Outsourcing State and Local Government Services is About Looting

by Yves Smith, Naked Capitalism

For decades, citizens have been sold on the mantra that the hungry private sector can do a better and cheaper job of providing services than “inefficient” government. Now it is true that there were some badly run government entities that have done better when privatized (the poster child is British Telecom). But particularly on the state and local level, where voters demand a high level of accountability, this premise was always dubious.

First, as we’ve discussed at some length, outsourcing in the private sector often fails to deliver on their promises. But those dead bodies are seldom discussed. The fleeced buyer has every reason to hide the botched initiative. And they are often prohibited from discussing them: corporate IT projects, for instance, have non-disclosure provisions. As a result, CIO Magazine used a series of failed state outsourcing deals as a forensic exercise relevant to private sector, arguing that the problems were broadly the same.

But a new report by In the Public Interest, Out of Control: The Coast-to-Coast Failures of Outsourcing Public Services to For-Profit Corporations, shows why voter should regard outsourcing proposals with considerable skepticism. Remember, a corporate outsourcer will have to preform the same tasks as a government body would, plus he expected to recoup his selling/contracting costs and earn a profit margin. As we’ve seen with mortgage servicers, and the Out of Control confirms, one of the approaches used by private companies to meet their profit targets is to cut corners on compliance with the rules and with service levels. And when outsourcing is motivated not by ideology or a belief that savings can be achieved, but by service problems, all too often there’s reason to suspect that the legislation that the supposedly under-performing bureau is executing is cumbersome or poorly thought out. In other words, the problem is being treated as one of government execution, when it’s actually one of bad drafting or overly complicated requirements that won’t go away by fobbing them off to a private company.

The report is targeted to a lay reader and I strongly recommend you read it in full. It categorizes the ways in which contractor behavior is deficient: transparency, accountability, shared prosperity, and competition. For instance, even though government contracts are almost without exception public, outsourcing companies are trying to extend the veil of secrecy, just as they have with private companies, to impede scrutiny and exposure of failure to live up to their agreements:

Corporations can – and do – circumvent open records requirements claiming that documents and records related to government functions are “proprietary information” exempt from disclosure. Even basic information about a government contract and the accompanying procurement process can be difficult to obtain. Corporations may not diligently collect data and information related to public programs and services, leaving the public record incomplete. As a result, the public loses access to information about our own government. The debate about the size of government at the state and local level becomes meaningless because no knows exactly how many people – including contractors – are on the government payroll. By skirting open records laws, private corporations essentially perform public functions behind a veil of secrecy that would not be tolerated by public agencies.

The key sections of one example:

Recently in South Carolina, the Jenkinsville Water Company failed to pay state employee payroll taxes, lost millions of gallons of water, and could not account for tens of thousands of dollars.4 Concerned about mismanagement of funds,residents and journalists submitted open records requests to the company seeking copies of financial records, including audited financial statements and budgets. The company refused to comply.

State Senator Creighton Coleman (D-Fairfield) sought an opinion from South Carolina Attorney General Alan Wilson to determine whether the company was bound by the state’s open records laws.5 The Attorney General’s office stated that the Jenkinsville Water Company had to disclose the records.6 But even after the opinion was issued, the company refused to hand over documents, leading to a lawsuit filed by The Independent Herald newspaper.7

Not paying payroll taxes is a real stunner. I don’t know about South Carolina state payroll taxes, but that sort of violation is one where the IRS treats the “responsible person” as personally liable and is not shy about filing criminal charges.

And here’s another doozy:

In 2011, Deborah Toomey, a concerned citizen of Truth or Consequences, New Mexico, asked her city government to review video recordings of city commission meetings. The city contracts with Sierra Community Council, Inc., a private company, to record the meetings and maintain the video recordings. The city refused to hand over the recordings, stating that the videos were not subject to open records laws because the city did not have these recordings in its possession.9 Even though the recordings were of public meetings of elected city officials and pertained to government business, taxpayers were denied access to them because they were considered the property of a private company.

The blandly titled “Accountability” section is more accurately titled “Companies take money and don’t deliver anything approaching the stipulated level of services.” The report also reveals that one of the ways these contractors meet their targets is by effectively fobbing costs back on the state, by paying working low wages that force them to rely on public services. in 2008, 80% of the employees working on Federal service contracts made less than a living wage; the level is likely to be similar for state and local contracts. And of course, this means that local governments, perversely, are sabotaging their economies by driving wages and hence demand and eventually their tax bases down.

The last section debunks the idea that these contracts can even be bid out well. Even when you put aside the not-inconsiderable problem of cronyism (of having requests for proposal tailored so allies of key local pols will win the bid), the report discusses how in many cases, the needs of the local entity are so specific that there aren’t enough candidates to provide for real competition. And as we’ve discussed repeatedly with privatization, the agreements often have provision that vitiate whatever competition might have existed at the outset, such as automatic renewals and pricing provisions that guarantee profits.

The good news is the public seems to be waking up to this scam. For instance, Pennsylvania’s governor had to abandon his plans to privatize the state lottery after multiple groups criticized the deal, which included guaranteed payments to the buyer even if revenues fell short of projections.

I hope you’ll circulate this report to friends and colleagues to educate them about how often outsourcing abuses take place and the sort of reforms that need to be put in place to make sure the contractors live up to their side of the deal.

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Out of Control

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