Top Reasons for Outsourcing
A 2003 Mackinac Center survey of Michigan school districts suggested that about 34 percent of them had privatized food, busing or janitorial services. The most common reason those districts gave for outsourcing was the desire to save money.

Today about 5,000 Michigan educators, parents and school administrators are expected to rally at the state Capitol to urge lawmakers to support Senate Bill 246 and House Bill 4582. These bills would legislate an annual state budget increase for primary, secondary and higher education of either 5 percent or the rate of inflation, whichever is less.

The desire to improve education is laudable. What remains in doubt is the cost-effectiveness of this approach to the issue.

For example, these bills would take effect in fiscal 2006, but the spending increase would be retroactive to fiscal 2003. The legislation therefore would require a one-time state payment of $1.5 billion, according to Michigan Senate Fiscal Agency Director Gary Olson, whose Senate testimony was cited on June 16 by the Lansing-based Michigan Information & Research Service. Olson projected that the one-time payment alone would force major cuts in other budget areas or sizable tax increases — either hiking the 3.9 percent state income tax to 4.75 percent, or raising the 6 percent state sales tax to 7.1 percent.

In contrast, the Mackinac Center has encouraged educators to improve primary and secondary schooling by consistently putting children first. A 2003 Mackinac Center survey indicated that only about one-third of Michigan public school districts "outsource at least one noninstructional service" among busing, janitorial and food services. More than 63 percent of the districts that did privatize said they were saving money (33 percent were unsure), and about 88 percent said they were satisfied with the quality of the services they received from their private contractors.

In a recent case, Grand Rapids Public Schools hired Dean Transportation to provide bus services for the next five years. The Grand Rapids Press noted, "Because the private company doesn’t have to pay into the state retirement system or use a union-affiliated insurance carrier, the company projects the district can save $18 million over the (5-year) duration of the deal." The Michigan Education Association reported that Grand Rapids may cut noninstructional costs further by accepting concessions of more than $2 million annually from union custodians following the school board’s exploration of privatizing custodial services.

Privatization has had longstanding potential to lower school districts' noninstructional costs. In 1993, for instance, the Center surveyed seven school districts and found that the East Lansing schools paid about $1.49 more per square foot for custodial services than Sears stores in the same area. We calculated at the time that if district officials hired a private custodial firm, they could save more than $1 million — a figure then equal to 30,000 new textbooks, 500 new computers or 20 new teachers.

Strategies like these are far more focused than legislation that would require annual increases and a one-time bill of $1.5 billion. As Mackinac Center President Lawrence W. Reed noted in his January speech "Michigan at the Crossroads": "In the schools, we don’t have a funding crisis so much as we have a management crisis. And it’s not Proposal A that needs to be tweaked. What needs to be changed are tired, old ways of business-as-usual."

This "business-as-usual" would have to include education funding hikes that preclude full consideration of every budgetary option. The Legislature’s ability to restrain education spending during the past few years seems worth retaining in light of state revenue constraints and the potential savings that school districts have not tapped yet. These untapped savings include not just privatized noninstructional services, but fully competitive bidding of employee health insurance services and a repeal of Michigan's costly "prevailing wage" act for school construction services.

I hope that the rally will feature a more nuanced agenda than simply calling for more money. In that spirit, I have inserted below a commentary written by Michael D. LaFaive, our director of fiscal policy, and Robert P. Hunter, our senior fellow in labor policy. Although the piece was written in 2003, it is timely — especially for the reportedly 51 percent of Michigan districts surveyed by the Michigan School Business Officials that say they may have to lay off employees next year. In the end, policies that give priority to the classroom are more likely to find support in the state budget than bills that try to tie legislators' hands.

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Ryan S. Olson is director of education policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

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(The piece below was originally published in June 2003.)

Contract Out School Services Before Laying Off Teachers

The Dearborn school district intends to lay off 12 percent of its teachers to help close an anticipated $4 million to $7 million budget deficit. As reported in April, this amounts to 160 teachers who will lose their jobs — teachers who won’t be there for the 17,000 children in Dearborn classrooms after summer break.

This drastic step, which takes effect June 30 and is expected to save the district $6 million, was unanimously supported by Dearborn’s Board of Education. Similar layoffs reportedly are scheduled or being contemplated in Livonia, Plymouth-Canton, Utica, Taylor and other Michigan school districts.

Any decision to lay off teachers begs the question of whether every cost-saving alternative was explored before choosing the one that arguably hits children the hardest.

The Mackinac Center for Public Policy has long encouraged school districts to consider the savings that can be gained by contracting with private companies for food, transportation, custodial and other noninstructional services, such as technology and security.

Districts that do it right — write tight contracts, seek competitive bids and closely monitor the performance of the contractor — almost invariably find they are paying significantly less money for higher quality service. In a noncomprehensive 2001 Mackinac Center survey, over 80 percent of responding school districts reported saving money through outsourcing. The money saved can be put back where it belongs: in the classroom, keeping good teachers instead of laying them off.

Bob Cipriano, director of business services for Dearborn Public Schools, said a private company provides the district’s security services. But the district has not privatized food, custodial or bus service. Cipriano said the district looked into privatizing custodial services four or five years ago, but decided against it. He said he is not sure it has ever considered privatizing bus service.

Cipriano emphatically contended that his district’s food service "is run like a business," "is making a profit," and "is not a drain on the school budget." In fact, a number of Michigan schools are taking this route: As a last-ditch effort to resist increasing pressure to contract out, they are actually trying to run their own services in ways that no longer lose money hand-over-fist.

Thus, the mere prospect of privatization is imposing economic discipline where before there was none, spurring school districts to run their services more efficiently.

The fact that this argues in favor of privatization seems lost on the editors of the April issue of the Michigan Education Association’s monthly magazine, which is devoted exclusively to "fighting privatization." Calling school districts that privatize "fool-hearty (sic)" and the companies that provide the services "privateers," the magazine showcases instances in which private companies have been fired for not delivering lower costs, or higher quality, or both.

Ironically, the union’s argument supports privatization. The whole reason privatization is an issue is because schools want to be able to get rid of services that cost too much, do a poor job, or both. It’s extremely difficult, nearly impossible, to fire unionized school employees. Schools can much more easily fire a private company that doesn’t live up to its contract.

The fact that poor-performing private companies have been fired — a point the MEA makes very clear — doesn’t prove that privatization doesn’t work. It proves that it does.

It’s not as if MEA officials don’t know the benefits of outsourcing. Not long ago the union itself employed private (even nonunion) companies — not its own unionized employees — to provide food, security, custodial and mail service at its East Lansing headquarters.

So why not privatize, if it can enable districts like Dearborn to retain its teachers? After all, private contractors often hire the same bus drivers, custodians and cooks who were formerly school employees.

But the union might lose these workers as dues-paying members in the process. Apparently, the union — facing a $10 million deficit this year — is willing to sacrifice a few teachers to ward off potentially bigger losses as privatization gains momentum. Does this display a primary concern for children and teachers?

Schools boards that put teachers and kids first have a powerful law on their side. Michigan law prevents the MEA from making privatization a bone of contention in contract negotiations. This leaves school districts free to save money for teacher salaries through privatization of noninstructional services.

They should do so before laying off a single teacher.

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Michael D. LaFaive is fiscal policy analyst and Robert P. Hunter is director of labor policy for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. More information on privatization, education and labor issues is available at www.mackinac.org. Permission to reprint in whole or in part is hereby granted, provided the authors and their affiliations are cited.

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FURTHER READING:

William Maze, "Why Does the Michigan House Want Schools to Waste Money?" http://www.mackinac.org/327

Michael Mills, "Do Schools Really Need More Money?" http://www.mackinac.org/603

Lawrence W. Reed, "Michigan at the Crossroads: a 'State of the State' Address," http://www.mackinac.org/6957

HB 4887, Appropriations: 2006 School Aid Budget; HB 4582 and SB 246, Mandate minimum annual school aid funding increase: http://www.michiganvotes.org.