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The Decision to Contract Out: Understanding the Full Economic and Social Impacts

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The delivery of public services has been changing for several decades. State and local governments ‐‐ traditionally the provider of many services – are sometimes now only the funder of those services. Instead of directly providing services through their employees, they may contract with outside vendors. While this is popularly called ‘privatization’, the term is misleading, since public tax dollars are still paying the bills.

Since public officials continue to have ultimate responsibility to taxpayers, the more accurate terms ‘outsourcing’ or ‘contracting’ are used here. A trend related to outsourcing has been the lease or sale of publicly held assets to private companies in public‐private partnerships, or ‘P3s’. This arrangement is closer to true privatization than outsourcing ‐‐ since more control is delegated to the private company ‐‐but is still quasi‐public.

While reducing costs is most often the motive for outsourcing, a growing body of research documents that savings are minimal, on average. It is also not unusual for total costs to be greater when performed by private contracting firms than they were in‐house. In addition, problems with quality, control or accountability are common when services are outsourced. When contracting failed to deliver, quality was a major issue 61% of the time, with insufficient savings in 52% of cases, according to surveys by the International City/County
Management Association (ICMA).

Reflecting this mixed success, the survey also shows that while approximately half of all governments continue to explore new contracting,4 many continue to bring service delivery back in‐house. While only 16% of municipal governments reported that political factors were a driving force behind
outsourcing before the recession,6 public employees and contract alternatives became a focus in some state legislatures in the years following the Great Recession. The Reason Foundation began strongly advocating ‘privatization’ several decades ago, and interest in it has been cyclical since then. There seems to be a resurgence of interest in exploring it now.

While many studies have examined the risks to government in contracting (such as uncertainties about costs or quality) there has been less attention to the broader social and economic effects of contracting. To understand the impacts on local economies and communities, this report goes beyond the net fiscal impact on governments to the larger question of how changes affect citizen well‐being.