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Executive Skills & Strategy

Schools Evaluate Whether to Privatize Support Services

By Sean Cavanagh — April 22, 2013 4 min read
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School districts face constant pressure to provide reliable support services in areas like transportation, student meals, and janitorial work — and do it as cheaply as possible. That leaves them with a decision to make: Should they use their own employees to perform those duties, or hire outside contractors who may be able to do the job for less?

In some cases, districts find that they can reduce expenses, especially in salary and benefits, or secure specialized services that would be hard to provide in-house, by seeking bids and selecting private companies to do the work.

In other circumstances, districts may find that outside businesses’ costs are too high, and that their ability to provide the exact services needed are lacking, so they choose to have the work done by the people already on the payroll.

Districts’ decisions about whether to contract out services or keep them in-house are influenced by myriad and often competing factors. School leaders want to cut expenses, while protecting money going to classroom instruction, and the pressure to trim cost was particularly strong during the Great Recession, from which states and districts only recently have begun to emerge.

At the same time, many districts are among the largest employers in their communities, and few school officials are eager to lay off workers they know, even in the name of reducing costs.

“Every district wants to be a good employer and make sure that their employees are treated well,” said James M. Hohman, the assistant director of fiscal policy for the Mackinac Center for Public Policy, a Midland, Mich., think tank that advocates free-market policies. The center sees contracting out for services, when that work can be performed effectively, as an “established way” for districts to save money, he said.

Embracing a Private Option

District: Lake Orion Community School District, a 7,600-student system north of Detroit

Context: The district has struggled financially as the local economy has sagged; the tax base has dropped significantly from seven years ago. The district, which has a $79 million general fund, had an operating deficit in fiscal 2011 of $1.8 million, said John Fitzgerald, an assistant superintendent.

Decision: The school board put out a request for proposals for a three-year contract to take over custodial services. Five bidders submitted proposals, including the union representing the workers, AFSCME, which offered concessions, including a reduction in wages. DM Burr, based in Flint, Mich., won the contract. Its bid was not the lowest, but the school board regarded the company as “the best fit,” Mr. Fitzgerald said.

Outcome: About 50 district employees lost their jobs. Those workers were offered severance packages and were invited to apply for jobs with the outside contractor, at a lower salary; some were rehired. The district expects to save more than $3.5 million on salaries, benefits, and other costs over the course of a three-year contract. The district has been “very satisfied” with the services provided by the company, Mr. Fitzgerald said.

Perspective: While district leaders struggled with the decision to contract out services, they ultimately believed it was the right one. “It’s something we had to do,” Mr. Fitzgerald said. The district was determined to avoid cuts that undermined instruction, he said. “Protect the classroom, protect your teaching philosophy,” he said. “And then streamline everywhere else.”

District: Kent City Community School District, a 1,400-student system north of Grand Rapids, Mich.

Context: The district, with a $12 million general fund, has been forced to make repeated budget cuts over the years, laying off staff and privatizing services. The school system has made especially large cuts over the past four or five years, including layoffs of employees.

Decision: The school board voted two years ago to end its contract for food service with a private company, Chartwells School Dining Services, reasoning that the school system could save money by cutting off the fees it was paying and bringing those services in-house.

Outcome: The district expects to at least break even or turn a profit this year, said Superintendent Mike Weiler. It uses the same number of employees — 15 to 17 — and it has not increased the prices of meals. Some of the savings have come from the district’s having more flexibility in purchasing than it had through the private company, the superintendent said.

Perspective: The decision to move services back in-house amounts to a “small victory” in driving down costs, Mr. Weiler said. “It shows it can be done.When you take the for-profit motive out, that’s probably 80 percent” of where savings come from, he said.

But unions representing support-service workers view many efforts to privatize services with skepticism.

“Privatization moves quality control away from the parents of the children these services are intended to support,” said Ruby J. Newbold, an American Federation of Teachers vice president, in a statement to Education Week, when asked about districts’ decisions to contract out services. She is also the president of the Detroit Association of Educational Office Employees.

Estimates of cost savings through privatization are often exaggerated, Ms. Newbold argued. “Today’s privatization bargain,” she said, “quickly becomes tomorrow’s increasingly costly contract that features less control and oversight.”

National data on districts’ contracting out for support services are limited, and the information that does exist offers a mixed picture.

A survey of state education departments, conducted in 2007 by the Mackinac Center, found that 13 percent of public school districts taking part in the federal National School Lunch Program contract meal services out to private companies, though the portion of systems doing so in each state varies enormously.

About 10 percent of districts said they outsourced custodial or maintenance services during the 2011-12 school year, according to a survey by the American Association of School Administrators, based in Alexandria, Va. The association also found that a greater number of districts, about 20 percent, said they were considering taking that step in 2012-13.

In Michigan, 61 percent of the state’s 549 school districts reported they had privatized one or more support services, a number that has increased steadily from 31 percent a decade earlier, according to a Mackinac Center report released this year. The increases in contracting out were pushed along by changes in state policy from the 1990s to today that have made it easier for districts to privatize certain services, Mr. Hohman said.

Those policies included a 2011 law signed by Gov. Rick Snyder, a Republican, that offered districts financial incentives to obtain competitive bids on noninstructional services.

Even so, the decision to privatize services can be an agonizing one, as was the case in the Lake Orion Community School District, a 7,600-student system north of Detroit, where the school board voted last year to contract its custodial services out to a private company.

The district has seen its tax base shrink by roughly one-third over the past six years or so, with job losses in the auto industry and other businesses, and it has been forced to cut spending, said John Fitzgerald, the system’s assistant superintendent for business and finance.

Felicia Hicks, a field staff representative for Council 25, the Michigan affiliate of the American Federation of State, County, and Municipal Employees, which represented the district custodial workers, argued that the district’s estimates of savings from privatization were overstated, because a contractor could not match the breadth of services provided by the public employees at a lower cost. The decision was not based on realistic “dollar for dollar” and “work for work” comparisons, she argued. “It was a totally misguided decision,” she said.

About 50 custodial workers — many of whom handled multiple duties as “jacks of all trades” — lost their jobs, though they were invited to reapply with the private company, said Mr. Fitzgerald.

“It was probably the most dramatic decision the board had made in decades,” Mr. Fitzgerald said of going with a private contract. “It was an extremely stressful time. ... These are all people we see every day. These are people the board members are seeing at the grocery store, at the movie theater.”

Coverage of entrepreneurship and innovation in education and school design is supported in part by a grant from Carnegie Corporation of New York.
A version of this article appeared in the April 24, 2013 edition of Education Week as Privatization Choices


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