(Editor’s note: The following remarks were delivered by Michael LaFaive, director of the Morey Fiscal Policy Initiative, at the National School Transportation Conference on July 22, 2014, in Charleston, S.C.)

Note: Portions of these remarks were taken from the 2007 book, “A School Privatization Primer,” authored by Michael LaFaive

Thank you, Ronna, for your kind introduction. Good morning. It’s great to be here today to talk about privatization and the Mackinac Center for Public Policy’s annual school support survey.

The Center is a nonprofit, nonpartisan research and educational institute, commonly called a “think tank,” and we publish research on key topics including labor, education, fiscal and health care policies.

As a matter of independence and principle, the Mackinac Center does not seek government funding of any kind and wouldn’t accept any if it we’re offered. Every state has a think tank like the Mackinac Center that does similar work. You can find yours at www.spn.org, the website of the State Policy Network.

I’ve been with Mackinac Center for 18 years, plus three before that as an adjunct scholar, which is Latin for “we can’t afford to pay you.”

About 25 percent of my work is focused on the field of competitive contracting by government, including ways privatization can be done well — or poorly — and the opportunities it opens to both save money and improve the quality of service.

This work has included subjects like selling state-owned assets, competitive contracting by states, cities and schools, and more. For years I edited a Michigan Privatization Report produced by the Center and in 2007 published this book, titled, “A School Privatization Primer,” which provides a no-nonsense guide for school districts in contracting out non-instructional services and which was distributed gratis to every school member, business officer and superintendent in the state.

Perhaps my favorite privatization-related publication, however, is the Mackinac Center’s annual school district survey of competitive contracting, which we started in 2001. In most years the survey obtains a 100 percent response rate from more 500 conventional public school districts statewide.

Our annual school survey is unique for its comprehensiveness, detail and the number of years it’s been undertaken. It provides a powerful historical database of non-instructional outsourcing unlike any other in this country.

We find that surprising, actually, given the extraordinary amount of financial resources at stake for school districts, unions and companies.

One subset of our data — transportation — will be of particular interest to this audience. For that reason our hosts have asked me to linger on the findings and lessons that we have drawn from this experience — both statistical and anecdotal. Needless to say, as a policy wonk I’m happy to do so, hopefully in a way you’ll find stimulating rather than dull.

Overview and Background

The word "privatization" has been part of the lexicon since at least 1969, when management expert Peter Drucker used the term "re-privatization" in his book "The Age of Discontinuity." Robert Poole of the Reason Foundation, a Los Angeles-based research institute, was primarily responsible for popularizing the term and concept in the 1980s.

Privatization comes in various sizes and shapes. In general, it involves an increased private-sector role in the management of government assets or the provision of government services. Examples include the sale of government assets to private owners; private management of government assets under a contract with a private asset manager; private management of government services and employees; and private production of government-mandated services through contracts with private vendors.

Outside of the United States, privatization has long meant the sale of state-owned enterprises, such as airlines, railroads or ports. Within the U.S., such sales have been infrequent, since this country was never as deeply involved in owning and running industries as some others. Nevertheless, the U.S. government has sold a few of its assets, most notably the Elk Hills Naval Petroleum Reserve, which generated $3.65 billion in new revenue.

Privatization at the state level is commonplace today, with examples as varied as the 50 states themselves. For example, Michigan sold its worker compensation insurance business for more than $255 million in June of 1994 — the largest single state asset sale in the nation’s history at the time. In New Mexico, more than 38 percent of state prison inmates are housed under contract with a private management company.

Privatization is also common in counties, townships, cities and villages. Locals have sold off city-owned parking garages and golf courses or contracted the management of services ranging from garbage collection to wastewater treatment to building permit inspections and rodent control. New York City contracted with a nonprofit organization to manage the famous Central Park.

Public education is another area of government with an extensive competitive contracting history, especially in New Jersey, Rhode Island and Michigan. The outsourcing of major non-instructional school support services — food, janitorial and busing — is a major area of both savings and union generated controversy in a number of states.

Professor John Donahue of Harvard’s Kennedy School of Government notes that America’s public education system is so big that public school teachers make up the largest single group of government employees in the nation, with teachers’ aides ranking second. Despite the number of teachers and aides, however, a significant percentage of public school employees are actually not involved in instruction.

Outsourced positions run the gamut from accountants, secretaries and counselors to bus drivers, janitors and cafeteria workers. In Michigan, data from the state’s Center for Educational Performance and Information indicate that teachers, teachers’ aides and instructional coordinators comprise 63 percent of Michigan’s public education employees, with the remaining 37 percent performing support work, including administration. This has changed dramatically since 2007, when those figures were 53 percent and 47 percent. In other words, more school employees today are instructors and fewer are support staff.

In large part that is due to growth in competitive contracting, which has been driven by school boards’ need to control costs.

Nationwide, there is no comprehensive central source of information on the extent to which roughly 13,500 conventional public school districts in this country have privatized support services. In addition to the annual Mackinac Center school survey there have been other attempts to measure the degree of competitive contracting at various levels of government. For example:

A yet-to-be-released 2014 survey by the Johnson Center at Troy University found that in Alabama, 16 percent of 121 responding districts contract out for food, transportation or operational work such as janitorial services. Only five school districts — 4.1 percent — reported contracting out for transportation services.

Earlier this year an editor at School Bus Fleet told me that about 30 percent of school buses nationwide are either owned or operated or both by private firms. This is an identical percentage to the 2007 figure reported by SBN, which obtains this figure from its survey of transportation directors nationwide.

The magazine’s editors have told us the figure is a “best guess” and that the difficulty in obtaining better support service contracting figures comes in part due to the fragmentation of the industry. In 2007, for instance, I was told that one Parish in Louisiana had 150 busing contractors.

A 2012 report by the U.S. Department of Agriculture Food and Nutrition Service found that about 13.5 percent of convention public schools in the National School Lunch Program in the 48 contiguous states contract out with a food service management company. This figure almost equals my 2007 national survey figure of 13.2 percent which I constructed by calling all 50 state education departments.

A 2008 survey done in Illinois found that 56 percent of school districts outsourced cafeteria, janitorial or bus services. Transportation dominated contracting then, with 43 percent of districts using a private busing arrangement for students.

Our Own Surveys

I don’t think it’s boasting to say that the Mackinac Center’s annual school privatization survey is probably the most comprehensive set of empirical time-series data showing the practice’s expansion in one state. This ongoing project was inspired by several factors:

  • A pro-privatization law was passed by the state in 1994, and we wanted to know whether it was actually facilitating the growth of competitive contracting.
  • We assumed state legislators would also want to know, and hoped too that journalists would use our survey results as a unique data source for their “back to school” stories each August.
  • School district leaders could use the information to see whether colleagues elsewhere were using competitive contracting to save money and/or improve services. If they were, expanding the practice would obviously be a boon to taxpayers, parents and students.

Without further ado, here are some highlights from what we have learned:

In 2001 we found that 31 percent of Michigan school districts outsourced at least one of the three major non-instructional services: transportation, custodial or food. Through 2013 that figure had jumped to 65.5 percent, a 111 percent increase in just 12 years. That means that 357 of the 545 school districts surveyed last year now outsource a basic non-instructional service, most of which are done with private, for-profit companies, though there are some exceptions.

As you can see from this graphic, there has been no year since we started doing this survey in which the total number of districts outsourcing at least one service has declined.

The percent of districts that outsource food services in the state rose from 27.5 percent of the total in 2003 to 36.5 percent 10 years later, more than a 24 percent increase.

The percent of districts that contract for custodial services has increased from a tiny 6.6 percent to 45.5 percent of all districts and in just 10 years. That’s a change of nearly 600 percent. Currently, some 248 Michigan school districts have a custodial contract in place. Thirty-nine of these are new contracts.

Busing is another success story and one I suspect will interest you the most. In 2003, just 3.9 percent of Michigan school districts held contracts with private providers of school bus services. Through 2013 that figure stood at 20.9 percent, more than a four-fold increase. Last year, 30 school districts began new contracts for busing. Transportation contracting rates have leapt upward, especially in the last four years.

Analysis

We attribute Michigan’s success in outsourcing these services to several factors:

  • In 1994, Public Act 112 was passed which made outsourcing of non-instructional services a prohibited subject of collective bargaining between school boards and unions. As much as they would like to, school unions cannot legally demand anti-privatization clauses in their contracts.
  • Following the 2001 recession, Michigan governments suffered nearly a decade of revenue declines. While the nation’s economy grew, our state did not, and experienced a “lost decade.” Less state money was available overall, and school districts also lost students to other states as their parents moved in search of work. Given that school funding here is allocated largely on a per-student basis, you can imagine how much this focused the attention of officials on getting more for less.
  • Elected in 2010, Gov. Rick Snyder instituted an incentive program for school districts he hoped would get them to adopt “sound practices.” Outsourcing non-instructional services was one item on a menu of reforms that could bring an extra $100 per-pupil from the state.

Of course, saving money isn’t the only reason districts look to the private sector to provide noninstructional services. The quality of service delivery is another.

Our survey indicates very high satisfaction and is currently at its highest point in the history of the survey. Only 3.4 percent of respondents in 2013 indicated that they were dissatisfied. I should note that our interviews are with the business offices that did the contracting in the first place, so this figure may a bit skewed to the positive. Even so, there is a revealed preference in favor of more contracting by the high number of contracts renewed by entire school boards.

One of those dissatisfied with their employee leasing arrangement is the Ubly school district Michigan’s Thumb region. The district of 740 students had contracted out for employees to work driving their buses, food services and custodial services. Given Ubly’s involvement, perhaps I should have named this speech: School Service Privatization: The Good, the Bad and the Ubly.” I’m here all week folks, try the veal.

So why isn’t everybody doing it?

Here is where I must spend a few minutes discussing the obstructionist role played by school employee unions and their legislative allies.

The Michigan Education Association has been referred to as M.O.M in the state Legislature, because for candidates willing to support its agenda it provides the mother’s milk of politics — money. From the union’s point of view, every school employee lost to competitive contracting means less dues money to spend on politicking. Here’s one sample of the union’s ire, the reaction of its chief lobbyist against Gov. Snyder’s “incentives” program:

The whole ‘best practices’ clause is basically out-and-out bribing schools to do this for the extra $100 a kid…” -- Doug Pratt, Public Affairs Director, Michigan Education Association.

It doesn’t matter that a local district could draw down an extra $100 per student from the state, not to mention additional dollars it could save by privatizing. To cite just one example, a custodial privatization deal in one district generated $184 in savings per pupil. Among other things, these new and newly liberated dollars could help keep more and better teachers in the classroom.

It doesn’t matter for the simple reason that privatized employees don’t pay union dues, and so unions fight privatization tooth-and-nail at every step, including making life miserable for superintendents and school board members who even consider implementing it.

My “favorite” example of this comes from the Redford Union School District back in 2001. The metro Detroit district announced that a budget shortfall of $350,000 meant it would have to lay off eight teachers. Things were so bad parents were holding bake sales to help out.

So the Mackinac Center swept in and made an offer they couldn’t refuse — or so we thought: If the district couldn’t save at least $350,000 by contracting out for support services such as busing, and at the same time maintain or increase service quality — the Center would make up the difference. This would have translated into an extra $82 per student at least. Members of this audience won’t be surprised to hear the outcome, although “normal people” find it shocking: The district chose instead to lay off the eight teachers.

That may seem irrational, but it’s a classic example of the outsized-influence of school employee unions on local decision makers: The union dues paid by scores of janitors, cooks and bus drivers no doubt exceeded those paid by a “mere” eight teachers.

This audience also won’t be surprised that union opposition is a nationwide phenomenon. Indeed, the National Education Association has produced anti-privatization manuals for their members. Today the privatization section on their web site actually reads, “for many NEA ESP members, privatization is another word for FIRED.”

It doesn’t matter that “public school” is not supposed to be another term for “union jobs program.”

One of NEA’s anti-privatization publications is titled “Beat Privatization: A Step-by-Step Crisis Action Plan.” Contractors, school board members, superintendents and business officers should have a copy of this publication, since it indicates the kinds of challenges decision-makers are likely to face.

The publication contains a 10-step plan for opposing privatization and a “tool kit” for recording useful school board meeting information, such as committee names, committee meeting schedules, people scheduled to make presentations to the board, and — I quote — any “gossip, tidbits, whatever, picked up before, during, and/or after the meeting.”

The final page of the 2011 edition includes four pieces of artwork to use on buttons and stickers for “distribution to education support professionals threatened by privatization and their supporters.” One of these reads, “I work here! I live here! I vote here! I am the TAXPAYER.”

The guide also includes “talking points” that union officials and allies can quickly deploy during public debates. For example, a section titled “The Pro and Con Debate: Countering Arguments that Support Subcontracting,” includes polemical references to “inexperienced, transient workers with few benefits and receiving minimum wages,” “faceless, nameless employees,” and “[s]trangers in our schools [who] are hazardous to everyone’s health and well-being.”

Indeed, when contemplating potential savings from privatization, school district officials should expect to be on the receiving end of a calculated campaign orchestrated by a politically powerful national organization. The NEA is not the only source of such polemics either. Others include:

  • The AFL-CIO’s 1993 publication, “The Human Costs of Contracting Out: A Survival Guide for Public Employees.”

This guide reads, “It’s [sic] purpose, plain and simple, is to help you prevent, defeat or reverse decisions by your employer to contract out work.”

  • AFSCME’s monograph “Schools for Sale: The Privatization of Non-Instructional School Services.”

Like the NEA product, much of this is designed to generate more heat than light, on the theory that if you throw enough mud some is likely to stick.

The Michigan Education Association is an NEA affiliate and acts as a conduit for the national union’s efforts. For example, a “10-step plan” for fighting privatization published in the Spring 2007 edition of the union’s magazine, “The MEA Voice,” contains material that is adapted from the NEA “Beat Privatization” guide described above.

The MEA also produces its own anti-privatization material. An idea of the contents can be seen it its 1995 pamphlet “Privatizing Public School Services: The Rest of the Story.” For details and in the interest of time I’ll refer you an essay I wrote on this called “Setting the Privatization Record Straight.”

The MEA shares what it has learned with other district officials as part of their own “best practices” work. Consider these comments made in an MEA union negotiator training tape, which are shocking enough that it’s worth reading verbatim:

“Do your best to split the board on crucial issues through contacts with individual board members or misrepresentation of the issues to the public through press releases. Attempt to carefully attack the credibility of the board negotiating team so that most of the board team’s executive sessions with their board will be spent answering board members’ questions about association charges and not with planning on upcoming negotiation sessions.

“Remember that large districts rely heavily upon the superintendent to absorb the flak. They use the superintendent as a shield. If he is discredited, the rest of the board suddenly feels naked, and they are often eager to take an escape route which the association has waited for the appropriate moment to offer.

“Use time as an ally. You know, if your negotiating team can get to bargaining sessions well rested, whereas the board’s team is harried and fatigued, keep negotiations going until 2 o’clock or 3 o’clock in the morning. Wear down the board physically and psychologically.”

The tape also suggests that negotiators investigate the background of each school board member, including religious affiliation, marital status, age, education, employment, family, politics, “his relationship with his employer or employees” and whether “holding a public office help[s] him advance in his job or produce business connections. …” According to the tape, such information means the negotiator will “know what sensitive chords and nerves to hit during negotiation to get the results you seek.”

Such tactics are not limited to stopping privatization, but they give a sense of the kind of dirty tricks potential school service contractors can expect to make them look bad. Worse, once a school board has been mugged by fiscal reality into actually issuing an outsourcing RFP, any routine glitch in delivering on a contract is sure to be blown out of proportion and repeated ad nauseam. A double standard prevails in which contractors are typically held to much higher standards than government employees.

Here’s one example from Michigan. Back in 2006 a public school employee — a school bus driver, specifically — kicked some kids off her bus where they were nowhere near their actual stop. Apparently they had failed to get up and leave at their appointed stop. This got maybe a day of statewide attention.

If a private contractor had done this on a video made public it would be the first story from every union leader’s mouth to fight any contracting opportunity in public schools anywhere. An ugly anecdote is frequently the starting point and then they attempt to build their case against privatization — even if it includes “misrepresenting the facts to the public,” as the MEA’s trainer encourages his negotiators to do.

If such bad faith antics make you feel angry, you’re not alone. The Mackinac Center’s disagreement with school employee unions is one reason we went to bat for Dean Transportation of Michigan in a legal tussle with the union, filing an amicus brief on their behalf. The suit against Dean was ultimately settled, though we were completely confident in Dean Transportation’s legal position.

We have since gone from filing amicus briefs on behalf of wronged defendants to creating our own public interest law firm, the Mackinac Center Legal Foundation, which I mentioned earlier. Today, we litigate for liberty on a full-time basis and routinely cross swords with the state’s powerful teacher union lobby.

I don’t want to give the impression the Mackinac Center is “anti-union” however, at least in the private sector (although we would prefer federal law didn’t tilt the scale in favor of unions at the expense of job providers). The story is different when it comes to public-sector unionization however, and we’re not the only ones who have expressed concerns over its potentially corrupting influence.

No less a big-government icon than President Franklin Delano Roosevelt said, “Meticulous attention should be paid to the special relations and obligations of public servants to the public itself and to the Government. .  .  . The process of collective bargaining, as usually understood, cannot be transplanted into the public service."

The reasons for this were articulated by the United States Supreme Court in the 1977 case Abood v. Detroit Board of Education. The court wrote:

“A public employer, unlike his private counterpart, is not guided by the profit motive and constrained by the normal operation of the market. Municipal services are typically not priced, and where they are [,] they tend to be regarded as in some sense “essential” and therefore are often price-inelastic. Although a public employer, like a private one, will wish to keep costs down, he lacks an important discipline against agreeing to increases in labor costs that in a market system would require price increases. A public-sector union is correspondingly less concerned that high prices due to costly wage demands will decrease output and hence employment.

The court also noted:

“[D]ecision making by a public employer is above all a political process. The officials who represent the public employer are ultimately responsible to the electorate, which for this purpose can be viewed as comprising three overlapping classes of voters [—] taxpayers, users of particular government services, and government employees. Through exercise of their political influence as part of the electorate, the employees have the opportunity to affect the decisions of government representatives who sit on the other side of the bargaining table.”

In short, there are good reasons to find union opposition to school privatization somehow distasteful, and free-market think tanks aren’t the only ones to find it so.

Survey research is an imperfect science, but the Mackinac Center for Public Policy has worked hard for 13 years now to collect and disseminate the very best information we can. We only wish other state think tanks or associations or even government did so as it would provide a better picture of support service contracting across the country.

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Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.