Legislative Approaches to Responsible Contracting

Introduction

Contracting out has risks for state and local government. Contrary to the promises made by contractors, it often results in higher costs, lower quality of service, greater opportunity for corruption and diminished government flexibility, control and accountability. In addition, women and minorities are disproportionately harmed because they, more than white male workers, rely on government employment as a means to economic and social advancement. The local economy and tax base may suffer as relatively good paying jobs with benefits are replaced with low-wage, no-benefit jobs.

If a government is considering contracting out, it is critical that these risks are minimized and that contractors are required to live up to the claims they make. Standards should be established to ensure that taxpayer money is used wisely, affected employees are treated fairly and citizens can continue to monitor and hold their government accountable for services provided.

Various state and local governments have enacted legislation, adopted regulations or established policies incorporating such standards. They may be found in procurement or administrative codes, statutes associated with a particular service or in personnel and labor codes where the rights of public employees are delineated. In some cases they are in a government’s constitution or charter. Local governments may have their own procurement procedures or they may be governed by state statute. Some approaches are described below.

In addition, an inventory of current statutes in 20 states where AFSCME membership is concentrated, is provided in Appendix A. Vermont is also included because it recently passed responsible contracting legislation. Summaries of the legislation, including citations, are provided in Appendix B.

Prohibit or Limit Contracting Out Certain Activities or Services

Governments cannot contract out their "accountability" and will remain ultimately responsible for a contractor’s mistakes. This is of particular concern in regard to certain public services, such as corrections, social services and health care. Some governments recognize this by requiring that certain functions should be left under the direct control and provision of the government.

• The state of Illinois is prohibited from contracting out the management or operation of its correctional facilities.
• Federal law requires that employees who decide eligibility for food stamps and Medicaid must be covered by a "merit system," (essentially a civil service system), which effectively prohibits contracting those jobs out.
• California’s constitution requires, according to judicial interpretation and with limited exceptions, that employees providing public services be covered by a civil service system.

Governments may occasionally need vendors with particular expertise for short-term projects. Some limit contracting out to temporary, emergency or uncommon situations where the jurisdiction does not have the technical personnel or equipment necessary to perform the work and it is not economically reasonable to hire staff or acquire the equipment.

• The state of California, which requires a comprehensive cost comparison before any service can be contracted out, permits contracting out if the service requires technical or expert knowledge not available through the civil service system even though it may cost more than in-house provision.
• The state of Minnesota’s requirements for contracting include, for contracts in excess of $5,000, certification that no state employee is able to perform the service.

Require Consideration of In-House Alternatives

Given the risks associated with contracting out, including loss of control and flexibility, decision-makers should be certain that in-house alternatives have been seriously considered. Contracting out should be limited to those circumstances in which the in-house approach fails to meet the government’s cost or quality benchmarks. Jurisdictions can be required to involve their employees and their unions in the development of in-house alternatives.

• Before contracting out, the city of San Jose requires a "competitive assessment," in which employees and the union are involved in identifying costs, performance measures and industry standards and developing benchmarks. Services determined to be competitive continue to be delivered in-house.
• The city of Detroit requires a cost evaluation of any proposed contract, legislative approval to seek bids and a two-thirds vote by the legislative body to certify that a contracted service would likely equal or exceed the quality of service delivered in-house.

Require Specific Conditions

Contracting out has broad ramifications. It can affect a community’s economy. It can harm a government’s affirmative action efforts. Rather than creating competition, which its advocates claim, it can lead to dependence on a single contractor that gains a monopoly on a service. Governments have addressed these concerns in a variety of ways. Many jurisdictions require that contracts over a certain amount only be awarded through a publicized competitive bidding process. Other approaches include the following:

• The state of California requires that contracts not adversely affect the state’s affirmative action program and that any potential economic advantage is not outweighed by the public’s interest in having the function performed by state government.
• The state of New York requires the state comptroller to approve and to keep on file contracts of more than $10,000.
• The District of Columbia requires an assessment of the economic impact on the District of each proposed contract.
• The city of San Jose will not contract out a service if the likely outcome would be the creation of a private monopoly, whereby one private firm would be the only available provider of the particular service.
• The state of Wisconsin requires agencies to include in the required Request for Purchasing Authority, a procedure for evaluating the contractor’s performance.

Require a Comparison of Private vs. Public Costs of Providing a Service

Often when its advocates claim that contracting out will save money, they are comparing apples and oranges. They may incorrectly assume that some overhead costs will decrease if a service is contracted out. A public-private cost analysis should consider which public costs will really be avoided or go away with contracting out and should also ensure that the total cost of a contract (contractor’s bid plus administration, any facilities, training or equipment provided and other hidden costs, such as severance pay for displaced employees) is taken into account. On the public side, items may be budgeted for a service for political or administrative reasons that are not truly associated with the service. Only the necessary costs of providing the service should be included.

• The state of California’s cost comparison must include all relevant costs of contracting including such expenses as salaries and benefits, equipment, materials, and those related to supervision, inspection and monitoring of a contractor’s performance.
• The state of Maryland’s cost comparison includes among all relevant costs of contracting, any continuing or transitional costs such as unemployment compensation and the cost of transitional services.
• The state of Wisconsin is required to prepare a written justification before contracting out. The justification must include evidence that the services under consideration for contacting can be performed more economically or efficiently by contract rather than by current or newly hired state employees.

Limit Contracting Out to Cases of Substantial Savings

The risk and uncertainty associated with contracting out for a service rather than providing it in-house, demand that there be a substantial cost advantage. Some jurisdictions recognize this and have established various cost-savings thresholds.

• The state of Maryland requires a cost savings of 20 percent of the contract or $200,000, whichever is less.
• The District of Columbia requires a cost savings of 5 percent over the duration of a contract.
• The Federal Government requires a cost savings of the lesser of 10 percent or $10 million over the duration of the contract for standard competitions.

Require That Employee and Union Alternatives to Contracting Out be Considered

Competition is a two-way street. If services are put up to bid, the workers who do the job should have the same opportunity as contractors to design the work, generate savings and present their case. To level the playing field, employees and unions need access to all necessary information and technical assistance and work time to develop a competitive alternative.

• The state of Massachusetts permits labor unions to bid on contracts and provides resources to assist in bid preparation.
• The District of Columbia includes in all solicitations for contracted services the procedure for District employees to exercise their right to bid on a contract.
• The city of San Jose provides "competitiveness training" to its employees and unions which includes cost accounting, preparation of proposals and general business principles.

Prohibit Automatic Renewal of Contracts

Often contracts last many years, or are automatically renewed when they expire, creating a private-sector monopoly on a public service. To ensure that contract costs continue to be scrutinized, quality is maintained and the public is kept informed, legislation or regulations should limit the length of contracts and prohibit automatic contract renewals and extensions. In addition, before any contracts are renewed, there should be an evaluation of whether the work should be brought back in-house.

• The city of San Jose’s public-private competition policy includes evaluating whether contracted out services can be delivered more competitively in-house.
• Federal Medicare regulations permit automatic renewal of contracts only if affirmatively authorized by the Health Care Finance Administration.

Implement Labor Standards Covering Employees

Low-wage jobs with poor benefits not only harm low-wage workers, they harm their community’s economy and may actually cost taxpayers money when contract employees are eligible for public assistance. To prevent this, some jurisdictions require that bidders mitigate negative repercussions of contracting out on affected employees. "Living wage" laws, which specify a minimum wage that government contractors must pay their employees, have been enacted in a number of areas. Other approaches include:

• The state of California requires notice to the unions representing the workers performing the work being considered for contracting out. It cannot contract out a service unless there is substantial savings which cannot be achieved because a contractor pays lower wages and provides inferior benefits.
• The state of Massachusetts sets minimum wage rates and health benefits for contractor-employees.
• The state of Rhode Island requires contractors to pay their employees wage rates based on the prevailing rates for comparable employment in the state.
• The District of Columbia requires successful contractors to offer comparable jobs to District employees displaced by a contract.
• The city of San Jose provides employment opportunities with comparable wages and benefits, including any necessary training, to employees displaced as a result of contracting out.

Prohibit Corporate Criminals From Bidding

Companies can save money and increase profits by ignoring and violating laws. To ensure that lawbreaking companies do not have an advantage over law-abiding ones, and keep the contracting process and decision clean, some jurisdictions bar from bidding, or define as unqualified, contractors who have been convicted of or pleaded no contest to violations of procurement, environmental or labor laws. Potential contractors should be required to document any charges filed against them in these areas.

• The city of Chicago will not contract with a company that has been convicted of bribing a public officer or employee or collusive bidding.
• The city of Flagstaff, Ariz. has a "bad boy" ordinance restricting contracting with a company that has been in trouble with the law.

Open Contracting Process to Public Scrutiny

The growth of government contracting has created, in essence, a "shadow government" of companies that are not elected, and not subject to any of the checks and balances that apply to elected officials. One way to keep taxpayers informed about how their money is being spent, and to minimize the potential of corruption in contracting, is to require that information on contracts be available for public inspection. Useful information includes the name of the public entity contracting for the service; the name of the contractor; major owners and board members of the company; a description of the service being provided; the period of the contract; the value of the contract; the official responsible for monitoring the contract; and where any additional information can be obtained. In addition, to ensure a fair process, political campaign contributors can be barred from receiving non-competitive contracts from the officials to whom they gave money.

• Dade County, Florida, requires contractors to disclose the identities of each person having any interest, other than subcontractors or suppliers, in the company. For corporations, the identities of each person owning 5 percent or more of the company’s stock must also be disclosed.
• The state of Ohio prohibits political campaign contributors from receiving non-competitive bids from politicians to whom they gave money.
• The state of Wisconsin’s Department of Administration is required to prepare an annual report detailing the number, value and nature of contractual procurements authorized for each agency.

To make sure that the government knows what it is getting into, contractors could be required to disclose whether any criminal convictions, penalties or assessments have been imposed against the owner or the company; and whether the company has ever been barred from a competitive bid or had a government contract terminated before its original expiration date. In addition, as agents of the government, providing public services with public funds, contractors should be subject to the same open meetings and records requirements as public entities.

• In New York, courts have determined that non-governmental bodies acting on behalf of a government, or performing an essential public service, are subject to the state freedom of information law.
• Wisconsin law requires public agencies to make available for review and copying any record produced or collected by a contractor under contract with the agency to the same extent those records would be available from the agency itself.
• Iowa law prohibits a government from limiting access to public records by contracting out.

Conclusion

Often services are contracted out based on the assumption — bolstered by contractors’ promises — that competition will lead to lower costs and better services. We believe that public officials have the responsibility to get the facts — to verify whether costs will decrease, to explore how services can be improved, to determine whether in fact there will even be competition — and to hold contractors to their promises. Other side effects of contracting, including taxpayers’ access to information and the impact on employees and the economy of the community, must also be determined. Many jurisdictions have adopted laws, regulations and policies that provide some protection to the public if a service is contracted out.

Copies of legislation are available by contacting the AFSCME Department of Research and Collective Bargaining Services at research@afscme.org.