 Similarly, federa l agencies operate a vast fleet of aircraft, estimated at 1,250 6 EXAMPLE #2: Veterans Administration hospitals. Over the past several decades EXAMPLE #3: The National Park Service. Large savings in the running of national 5 6 U.S. General Accounting Offic e,"Federal Motor Vehicles: Private and State Practices Can Improve Fleet Management,"

GAO/GGD-95-18, December 1994.

Dana Priest,"on-Defense Projects Targeted; Pentagon Supports Some, Not All Against GOP Attack The Washingron Posr, February 10, 1995, p. A 1 5 trash-collection, ticket-taking, maintenance, grounds-keeping, security, and other ba sic, semi-skilled services routinely contracted out by other organizations, including most other government agencies.

The problem is existing congressional prohibiti ons on contracting out Park Serv ice tasks. These prohibitions should be removed, and the Park Service should be re quired to take private bids for all routine service positions within the next twelve months. The money saved by contracting out basic servi ces could be reinvested in national parks and historic structures which now suffer from neglect and deferred maintenance.

EXAMPLE #4: Mapmaking. Thirty-nine federal departments, agencies, and bureaus, in cluding the U.S. Geological Survey, National Oceanic and Atmospheric Administra tion, Army Corps of Engineers, Defense Mapping Agency, and National Mapping Division of the Department of Interior, employ 7,000 workers and spend approxi mately $1 billion in surveying and mapmaking. Mapmaking is a service tha t is read ily available from private industry at competitive costs. All government mapmaking activities should be opened to bids from private-sector suppliers HOW TO REVIVE THE CONTRACTING PROGRAM Past experience in the United States and abroad demonstrate s that successful contract ing out requires strong leadership and a commitment from both the Congress and the ex ecutive branch. Without such a commitment, and without rewards and penalties for suc cess or failure, government departments and agencies will b e disinclined to implement a program that creates uncertainty among existing workers merely to save money for tax payers and improve efficiency. The lack of this commitment in recent years helps explain why as many as half of the executive branch departme nts have never conducted an A-76 review of any facet of their operations.

To obtain the efficiency savings potentially available from this form of privatization, a revived contracting out program must include the following elements ELEMENT #1: Appoint a "Privatization Czar."

The position of Associate Director for Privatization shouldbe re-established within OMB, and each government agency, in cooperation with Congress and OMB, should be required to designate a privatization official to identify those offic es and divisions that awperforming commercial-like functions and that portion of its workforce (expressed as full time equivalents, or FTEs) that my be performing services available from the pri vate sector ELEMENT #2: Identify areas for contracting out.

Congress and OMB, in cooperation with the General Accounting Office (GAO) and Congressional Budget Office (CBO), should review and approve the list or make recom mendations for its improvement. H.R. 28, introduced by Representative John J. Duncan Jr. (R-T N would require OMB to create such a list 6 ELEMENT #3: Contract out where appropriate.

Once the list is approved, each department and agency should be required to subject to competitive review, under the process laid out in OMB Circular A-76 or through a simi lar procedure, between five and ten percent of all positions (FTE offices, and div i sions included in the list. Ten percent would mean as many as 100,000 positions per year, com pared to the past peak of about 20,000 reviews in the last year of the Reagan Administra tion, and (based upon past experience) annual savings of $9 billion. In t he event the re view indicated potential savings in excess of ten percent over current costs, the agency should be required to contract out those areas to qualified private contractors. Offices and divisions winning the competitions would remain within go v ernment-typically in a more efficient and less costly form. Offices, divisions, and FIX positions that failed the competition would be replaced by the winning private contractor ELEMENT #4: Monitor progress White House should be subject to periodic review by OMB and Congress.

Departmental and agency progress-or the lack of it-toward the goals set by the ELEMENT #5: Create stronger incentives for privatization.

In dealing with large bureaucracies, even the best-laid reform plans are doomed to fail ure unle ss they are accompanied by meaningful incentives for performance and penalties for non-performance. There are several ways in which agencies could be spurred to con duct formal competitive reviews and contract out appropriate functions. Among them r/ Cong r ess simply could assume the savings in advance in an agencys budget allocation. For example, if A-76 competitive reviews typically save $9,000 per FTE reviewed, and if a specific agency is assigned to review 3,000 FTEs in the coming year, an expected savi n gs of $27 million would be taken in advance from the next years budget. I r/ Anticipating that contractors would win half the competitions and that fed eral workforce victories in the other half would lead to efficiencies and FTE savings, Congress could r e duce the number of FTEs the agency is permitted during that year. Agencies then would have a powerful incentive to adopt contracting to maintain services with fewer resources r/ Using a carrot rather than a stick, the agencies could be permitted to keep a ny sav ings achieved over and above.the.leve1 required 27 million in the above example by Congress ELEMENT #6: Remove obstacles to privatization.

While many government departments have successfully resisted competitive review through bureaucratic maneuveri ng, progress also has been stymied by congressional pro hibitions and obstacles. A top priority for this Congress should be to repeal all legislative obstacles that needlessly inhibit or prohibit contracting out and other forms of privatiza tion. The appe n dix provides a detailed list of some of the prohibitions Congress has en acted in the past. The following are typical 7 d Outright prohibitions on contracting of specific functions d Denial of funds for purposes of contracting-in some cases, bans on even s tudying d Removal of contracting authority from certain government officials d Minimum staffhg requirements. Once applied to such agencies as the Farmers Home Administration, Agriculture Stabilization and Conservation Service, Railroad Retirement Board, F e deral Aviation Administration, and the Veterans Administra tion, among others, these employment floors were perhaps the most pernicious of all obstacles because they also discouraged internal management improvements and the introduction of labor savings t e chniques and equipment. Most of these minimum re quirements have been removed in recent years, and Congress should resist constitu ent pressure to establish new ones d The Service Contract Act. This statute has forced prospective private contractors to in f late their proposed wage costs artificially when competing for government con tracts, thereby rendering them less competitive with government workers already in place, whose wages may be less than the so-called prevailing wages imposed on con tractors by t he Act. In cases where union wages may be less than government wages the Labor Department often rules that higher government wages are the prevailing wages. Thus, even when the contractor wins the bid and performs the service for less than the government charged itself, the final costs may be higher than necessary because of the inflationary provisions of the Service Contract Act.

The Service Contract Act also artificially inflates contracting out costs even when there is no competing federal workforce. Fo r example, when the Environmental Pro tection Agency hires a private contractor to clean up a hazardous waste site under the Superfund program, wages must conform to those designated under the Act even if qualified workers are available for less. Congress should follow the 1983 rec ommendation of its own GAO and repeal the Service Contract Act? H.R. 246, intro duced by Representative Harris Fawell (R-IL), would repeal this Act d The Davis-Bacon Act. This statute places the same prevailing wage requirement o n contractors bidding for construction projects. It has had the same effect on these private contractors as the Service Contract Act. Davis-Bacon will be a serious obsta cle to obtaining the full benefits of infrastructure privatization unless repealed.8 S . 141, introduced by Senator Nancy Landon Kassebaum (R-KS), and H.R. 500, in troduced by Representative Cass Ballenger (R-NC) would repeal the Davis-Bacon Act d Section 13(c) of the 1964 Urban Mass Transit Act. Counterproductive federal regulations greatl y limit the extent to which regional and metropolitan mass transit authorities can reduce costs and improve service through contracting. Section 13(c the potential savings from privatization 7 8 U.S. General Accounting Ofl?ce,The Congress Should Consider R epeal of the Service Contract Act, GAO/HRD-83-4 January 31, 1983.

U.S. General Accounting Ofl?ce,The Davis-Bacon Act Should Be Repealed, HRD-79-18, April 27, 1979 8 requires that transit authorities receiving federal grants hold special negotiations with t ransit unions. Moreover, transit workers must receive six years severance pay in the event their job is lost because of contracting. This obviously introduces a severe dis incentive against any local contracting and is estimated to cost transit authoritie s $2 billion to $3 billion per year in foregone savings. This Congress should repeal this section of the Act in order to free local transit agencies from onerous federal regula tions. 9 CONCLUSION Although contracting out commercial-type government service s to the private sector has been formal federal policy since 1955, its application to eligible programs and oppor tunities has barely scratched the surface. Serious obstacles erected by Congress, often combined with executive branch indifference, have kept the program on the back burner for much of the last forty years. Nonetheless, enough federal departments and agencies as well as state and local governments, have applied the program to establish an impres sive record of cost savings and service improveme nts.

Unlike the past, when the programs application was limited by a generally hostile Congress confronting an often unenthusiastic President, both branches of government to day have endorsed the contracting out approach. What is needed now is an aggressiv e and comprehensive program as part of this years budget and appropriations process.

Ronald D. Utt, Ph.D.

Visiting Fellow 9 Wendell Cox and Jean Love, Reclaiming Transit for the Riders and Taxpayers, in Edward L. Hudgins and Ronald D. Utt eds. How Privat &tion Can Solve Americas Infrastructure Crisis (Washington, D.C The Heritage Foundation, 1992 10 During the Reagan Administration, Dr. Utt was Associate Director for Privatization at the Office of Management and Budget. That position was abolished during t he Bush Administration and has not been revived under the Clinton Administration 9 HOW CONGRESS HAS BLOCKED PRIVATIZATION AGRICULTURE Minimum employment levels exist at the Farmers Home Administration, Agri cultural Stabilization and Conservation Service, and the Soil Conservation Service The Farmers Home Administration is prohibited from contracting with pri vate debt collection firms to collect delinquent payments Agriculture is precluded from selling loans made by the Agricultural Credit Insurance Fund C OMMERCE NOAA is prohibited from commercializing meteorological satellites NOAA is required to use appropriated funds for certain projects The Department of Commerce is prohibited from selling its economic devel opment loans The National Technical Informat i on Service is prohibited from contracting out services DEFENSE Minimum civilian employment levels exist at Army depots The Department of Defense is prohibited from contracting out security and firefighting services The Crane Army Ammunition Activity and M c Alester Army Ammunition Plants are prohibited from contracting out services The Department of Defense is prohibited from contracting out core logistics The Philadelphia Defense Personnel Support Center is prohibited from con The Department of Defense is p r ohibited from contracting out any activity The Department of Defense is prohibited from contracting out logistics ac The Department of Defense is prohibited from contracting out entire medi maintenance functions tracting out services performed by 10 or mo re civilian employees tivities to non-governmental personnel cal facilities 10 x Officers at Fort Benjamin Harrison, Indiana are prohibited from A-76 proce dures A-76 implementation is impeded by complicated requirements for notice and reporting.

The Army Corps of Engineers is prohibited from contracting out reservoirs in Mississippi.

The Army Corps of Engineers is prohibited from contracting out the opera tions and maintenance of hydroelectric power facilities.

Only installation commanders have the autho rity to decide which commer cial activities will be subject to A-76 review (Nichols amendment ENERGY The Department of Energy is prohibited from studying alternative pricing The Department of Energy is prohibited from studying the sale of the Power The De partment of Energy is prohibited from using appropriations for the pri The Department of Energy is prohibited from studying or proposing the pri structures.

Marketing Administrations, except Alaska vatization of the Naval Petroleum Reserves vatization of t he uranium enrichment programs GENERAL SERVICES ADMINISTRATION GSA is prohibited from contracting out certain intra-agency service positions HEALTH AND HUMAN SERVICES K The FDA is prohibited from adopting user fees The Social Security Administration is pr o hibited from contracting outside the United States for printing services HOUSING AND URBAN DEVELOPMENT HUD is prevented from selling section 202 loans Minimum employment levels exist within the Public and Indian Housing Pro gram HUD is prohibited from sel l ing section 31 2 direct loans 11 A-76 is the title of the OMB circular that outlines and regulates the process and procedures for federal contracting out of competition 11 I NTERl OR The National Park Service, Fish and Wildlife Service and Bureau of Land M anagement are prohibited from contracting out any services JUSTICE The Department of Justice is prohibited from contracting out any functions The Department of Justice is prohibited from the sale of loans or guarantees involving law enforcement, litigatio n or the administration of justice held by the Federal Financial Bank LABOR The Job Corps is forbidden to contract out any Civilian Conservation Center TRANSPORTATION The FAA is prohibited from contracting out maintenance for national air The Coast Guard m u st delay the A-76 process for congressional review Minimum employment levels exist within the FAA for air traffic controllers The Department of Transportation is prohibited from funding changes in the current federal status of the Transportation Systems C e nter or the Turner-Fair bank Highway Research Center ways system facilities TREASURY Minimum employment levels exist at the Customs Service despite the fact that automation has reduced the need for large staffing levels VETERANS AFFAIRS Minimum employment levels exist within theVA medical care staff The Department of Medicine and Surgery is prohibited from contracting out certain activities RAILROAD RETIREMENT BOARD Minimum employment levels exist within the Railroad Unemployment Insur ance Trust Fund SMAL L BUSINESS ADMINISTRATION The SBA is prohibited from selling loans held or guaranteed by SBA and held by FFB 12

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