Bringing the Market to the Ivory Tower

Leased space at University of Michigan
Like many of Michigan’s public universities, the University of Michigan leases space to private bookstores and receives a percentage of gross sales in return.

Universities take pride in being on the cutting edge of research, technology and culture. In recent years, however, Michigan universities have found themselves on the cutting-room floor of the governor’s office. Even in fiscal 2005, for which the state approved an effective “no change” in state funding to Michigan’s 15 public universities, the appropriation is a long way from the gravy days and has had universities working overtime to balance their budgets.

Fortunately, both recent events and a recent survey by the Mackinac Center for Public Policy suggest that this budget pressure has forced the state’s institutions of higher education toward the cutting-edge of something new: cost-savings.

For example, in May 2004, Western Michigan University signed a contract with Commercial Sanitation Management Services Inc. to handle custodial needs in its 22 residence halls. The contract is projected to save the university $1.5 million annually.

Before choosing Commercial Sanitation, WMU received bids from five private firms and from the union that represented the 60 custodial workers whom WMU had employed prior to its decision to privatize. Commercial Sanitation submitted the lowest bid — approximately $1.1 million less than the union’s.

Similar indications of cost savings and institutional efficiency are suggested by a survey of the state universities conducted by the Mackinac Center for Public Policy last summer. Of the 15 schools, 10 took part in the survey (four universities — Central Michigan University, Grand Valley State University, Saginaw Valley State University and Wayne State University — did not return Mackinac Center phone calls, while Western Michigan University declined to participate due to ongoing contract talks).

According to the survey results, the most commonly outsourced services among the responding universities were garbage and sanitation services (90 percent), bookstore operations (80 percent), vending operations (70 percent) and legal services (70 percent). Other outsourced services included maintenance (50 percent), utilities (50 percent), food services (40 percent), busing (30 percent), laundry (30 percent) and custodial services (30 percent).

Almost all of the university officials interviewed told the Mackinac Center that expertise was their main reason for outsourcing. “What we are is an educational institution; that’s where we have our expertise,” said David W. Barthelmes, vice chancellor for administration at the University of Michigan-Flint. Gary Reffitt, director of purchasing and communications at Eastern Michigan University, echoed Barthelmes, telling the Center, “Universities are starting to realize they’re in the education business, not the bookselling or food or laundry business.”

Cost savings and efficiency also rated high among universities’ reasons for privatizing. Ferris State University’s vice president for administration and finance, Dr. Richard P. Duffett, reported going from losses of $85,000 per year to profits of $85,000 per year on the school’s vending services when the university partnered with Consolidated Vendors Corporation of Norton Shores, Mich.

Some school administrators also cited equipment needs and capabilities as driving their schools to outsource. FSU contracted with Automated Apartment Laundries to purchase and replace the school’s old laundry equipment when it hired the company to provide laundry services. Duffett said of outsourcing, “I think we [universities] have taken advantage wherever we can … to serve both students, faculty and staff. [There’s] been a lot of good, hard work done.”

To the universities’ great credit, their officials have adopted a creative solution to their budget problems through the “Higher Education Purchasing Consortium,” which the schools formed with the state of Michigan in order to gain leverage when negotiating contracts with private firms. Michael Boulus, executive director of the Presidents’ Council, State Universities of Michigan, said of the Consortium, “[The] overarching goal is for universities to work creatively to keep costs down.” All 15 public universities are part of the Consortium, although each university participates only in the contracts it chooses.

One example of the Consortium’s work was a recent contract for electrical power. In February 2004, the State Department of Management and Budget, Michigan State University, Western Michigan University and the University of Michigan-Flint signed a contract with Consumers Energy through the Consortium. The agreement is expected to save each signer 7 percent on electricity, or approximately $730,000 for the three universities combined.

Commendably, the universities have also applied the strength-in numbers approach to manage the rising costs of health care and insurance, forming the Michigan Universities Coalition on Health (MUCH) and Michigan Universities Self-Insurance Corporation (MUSIC). Given rapidly rising health care costs in the state, these organizations could provide significant cost advantages in purchasing health services.

Clearly, the state’s current budget strains have spurred state universities to provide new solutions to perennial problems. But there is room for improvement. The consortium could work to collectively outsource more noninstructional services, such as janitorial work. When it does, it would do well to remember that to produce optimal results, it should conduct an open bidding process; include multiple vendors; give appropriately detailed specifications for the desired service; and engage in periodic, competitive rebidding.

Individual universities could do more, as well. Many schools responded that they did not outsource noninstructional services because they did not want to relinquish control of certain areas of business; because of union objections and contract clauses that prohibit outsourcing; and because they received satisfactory services in-house.

If education is the main “business” of Michigan’s public universities, however, there is no reason for them to continue running cafeterias, lawn care crews, or custodial departments. These are not the purposes for which Michigan’s taxpayers support them, and contracting that saves money and focuses the schools on education will not only do right by Michigan citizens, but do well by university budgets.

Laura J. Davis is a University of Michigan student who served as a fiscal policy intern for the Mackinac Center for Public Policy in 2004.