Does outsourcing really save taxpayer money?

TSEA November 18, 2016 Comments Off on Does outsourcing really save taxpayer money?
Does outsourcing really save taxpayer money?

Saving taxpayer money is the main selling point behind every proposal to outsource a state service.

On the contrary, when analyzed, outsourcing is often found to be more expensive than promised.

For example, in January of 2012 the state paid the multi-national corporation Jones Lang LaSalle $1M to assess the condition and management of state properties (A detailed contract timeline is available on pages 26-30 of the State Comptroller’s 2013 Dept. of General Services Performance Audit Report). The original contract was for statewide facility assessment, master planning, and facility management services.

That November, the state expanded JLL’s contract to include the procurement of outside leases, a job previously handled by state employees. The contract was also adjusted to allow JLL to receive a 4-percent commission on any leases it procured.

The next month, the contract was again amended to accommodate JLL’s need for more funding for facility assessments and master planning, and facilities management services were removed. By April of 2013, funding allocated for the contract had increased from the original $1M to $7.6M.

In June of 2013, the state signed a $330 million, five-year contract with JLL to outsource the facilities management of all state buildings.

In August of 2013 WTVF in Nashville reported, “only one lease negotiated by JLL has been publicly released. Despite the Haslam administration’s claim that the deal will save taxpayer money, in that case, the state is now paying 44 percent more — to the same landlord — than it was before JLL got involved.”

In November of 2013, the state comptroller audited the JLL contract and found the contract “created an organizational conflict of interest whereby Jones Lang LaSalle can profit from its own planning recommendations.”

Furthermore, as reported by WTVF in Nashville, the state has paid $1M in secret settlements for lease cancellations and terminating contracts, presumably a result of JLL’s advice.

Records obtained by WTVF in Nashville show the state paid the owner of L&C Tower $900,000 after canceling a lease and paid $100,000 to Sanders Moving after abruptly ending a contract. Unfortunately, these settlement agreements are confidential and prevent either side from discussing the agreements. One of the many side effects of outsourcing is private companies are not as accountable or transparent to the public as with government.

What is more, the Commercial Appeal reported in September of 2015 that three part-time outsourcing consultants stood to be paid $612,000 annually by the state. The top paid contractor, according to the Appeal, receives $222 per hour – about $369,000 per year. That’s over $100,000 more than the top earning state employee. This is an example of  costs not included in discussions about outsourcing.

As a side note, Nashville’s News Channel 5 reported Bill Haslam, while a candidate for Governor, listed JLL among his major investments. The Governor’s investments are currently in a blind trust.

As another example of questionable cost savings from outsourcing, the state in 2011 outsourced the management of its motor vehicles to Enterprise. The annual budget for motor vehicles in 2011 was $38M. For 2016, despite significantly lower fuel costs, their budget has increased to $46M. Nonetheless, the department says they are under the annual budget and therefore saving taxpayer money.

But, as WTVF in Nashville discovered, each year, after the legislature passes the state budget and goes home, the Haslam administration increases the motor vehicle budget by several million dollars.

For instance, in 2012-2013, after the legislature passed a budget which included $32M for motor vehicles, the Haslam administration increased the department’s budget to $67M. When the final numbers were tallied, the administration had paid Enterprise $43M. The department claimed they were under budget, despite exceeding the original budget by $11M.

In yet another instance, Tennessee Tech University in FY 2011-12 outsourced custodial services to SSC service solutions. According to numbers from a rare independent post-outsourcing comparison study, the total of SSC’s original contract with the state was $1,731,780 ($.91 per s/f), whereas the cost for the University to provide services using state employees was $1,824,895 ($.92 – $.96. per s/f). However, according to the study, SSC’s actual operational costs were higher than the signed contract and very close to costs before outsourcing (and remember, unlike the private company the University’s costs also included pension and health benefits for employees). After final analysis, the actual cost for SSC to provide custodial services was $1,929,030 ($1.01 – $1.03 per s/f).

In another example of unexpected cost increases from privatizing, in 2015 the state signed a $31M contract with a private vendor to run a Medicaid eligibility call center. That vendor failed to adequately perform its duties and was replaced by another private company. The state paid the first vendor half of the contracted amount, and then signed a similar contract with a new vendor for $56.5M. Prior to setting up these privately run call centers, this work was handled by state employees.

And, some of the contracts come with a catch.

In 2014, the state signed a $276 million contract with Trousdale County for a 2,400-bed private prison for Corrections Corporation of America. This contract also includes a 90% occupancy guarantee for CCA for Per Diem fees, which means if the private prison doesn’t remain above 90% occupied, taxpayers will pay Per Diem fees for empty beds. The contract also guarantees annual 2.5% operating Per Diem Rate increases. In contrast, state employees do not receive guaranteed pay increases.

A further example includes Tennessee modeling an effort to outsource the facilities management of all our state colleges and universities on a similar effort by Texas A&M. In December of 2015, the New York Times ran a story on the rising costs of student meal plans, focusing on the University of Tennessee’s new mandatory $300 per semester student dining fees. These fees are as a result of a contract with Aramark where Tennessee gets 14 percent of all food revenues and receives $15.2M in renovations to dining facilities. That contract runs through 2027.

But what happens if the vendor is performing poorly sometime before 2027? According to the Times article, a similar contract signed by Texas A&M with food service vendor Chartwells is guaranteed, which requires the university if the contract is terminated early to return the entirety of any money paid to the university during the contract period.

In some instances, the decision to use a private vendor is just bizarre.

To cite one well-publicized example, $46,000 in taxpayer dollars went to pay a private firm to create a new state logo, at a time when the state employed eight graphic artists and designers.

Sadly, costs aren’t always measured in dollars.

Tragically, in July, a man committed suicide by jumping off the Tennessee Tower in Downtown Nashville. According to a WSMV report, “Security at the tower falls under the state’s General Services division. They contract with private security companies Walden Security and Allied Barton.”

In August, an accident at a Tennessee county fair sent three children plummeting 45 feet to the ground, severely injuring one. The Associated Press after the incident reported, “The state relies on private inspectors hired by operators and other states’ regulators to determine whether roller coasters, zip lines, and Ferris wheels are safe.” State employees used to handle this work.

In conclusion, as taxpayers, we must ask harder questions and demand more oversight on any contracts which outsource a state service. The notion of cost savings from outsourcing is simply no longer credible.

Written by Randy Stamps and Chris Dauphin.

About Randy Stamps
Randy Stamps is the Executive Director of TSEA.
Contact him by email: [email protected]
Contact him by phone: 615-256-4533 or 800-251-TSEA (8732)

About Chris Dauphin
Chris Dauphin is the Communications Director of TSEA.
Contact him by email: [email protected]
Contact him by phone: 615-256-4533 or 800-251-TSEA (8732)