Privatizing Public Services

In pursuit of smaller government, states have considered a variety of privatization schemes in the past few years. In a recent survey of state officials, half said that they anticipate an increase in privatization and half anticipate that the level of privatization will stay the same in their agencies or states.1 It is expected that the money spent on outsourcing of state and local technology jobs alone will increase from $10 billion in 2003 to $23 billion in 2008.2

Many state contractor bids do not accurately reflect the hidden costs required to transfer responsibility to a non-government entity, including the use of public equipment, facilities and human resources. Other hidden costs include the need for a new layer of bureaucracy to administer the bidding process, oversee contracts, and monitor results. A survey of state budget directors revealed that over 68 percent cite cost savings as the primary reason for privatization, but only 19.6 percent reported any quantifiable cost savings.3 An Ohio study found that school districts that privatized bus services paid significantly more per pupil and per mile than districts that did not privatize.4 An in-depth cost-comparison of New York’s privatized public services determined that the state could save over $500 million by de-privatizing.5

Contractors reduce costs by hiring contingent and inexperienced personnel at low wages, skimping on contract requirements, or providing inadequate supervision. Too often, regular tasks once performed by public employees are not accurately reflected in a contract, resulting in increased costs or eliminated services.

Private sector workers who deliver public services are directly accountable to their company, not to citizens. This reduces citizens’ ability to hold their public officials and workers responsible for the quality and timeliness of public services.

When services are privatized, international trade agreements can prevent states from limiting the bidding process to local companies. States are at risk of being forced to accept contracts from out-of-state or overseas companies.6 At least 40 states have sent food stamp administration jobs overseas. An audit in Washington State revealed that 36 of 41 state agencies were contracting overseas.7 Offshoring is not an issue when services are provided by state employees.

While proponents of privatization claim that public jobs are simply transferred to the private sector, the public sector incurs many hidden costs as a result of layoffs, such as unemployment insurance. Some workers may also require additional public assistance, like Medicaid, as a result of layoffs.

The public sector provides greater employment opportunities for women and minorities, both in absolute numbers and in seniority. Women and minorities are more heavily represented in professional and managerial positions in government than in the private sector. Privatization can contribute to a decline or stagnation in their careers. In addition, private firms that take over public services usually employ only two groups of workers—high-level management and front-line workers. This limits the ability of women and minorities to move from lower- to higher-skilled positions.

In 2006, Wisconsin’s governor signed a bill that requires state agencies to compare contracting costs with the cost of using state employees to do the work. In 2005, Montana enacted a law that gives state employee unions early access to privatization plans as well as a voice in the decision-making process. Connecticut’s governor issued an executive order in 2006 that creates a State Contracting Standards Board that will set standards for state agencies to evaluate proposals to privatize public services. Kentucky, Maryland, Massachusetts, Oklahoma and Vermont also have privatization standards.

While the public supports the concept of improving the delivery of government services, Americans also support laws that ensure the continuity of quality public services. In a national poll, three out of four voters favored standards and accurate comparisons of cost between privatizing and retaining public oversight of services. Support was equally strong among Republicans, Democrats and Independents, with more than 60 percent of each group favoring the policy.8