Civility Toward Privatization: How Civil Service Impedes Privatization in Michigan

Civil Service systems came to government beginning in the late 19 th century and to state governments during the early part of the 20 th century. Initially, these systems were created as a response to the abuses of government officials who had made wide use of political patronage in hiring personnel. The two goals of Civil Service systems were 1) to make government employment more professional and 2) to provide opportunities for citizens to work in government without relying on political patronage.

Although these are laudable goals, the detail of some of the constitutional language associated with these goals has created several significant barriers to modern management practices. This is especially true in Michigan, where the state constitution reads

The [Civil Service] commission shall classify all positions in the classified service according to their respective duties and responsibilities, fix rates of compensation for all classes of positions, approve or disapprove disbursements for all personal services, determine by competitive examination and performance exclusively on the basis of merit, efficiency and fitness the qualifications of all candidates for positions on the classified service, make rules and regulations covering all personnel transactions, and regulate all conditions of employment in the classified service." (Article 11, Section5, paragraph 4, Constitution of Michigan of 1963.) This language first appeared in the Michigan Constitution of 1908.

The bolded language above has been interpreted by the State Civil Service Commission to mean that it must review and approve all spending for personal services, whether it be for state employees or contractors of the state. Thus, any time a state agency wishes to privatize an activity by contracting it out, the contract must have the explicit approval of the State Civil Service Commission.

Any time a state agency wishes to privatize an activity by contracting it out, the contract must have the explicit approval of the State Civil Service Commission.

As a means of creating "objective" measurement for when it will approve outsourcing of personal services, the Civil Service Commission has said that one of the following conditions must be met. First, the services are temporary. Second, the services needed are uncommon and the state lacks the internal expertise to perform them. Third, the service needed requires equipment or materials unavailable to state employees. Lastly, services can be performed at substantial savings (defined by the Michigan Department of Civil Service as greater than 5%).

These conditions may not, at face value, seem terribly burdensome. It is important to understand, however, that labor unions representing government employees may challenge the straightforward language in the constitution in order to defend their own interests. Consequently, staff of the Commission, in an effort to avoid controversy, will often avoid taking a position on a request to outsource an activity or repeatedly return it to the requester in search of additional information.

The most difficult of these criteria to gain approval of the Civil Service Commission is the condition that outsourcing will save 5%. At face value, this is a difficult threshold to cross. It is also an unfortunate one for taxpayers. Consider the following example. If a state project costs $100 million, the savings must be at least $5 million to justify outsourcing under this criteria. Therefore, if outsourcing will save taxpayers only $4.5 million, it is deemed unacceptable by Civil Service standards.

Consider another example:

If the state wishes to enter into a contract for $2 million of work under an outsourcing arrangement, the savings must be $100,000. If the state enters into a contract for $2 million, it knows it has three costs: 1) the cost of the contractor 2) the cost of monitoring the contract (usually involving time of one to two people depending on the magnitude of the project, and 3) the time of staff, if any, who must work with the contractor on the project.

If, on the other hand, the state chooses to use state personnel to do the work, it typically compares the cost of the contractor (above) with the indirect costs of doing the project in-house. Calculations of state costs typically include direct labor, any related equipment that must be acquired, and, in the most sophisticated analyses, will include indirect labor costs such as benefits. What are not included in these costs, which are implicitly included in the price charged under outsourcing, are the cost of management oversight, office space, utilities, indirect support costs (lawyers, accountants, personnel staff, secretarial support, phones computers, etc.) Thus, the five percent savings is often applied to a level which substantially understates the true cost of doing the work in-house.

What this also fails to reflect is the risk of failure. If state staff are used to complete a project, and they do not, management has the choice of disciplining the staff or doing nothing. But, in either case, the costs have already been paid and no benefit has been received for the tax dollars spent. If, on the other hand, a contractor fails to deliver (and the contract was properly written), the state pays nothing. The only sunk costs to the state are those spent monitoring the contract. Thus, the five percent calculation fails to take risk and experience into account.

The processes created to approve outsourcing contracts are less-than-civil to job providers and taxpayers alike. In fact, the built-in bias of civil service rules make outsourcing relatively unlikely. The state’s methods of budgeting and accounting make an apples-to-apples comparison very difficult, especially if those making the calculations are politically and institutionally opposed to outsourcing from the beginning.