This proposal is one of ten winning reports from the 1994 Oregon Better Government Competition. The 1994 and 1996 Competitions were organized by the Portland-based Cascade Policy Institute. Opinions expressed are those of the author(s) and not necessarily those of Cascade staff or advisors, nor should they be construed as an attempt by Cascade Policy Institute to influence any election or legislation.
Legislative Reform
for
Competitive Contract Bidding
by David L. VanDerlip
VanDerlip and Associates
Brownsville, OR
Executive Summary
Because it is not required, and because exemptions exist to its use, competitive bid contracting is not fully used to taxpayer advantage in Oregon. This is unfortunate. Competitive bidding for public service delivery offers the potential for saving taxpayer dollars, as local and national evidence demonstrates. Competitive bid contracting has produced savings ranging from 9 to 80 percent, depending on the service, over government service provision. Competitive bidding also fosters greater efficiency and reduced costs within the public sector through repeated self-examination of methods and organization.
Often, one Oregon governmental entity will contract with another governmental entity to provide a given service. These intergovernmental contracts are legal, and outside bids need not be considered. Nothing prohibits outside bids from being considered; however, discretion to seek and/or consider bids from the private sector is left to the public officials responsible for awarding a contract. Such intergovernmental, noncompetitive contractual arrangements are common. Such noncompetitive contractual arrangements frequently results in more taxpayers' money being spent than is necessary, as this report documents.
This report does not advocate contracting out government services to nongovernmental organizations. Rather, this report advocates the required and expanded use of competitive bidding for the provision of a public service when the desired service is available from the private sector. (It is important to remember that governmental entities may also enter a bid.) To that end, this report proposes statutory reforms that will create a climate where competitive bid contracting for public service delivery is the rule, rather than the exception.
Reprints of the complete report with appendices and exhibits are available from Cascade Policy Institute.
About the author
David L. VanDerlip is the owner of VanDerlip and Associates, a private grant management firm. Mr. VanDerlip has fourteen years of public and private sector experience in the writing and management of federal grants for cities and counties.
Description of the Problem
Governmental entities often provide services that are readily available from, and could be easily provided by, the private sector. Likewise, governmental entities frequently purchase a service from another governmental entity even though that same service could be "contracted out" to the private sector at a competitive, if not lower, cost to taxpayers. Intergovernmental contracting for services often takes place in a noncompetitive vacuum to the detriment of taxpayers. This intergovernmental behavior, its negative effects, and what can be done to improve it, are the focus of this report.
Contracting out public services to private firms has been espoused by federal, state, and local officials as a way to maintain, or improve, public services while reducing, or maintaining, the current level of taxation. However, archaic, anti-competitive state and local contracting laws can, and are, used to deny citizens the benefits of this option. Taxpayers do not necessarily receive the best possible services at the most competitive price because governmental entities are not required to even consider private sector bids for the provision of services; this is true whether the service is provided to the public-at-large or intergovernmentally. Hence, as has occurred numerous times in the author's career as both a public servant and the owner of a private company, excess tax dollars have been spent needlessly as intergovernmental contracts are awarded without any measure of competitive bidding from the private sector.
Consider the following examples of unnecessary expenditures of taxpayers' money:
• In March 1994, Linn County contracted with Portland State University's Center for Population Research and Census to conduct income surveys for five cities in the County at a cost of $18,700. A qualified private firm was prepared to do the same work for $2,875 but it did not have the opportunity to submit a bid. This is legal; the County is not required to seek competitive bids from the private sector. Ultimately, Portland State University (PSU) only completed four of the five Linn County city surveys. Lebanon city officials, after reading an article in the Albany Democrat Herald about the downside of intergovernmental contracting, solicited bids from other organizations; Lebanon city officials then selected a private firm to complete its income survey. On the whole, taxpayers paid $11,725 more than was necessary for the four income surveys that PSU completed.1
• In February 1994, the City of Brownsville awarded a $52,500 contract to a three county agency to administer a federal low income housing grant. A private company requested the opportunity to submit a proposal to administer the grant, but the private company was not permitted to enter its proposal for consideration. It is estimated that the private firm's proposal could have saved taxpayers $7,500.2 According to the minutes of the February 22, 1994 City Council meeting, an official from the county agency "advised that since [Community Services Consortium] is a governmental agency, the ad-ministration does not have to be put out for bid." A motion was then made and passed "to have Community Services Consortium apply for the [Oregon Community Development Block] grant and to enter into an agreement to have [Community Services Consortium] administer the grant..."3
• In February 1993, the City of Philomath authorized a contract to a local governmental agency to administer a federal low-income housing grant for $70,000. A qualified firm was prepared to submit a bid, but its request to do so was denied. The private firm could have completed the same job for $48,000; hence, taxpayers paid roughly $22,000 more than necessary for the administration of this federal grant.4 According to the City Administrator, it was "a done deal from the start."
Each of the above contracts were awarded from one governmental entity to another through a non-competitive process, and the excess cost to taxpayers as a result. In each case, a private firm wanted to submit a bid. In each case, the actions taken, or not taken, by public servants were legal. Under Oregon law, governmental entities may award service contracts to other governmental entities without considering private sector bids. Though many state and local governmental entities do contract with the private sector to reduce costs or improve service delivery, they are not required to consider private proposals. The examples cited above show the results of intergovernmental contracts awarded in an essentially noncompetitive vacuum.
The focus of this report is not to champion contracting with the private sector, be it for-profit or nonprofit organizations, to provide govern-ment services. Rather, the point of this report is to propose legal reforms that will require private sector proposals to be considered. The point of the reforms is to permit an option that could greatly benefit taxpayers.
Exemptions
As has been stated, one of the biggest challenges, if not the biggest challenge, faced by private organizations is getting their proposal "on the table." A number of exemptions exist under Oregon procurement statutes and local ordinances, patterned after state law, that can be used to shield public entities from the positive benefits of competitive forces; these exemptions help perpetuate government monopolies on services that could be competitively provided by the private sector. The following public contracts are exempt from competitive bids under current state law:
• All contracts made with other public agencies or the federal government;
• Contracts made with qualified non-profit agencies providing employment opportunities for disabled individuals;
• Contracts for supplies if the value of the contract is less than $2,500. (See ORS 279.015 for a list of exceptions.)
The exemptions listed may exist for the best of intentions, but we must be objectively concerned with results, not intentions. Certainly the third exemption exists to reduce paperwork and time costs associated with low dollar contracts. Nevertheless, the above exemptions can be used to thwart and undermine state statutory policies whose intent are to foster and encourage open competition.
The Oregon Revised Statute (ORS) 279.005(1) reads:
It is the policy of the State of Oregon to encourage public contracting competition that supports openness and impartiality to the maximum extent possible. However, nothing in the statute requires public agencies to request and consider bids and proposals from private organizations for services provided by governmental entities. Yet, it can be said that public contracting competition is the policy of the State of Oregon.
Empirical evidence and historical examples have proven that when an industry or business is sheltered from competition the quality of its service or product stagnates or declines, and prices tend to rise. Consumers are thus adversely affected. Taxpayers are similarly adversely affected when governmental entities insulate themselves by choice, or are sheltered by law, from competitive forces.
Contract Benefits
The following examples show how taxpayers benefited when competitive contracting forces were utilized:
• The City of Lebanon sought competitive bids to do an income survey even though it was not required to do so. As a result, the city awarded the work to a private firm, thereby saving city taxpayers $4,100, or 80% over the intergovernmental bidder.5
• The City of Sweet Home sought competitive bids to administer a federal low-income housing grant, instead of awarding the grant non-competitively, through an intergovernmental agreement, to the Community Services Consortium. The result: the City of Sweet Home saved] $9,000, or 16%over the next lowest bid of] $57,000 which was bid by Community
Services Consortium.6
Much could be done to create a legal framework and environment that would foster competition, thus reducing costs and improving the quality, of public service delivery. Oregons procurement statutes need to be reformed to provide maximum opportunity for private organizations to bid, in an open and fair process, on contracts that are presently exempt from competitive bids, and to bid on services that are presently provided by state and local government.
Exempting contracts between public entities from a competitive bid process, when private organizations can and want to provide similar, same, or better goods or services, is not consistent with the intent and purpose of state procurement law. Further, this exemption, as has been demonstrated, does not serve the interests of taxpayers.
Private sector proposals to provide building inspection, planing, job training, health care, elderly care, grant administration, food, janitorial, vehicle maintenance, student transportation, refuse collection, street repair and maintenance, and other services should be given, and deserve, due consideration by state and local public officials. Similarly, there should be enabling legislation to allow private firms to submit such proposals that would be given an open and fair hearing.
Proposed Solution
A minor, technical change to ORS 279.015(a) would go a long way to opening up the essentially closed, noncompetitive bidding process for the delivery of government services. This statutory change is directed at the current exemption enjoyed by intergovernmental agreements (intergovernmental contracts can be awarded without comparison to outside bidders). The exemption provision reads:
all public contracts shall be based upon competitive bids or proposals except:
Contracts made with other public agencies or the Federal Government
It should be modified to read:
Contracts made with other public agencies or the federal government except when the goods or services being procured are also available from the private sector.
Benefits of the Proposed Reform
Examples cited in this report show the potential savings of competitive contract bidding, from 9 to 80% depending on the service. Because the opportunities for private organizations to bid on the delivery of government services is hindered in some cases, and not required in others, it is difficult to estimate the total potential savings to Oregon taxpayers through the proposed reforms. Nevertheless, the examples in this paper provide a very good guideline for the potential financial savings taxpayers could expect -- assuming that the resulting savings are returned to taxpayers in the form of reduced tax burdens -- from an open, competitive bidding process.
Ample data exists from other states that strengthen the examples already provided. A 1988 survey of studies, Savings ASAP, undertaken by the Reason Foundation and the University of Miamis Law and Economics Center, analyzed 79 categories of public services. The purpose of the study was to estimate the savings that resulted from competitive contracting. Contracting for the private provision of cafeteria and food service management produced savings ranging from 21 to 36 percent. Contracting out vehicle maintenance yielded savings between 20 and 34 percent, grant administration 8 to 24 percent, inspection and code enforcement, 10 to 25 percent.7
An additional benefit of the competitive bidding process is governmental entities have had to review their internal operations, thus they have been forced to identify waste, cut it, and become a more efficient organization. According to one study, in-house units that won competitive contract bids were able to cut their costs by 17 percent for refuse collection, and 22 percent for hospital cleaning.8 In the profession of grant administration, a public agency in Oregon found ways to reduced the service costs by up to 40 percent. 9 Other states experiences with com-petitive contracting certainly suggest that there is enormous potential to save taxpayers money. The way to determine the total possible savings in Oregon is to open up the process.
Monetary savings are not the only benefits that could accrue to taxpayers from the reform discussed heretofore. Introducing competitive elements to the provision of government services would help send a powerful message to a skeptical, and sometimes cynical, public that the government is serious about controlling costs and cutting waste. It would stimulate initiative, innovation, and improve the quality of service.
Implementation
Implementation of this reform is quite straightforward. First, it will require tightening the exemptions from competitive bids as presently allowed under state procurement law. These exemptions, as discussed previously, include:
• All contracts made with other public agencies or the federal government;
• Contracts made with qualified non-profit agencies providing employment opportunities for disabled individuals;
• Contracts for supplies if the value of the contract is less than $2,500.
Second, this reform requires statutory changes to foster a more competitive bidding process for public service delivery, where the private sector can, or is willing to, offer the same or a similar service. This author suggests adding the following provision to Oregon Revised Statutes 279.007 - Methods of fostering competition:
Public agencies should solicit proposals from private sector organizations to deliver services provided by the public agency through an open, fair process that evaluates price, technical competence, performance and other relevant factors.
Timothy D. Hovets proposal to expand competitive bidding for public construction projects could require a change in Oregon administrative rules, and possibly procurement statutes. The private teaching contracts proposal, submitted by Janet R. Beales, could also necessitate procurement law reforms. The same might be true of the other seven winning Better Government Competition plans.
Obstacles to Reform
One very serious obstacle to the intent of the proposed reform lies not in any special interest group, but rather in the form of a potentially flawed public accounting system. This flawed system often enables the public sector to hide the true cost of service delivery. This flawed system enables the public sector to show a cost of service delivery at dramatically understated amounts; such understatements give an undeserved advantage to in-house bidders, that is govern-mental entities, over private sector bidders.
To achieve the desired results of this papers proposed reform, public sector delivery costs must be compared to those as bid by nongovern-mental bidders. (Quality of the service or product is assumed to be equal.) Making this comparison is problematic because governmental entities generally have no formal methodology for conducting cost comparisons; in a recent national survey of 120 cities, counties, and special districts, 50 percent of the respondents reported having no formal methodology for conducting cost com-parisons. 10 Another national survey estimates that the cost of in-house service delivery is frequently underestimated by as much as 30 percent.11
How such underestimation occurs is exemplified by a composite of dialogues Dr. E.S. Savas, noted privatization expert, has had with local public officials proclaiming the low cost of their operations. His dialogue uses the example of street paving to illustrate the point.
Savas: You mean the service is only costing you 50 cents per capita per year? Does that include the cost of vehicles?
Official: No, the vehicles are in the capitol budget; their cost does not show up in the operating budget.
Savas: Does it include the cost of vehicle maintenance and fuel?
Official: No, those costs are in the engineering budget; they dont come under the street repair budget.
Savas: And the cost of overtime?
Official: No, overtime has a special budget.
Savas: How about the taxes forgone on the garage and the property used?
Official: No, we never consider the taxes.
Savas: How about the insurance premiums?
Official: We pay insurance premiums, but they are in the overhead budget.12
Dr. Savasdialogue highlights the difficulty that exists in arriving at a true cost of government delivered services. Actual costs of a government service can be much higher than is officially claimed because related expenses are distributed throughout a variety of budgets. This kind of faulty bookkeeping, or rather bookkeeping not aimed at cost accounting, permits government agencies - federal, state, and local, to bask in the belief that a service is very inexpensive and offers no opportunities for contracting out.13
It is only fair to require government officials to consider all costs that should be charged against every service they provide; after all, private organizations must include the cost of complying with every government rule and regulation that is forced upon them when determining their prices. Obviously, if public agencies:
(1) do not know or cannot calculate an accurate cost of a service and/or
(2) frequently underestimate the cost,
public policy makers and taxpayers cannot make an informed decision as to whether the government is efficently efficiently delivering publics services and maintaining maintaining public assets.
In order that a credible, open, and fair bidding process exist, the cost comparison methodology should be developed by an independent, disinterested third party. Although cost is not the only factor to be considered, it ranks as one of the most important. Certainly, quality of work is another important factor. To be fair, the cost of contract administration and monitoring contractor performance needs to be part of the cost equation; this applies to the government sector as well, where similar costs would be attributed to management and overhead expenses. An informed decision can be made about contracting out only after all the costs of service delivery are calculated, from the public and private bidders, and other relevant factors considered.
Potential opposition to the increased use of the contracting out option may come from public employees, the fear of job loss being among their chief reasons. Countering this argument is the philosophical belief that governments role is not that of job provider. >From an economic standpoint, it is not efficient to pay five people to do a job if that same job can be done by three people. The opportunity cost to taxpayers, and the economy, of employing five where three is enough, is generally neglected when the loss of public sector jobs argument is used against privatization.
Money saved through competitive contracting is money that should be returned to taxpayers. Money in the hands of those who earned it is spent on various things, such as a vacation, a new pair of shoes for the children, a computer repair class, enabling a person to get a better paying job, and so forth, or invested for ones retirement or a childs college education. The point being, excess money spent by the government means less money in private hands, where, if it had been left, it would have been saved or spent, creating and supporting private sector jobs. Hence, though there may be a reduction in public sector jobs, a corresponding increase in private sector employment opportunities can be expected.
Other arguments used by opponents of con-tracting out are that service delivery quality will decline, private sector employees will be paid lower wages, and unemployment and other public benefits paid to displaced public employees will wipe out savings realized from contracting out to private organizations. These arguments, and more, are covered at great length in any general text on privatization.14
Public employees are unlikely to enthusiastically endorse greater use of competitive bidding for services on which they have enjoyed a provision monopoly. Still, a number of actions can be taken to mitigate public employee opposition to this idea.
First, public employees should be informed about the effects of contracting out, and privatization in general, with respect to their jobs. According to a 1989 survey conducted by the national commission on employment policy, of 2,213 government workers in 86 jurisdictions, only 7 percent of the workers were laid off, 58 percent went to work for the private contractor, 24 percent were transferred to other government departments, and 7 percent retired.15
Second, consideration can be given in the proposal review process to private organizations that will give first consideration to public employees for new positions. Job losses can also be minimized by relying on normal yearly attrition, which averages about 5 percent in most jurisdictions.16 Public employees that lose positions due to contracting out can be transferred to other department to fill vacancies created by normal attrition.
Third, other measures, such as one-time bonuses, pension enhancements, and other forms of financial assistance, can be used to encourage and ease the transition out of public employment. These and other techniques are customarily used in private sector organizations that are reducing their workforce.
Finally, opponents of contracting out must remember that private sector organizations do not always win the contract bid. Many times the government entity that provides a given service, wins the bid. As stated previously, the bidding process has helped the public sector review its operations and cut back the waste. Certainly, assuming that all costs are calculated in the winning bid, public employees' morale can only improve knowing that they went head-to-head with the private sector and won.
Conclusion
Because it is not required, and because exemptions exist to its use, competitive bid contracting is not fully used to taxpayer advantage in Oregon. This is unfortunate. Competitive bidding for public service delivery offers the potential for saving taxpayer dollars, as local and national evidence shows. Competitive bidding fosters greater efficiency within the public sector through repeated self-examination. The opportunity cost of inefficient and costly public services are fewer private sector employment opportunities. Statutory reforms should be undertaken that will create a climate where competitive bid contracting for public service delivery is the rule, rather than the exception. These reforms must ensure, too, that accurate accounting systems exist for the public sector; accurate public accounting systems are necessary for meaningful cost comparisons between private and public contract bids.
ENDNOTES
1. Consultant Produces Winning Suggestion, Hasso Hering, Albany# Democrat-Herald (May 21, 1994), p. 1.
The contract between Linn County and Portland State University (PSU) to do the surveys was coordinated by the Oregon District 4 Council of Governments, a three county agency. Linn County received a grant from the U.S. Forest Service to pay for 75% of the cost of the surveys. The cities had to pay 25%. The author contacted both the Council of Governments and PSU by telephone and told them that the authors firm, VanDerlip and Associates, was interested in contracting to do the survey work. The author spoke directly with Pam Silbernagel from the Council of Governments, and Charles Rynerson from PSU.
Below in Chart 1 is a summary of the income surveys by VanDerlip & Associates. PSU was originally going to do the income survey for Lebanon at a cost of $5,100, but when the article cited in this endnote appeared, Lebanon officials
decided to seek proposals from other organiza-tions. Lebanon city officials ultimately awarded the survey contract to VanDerlip and Associates, which had submitted a bid for $1,000 -$4,100 less than PSUs bid. Chart 2 shows how the $2,875 cost was calculated for the five city estimate.
2. The $7,500 savings figure cited is based upon a comparison of actual contracts to administer the same grant. The grant referenced was a $300,000 Oregon Community Development Block Grant (OCDBG). VanDerlip & Associates admin-istration charges for these grants range from 15 to 18% of the grant, depending on the distance from its office. VanDerlip & Associates was awarded a contract to administer one OCDBG grant for the City of Sweet Home, sixteen miles from its office, for $48,000, or 16% of the grant. The firm would have charged the City of Brownsville $45,000, or 15%, of the grant. The lower amount would be attributed to the reduced travel cost (The firms offices are located in Brownsville). The Community Services Consortiums winning bid was $52,000, representing 17.5% of the grant.
3. Brownsville City Council Meeting Minutes (February 22, 1994).
4. Fund transfer - one more loan, but are group fees too high?, Bonnie Burton, Benton Bulletin (July 2, 1994), p. 1.
The grant referenced was a $300,000 Oregon Community Development Block Grant for housing rehabilitation. The City of Newport awarded VanDerlip & Associates a contract to administer the same kind of grant for $51,000, or 17% of the grant total. Because Philomath is only 40 miles from Brownsville, compared to 81 miles from Newport, and because the firm's employees would have had to travel through Philomath to work on the Newport grant anyway, VanDerlip & Associates bid would have been $48,000 -- $3,000 less than the Newport contract, and the same as the Sweet Home contract.
5. PSU would have charged $5,100, the authors firm was hired to do the same work for $1,000 -- a savings to taxpayers of $4,100. Refer to Endnote 1 for additional supporting information.
6. The Community Services Consortium submitted a bid for $57,000. The authors firm submitted a bid for $48,000 and was awarded the contract in March 1992.
7. Designing a Comprehensive State-Level Privatization Program, William D. Eggers, Reason Foundation (Los Angeles, CA, January 1993), pp. 25, 26.
8. Ibid, p. 18.
9. Based upon actual proposals to administer Oregon Community Development Block Grants. Bid submitted by Community Services Consortium inApril 1991 was for 26.4% of the grant amount. In July 1992 the community Services Consortium agreed to administer the same grant for 17.5% a 34% reduction.
10. How to Compare Costs Between In-House and Contracted Services, William D. Eggers, p. 2.
11. Ibid., p. 2.
12. The Efficiency of the Private Sector, by Dr. E.S. Savas, in The Privatization Option: A Strategy to Shrink the Size of Government, ed. by Stuart M. Butler (Washington, DC, The Heritage Foundation, 1985), p. 24.
13. Ibid., p. 24.
14. For example see Objections to Privatization, Robert W. Poole, Jr., in Policy Review (The Heritage Foundation, Washington, DC, Spring 1983) and Better Government at Half the Price: Private Production of Public Services, James T. Bennett and Manuel H. Johnson (Greenhill Publishers, Ottawa, IL, 1981), pp. 77-97.
15. Designing a Comprehensive State-Level Privatization Program, William D. Eggers, Reason Foundation (Los Angeles, CA, January 1993), p. 6.
16. Ibid., p. 8.
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